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<SEC-DOCUMENT>0001019687-04-000287.txt : 20040212
<SEC-HEADER>0001019687-04-000287.hdr.sgml : 20040212
<ACCEPTANCE-DATETIME>20040212125346
ACCESSION NUMBER:		0001019687-04-000287
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		6
CONFORMED PERIOD OF REPORT:	20031231
FILED AS OF DATE:		20040212

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:		04589473

	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>atco_10q-123103.htm
<TEXT>
<html>
<head><meta content="text/html; charset=iso-8859-1">
<title>atc10q396</title>
</head>

<body >
<ul>
</ul>

<hr color="#000000" size="4">
<p align="center">
<b><font size="4">UNITED STATES</font></b><font size="4"><br><b>SECURITIES AND EXCHANGE COMMISSION</b><br>
</font>
<font size="2">Washington,
D.C. 20549</font><p align="center">
<b><font size="5">FORM 10-Q</font></b><p>
<font size="2">(Mark one) </font> </p>
<table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="43" align="left" >
<p>
<font size="2">[X]</font></p>
</td>
<td width="599.999850" colspan="1" rowspan="1" >
<p align="left">
<font size="2">QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934&nbsp; </font></p>
</td>
</tr>
</table>
<p align="center">
<font size="2">For the quarterly period ended December 31, 2003</font><p align="center">
<font size="2">or</font><p align="left">
&nbsp;<table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="43" align="left" >
<p>
<font size="2">[&nbsp;&nbsp;]</font></p>
</td>
<td width="599.999850" colspan="1" rowspan="1" >
<p align="left">
<font size="2">TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934&nbsp; </font></p>
</td>
</tr>
</table>
<p align="center">
<font size="2">For the transition period from ________ to ________.</font><p>
<font size="2">Commission File Number: </font> <u><font size="2">0-24248</font></u><p align="center">
<font size="6"><b>AMERICAN TECHNOLOGY CORPORATION<br></b></font>
<font size="2">(Exact name of
registrant as specified in its charter)</font></p align="center">
<div align="center" style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="318.666587" colspan="1" rowspan="1" >
<p align="center">
<u><font size="2">Delaware</font></u><font size="2"><br>(State or other jurisdiction of<br>incorporation or
organization)</font></p align="center">
</td>
<td width="41.333323" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="295.999926" colspan="1" rowspan="1" >
<p align="center">
<u><font size="2">87-03261799</font></u><font size="2"><br>(I.R.S. Empl. Ident. No.)</font></p align="center">
</td>
</tr>
<tr valign="top">


<td width="318.666587" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="337.333249" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="318.666587" colspan="1" rowspan="1" >
<p align="center">
<u><font size="2">13114 Evening Creek Drive South, San Diego, California</font></u><font size="2"><br>(Address of
principal executive offices)</font></p align="center">
</td>
<td width="41.333323" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="295.999926" colspan="1" rowspan="1" >
<p align="center">
<u><font size="2">92128</font></u><font size="2"><br>(Zip Code)</font></p align="center">
</td>
</tr>
</table></div>
<p align="center">
<u><font size="2">(858) 679-2114<br>
</font></u>
<font size="2">(Registrant's telephone number, including area code)</font><p>
<font size="2">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. [<u>X]</u> YES   [_]  NO </font> <p>
<font size="2">Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No </font> <u>
<font size="2">[X]</font></u><p>
<font size="2">Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 6, 2004.</font></p align="center">
<div align="center" style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="318.666587" colspan="1" rowspan="1" >
<p align="center">
<u><font size="2">Common Stock, $0.00001 par value</font></u><font size="2"><br>(Class)</font></p align="center">
</td>
<td width="41.333323" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="295.999926" colspan="1" rowspan="1" >
<p align="center">
<u><font size="2">19,464,909</font></u><font size="2"><br>(Number of Shares)</font></p align="center">
</td>
</tr>
</table></div>
<hr color="#000000" size="4">
<div align="center" color="#000080" style="position:relative; left: -5">
  &nbsp;<hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div><p>
<p align="center">
<font size="4">AMERICAN TECHNOLOGY CORPORATION<br></font>
<font size="2"><a name="INDEX">INDEX</a></font></p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="539.999865" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">Page</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
<p>
<font size="2"><a href="#PART I. FINANCIAL INFORMATION">PART I. FINANCIAL INFORMATION</a></font></p>
</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 1. Financial Statements.">Item 1.</a></font></p>
</td>
<td width="571.999857" colspan="2" rowspan="1" >
<p>
<font size="2"><a href="#Item 1. Financial Statements.">Financial Statements:</a></font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#BALANCE SHEETS">Balance Sheets as of December 31, 2003 and September 30, 2003 (unaudited)</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">3</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#STATEMENTS OF OPERATIONS">Statements of Operations for the three months ended December 31, 2003 and 2002
(unaudited)</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">4</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#STATEMENTS OF CASH FLOWS">Statements of Cash Flows for the three months ended December 31, 2003 and 2002
(unaudited)</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">5</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#NOTES TO INTERIM FINANCIAL STATEMENTS">Notes to Interim Financial Statements</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">6</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 2.">Item 2.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 2.">Management's Discussion and Analysis of Financial Condition and Results of
Operations</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">12</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 3.">Item 3.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 3.">Quantitative and Qualitative Disclosures about Market Risk</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">24</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 4.">Item 4.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 4.">Controls and Procedures</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">24</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="623.999844" colspan="3" rowspan="1" >
<p>
<font size="2"><a href="#PART II. OTHER INFORMATION">PART II. OTHER INFORMATION</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">25</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 1. Legal Proceedings.">Item 1.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 1. Legal Proceedings.">Legal Proceedings</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">25</font></p>
</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 2. Changes in Securities and Use of Proceeds.">Item 2.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 2. Changes in Securities and Use of Proceeds.">Changes in Securities and Use of Proceeds</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">25</font></p>
</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 3. Defaults Upon Senior Securities.">Item 3.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 3. Defaults Upon Senior Securities.">Defaults upon Senior Securities</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">25</font></p>
</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2">
<a href="#Item 4. Submission of Matters to a Vote of Security Holders.">Item 4.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2">
<a href="#Item 4. Submission of Matters to a Vote of Security Holders.">Submission of Matters to a Vote of Security Holders</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">25</font></p>
</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 5. Other Information.">Item 5.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 5. Other Information.">Other Information</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">25</font></p>
</td>
</tr>
<tr valign="top">
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="53.333320" colspan="1" rowspan="1" >
<p>
<font size="2"><a href="#Item 6. Exhibits and Reports on Form 8-K.">Item 6.</a></font></p>
</td>
<td width="539.999865" colspan="1" rowspan="1" >
<p>


<font size="2"><a href="#Item 6. Exhibits and Reports on Form 8-K.">Exhibits and Reports on Form 8-K</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">25</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="4" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="623.999844" colspan="3" rowspan="1" >
<p>
<font size="2"><a href="#SIGNATURES">SIGNATURES</a></font></p>
</td>
<td width="31.999992" colspan="1" rowspan="1" >
<p>
<font size="2">26</font></p>
</td>
</tr>
</table></div>
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><font size="2"><a name="PART I. FINANCIAL INFORMATION">PART I. FINANCIAL INFORMATION</a></font></b><p>
<b><font size="2"><a name="Item 1. Financial Statements.">Item 1. Financial Statements.</a></font></b></p align="center">
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="791.999802" colspan="8" bgcolor=#FFFFFF bordercolor="#FFFFFF">
<p align="center">
<b><font size="2">American Technology Corporation</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="791.999802" colspan="8" bgcolor="#FFFFFF" bordercolor="#FFFFFF" >
<p align="center">
<font size="2"><a name="BALANCE SHEETS">BALANCE SHEETS</a></font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="791.999802" colspan="8" bgcolor=#FFFFFF bordercolor="#FFFFFF">
<p align="center">
<font size="2">(Unaudited)</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<font size="2">December 31,</font></p align="center">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<font size="2">September 30,</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">2003</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">2003 (a)</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">ASSETS</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
</p align="center">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Current Assets:</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Cash</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="110.666639" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">7,975,625&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="119.999970" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">9,850,358&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Trade accounts receivable, less allowance of </font> </p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right">
&nbsp;</p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$25,000 each period for doubtful accounts</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">689,382&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">184,162&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Inventories, net</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right">
<font size="2">557,638&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right">
<font size="2">408,944&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Prepaid expenses and other</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">68,960&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">33,849&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Total current assets</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right">
<font size="2">9,291,605&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right">
<font size="2">10,477,313&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Equipment</font></b><font size="2">, net</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">204,568&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">200,262&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Patents</font></b><font size="2">, net</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,159,962&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,066,796&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Total assets</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="110.666639" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">10,656,135&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="119.999970" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">11,744,371&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">LIABILITIES AND STOCKHOLDERS' EQUITY</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Current Liabilities:</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Accounts payable</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="110.666639" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">509,155&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="119.999970" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">604,343&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Accrued liabilities:</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Payroll and related</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">196,163&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">463,788&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue and deposits</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right">
<font size="2">387,825&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right">
<font size="2">276,708&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Warranty reserve</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">315,000&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">319,500&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right">
<font size="2">317,097&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right">
<font size="2">318,849&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Capital lease short-term portion</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">10,168&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">9,915&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Total current liabilities</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,735,408&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,993,103&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>


<p>
<b><font size="2">Long-Term Liabilities:</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">Capital lease long-term portion</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;20,458&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">23,097&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Total liabilities</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,755,866&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">2,016,200&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Commitments and contingencies</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Stockholders' equity</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="633.333175" colspan="4" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Preferred stock, $0.00001 par value; 5,000,000 shares authorized:</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="633.333175" colspan="4" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Series D Preferred stock 250,000 shares designated: 50,000</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="633.333175" colspan="4" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;issued and outstanding each period. Liquidation preference</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;of $550,000 and $542,000, respectively.</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
</tr>
<tr valign="top">
<td width="633.333175" colspan="4" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Series E Preferred stock 350,000 shares designated: 263,250</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="633.333175" colspan="4" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;issued and outstanding each period. Liquidation preference</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;of $2,767,000 and $2,725,000, respectively.</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">3&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">3&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="633.333175" colspan="4" rowspan="1" >
<p>
<font size="2">Common stock, $0.00001 par value; 50,000,000 shares authorized;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="498.666542" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;19,439,157 and 19,342,657 shares issued and outstanding</font></p>
</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">194&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">193&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<font size="2">Additional paid-in capital</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right">
<font size="2">46,403,556&nbsp;</font></p align="right">
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right">
<font size="2">46,095,032&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Accumulated deficit</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(37,503,484)</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(36,367,057)</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
<p>
<b><font size="2">Total stockholders' equity</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">8,900,269&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">9,728,171&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Total liabilities and stockholders' equity</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="110.666639" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">10,656,135&nbsp;</font></p>
</td>
<td width="19.999995" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="113.333305" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">11,744,371&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="474.666548" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="134.666633" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="19.999995" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
</table></div>
<p>
<font size="2">See accompanying notes to interim financial statements.<br>
(a) Derived from the audited financial statements as of September 30,
2003.</font><p>
&nbsp;<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">3</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="702.666491" colspan="6" bgcolor=#FFFFFF>
<p align="center">
<b><font size="2">American Technology Corporation </font> </b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="702.666491" colspan="6" bgcolor="#FFFFFF" >
<p align="center">
<font size="2"><a name="STATEMENTS OF OPERATIONS">STATEMENTS OF OPERATIONS</a></font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="702.666491" colspan="6" bgcolor=#FFFFFF>
<p align="center">
<font size="2">(Unaudited)</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="329.333251" colspan="5" rowspan="1" >
<p align="center">
<font size="2">For the three months ended</font></p align="center">
</td>
</tr>

<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="329.333251" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">December 31,</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">2003</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">2002</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<b><font size="2">Revenues:</font></b></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Product sales</font></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="119.999970" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">618,584&nbsp;</font></p align="right">
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="107.999973" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">387,967&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Contract and license </font> </p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">156,194&nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">35,332&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Total revenues</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">774,778&nbsp;</font></p align="right">
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">423,299&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<font size="2">Cost of revenues</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">408,478&nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">321,635&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Gross profit </font> </b></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">366,300&nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">101,664&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="143.999964" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Operating expenses:</font></b></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Selling, general and administrative</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="right">
<font size="2">1,072,314&nbsp;</font></p align="right">
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="right">
<font size="2">756,317&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Research and development</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">448,971&nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">581,421&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<font size="2">Total operating expenses</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,521,285&nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,337,738&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<font size="2">Loss from operations</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(1,154,985)</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(1,236,074)</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<b><font size="2">Other income (expense):</font></b></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Interest income</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">19,374&nbsp;</font></p align="right">
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">2,331&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Interest expense</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(816)</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(497,902)</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Total other income (expense)</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">18,558&nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(495,571)</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="143.999964" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Net loss</font></b></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(1,136,427)</font></p align="right">
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(1,731,645)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<font size="2">Dividend requirements on convertible preferred stock</font></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">293,705&nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">158,798&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Net loss available to common stockholders </font> </b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="119.999970" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(1,430,132)</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="30" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="107.999973" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(1,890,443)</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
<p>
<b><font size="2">Net loss per share of common stock - basic and diluted</font></b></p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="119.999970" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(0.07)</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="30" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="107.999973" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(0.13)</font></p>
</td>
</tr>
<tr valign="top">

<td width="371.999907" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Average weighted number of common shares outstanding</font></b></p>
</td>
<td width="143.999964" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">19,376,717 &nbsp;</font></p>
</td>
<td width="47.999988" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">14,354,598 &nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="371.999907" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="143.999964" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="47.999988" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137.333299" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table></div>
<p>
<p>
<font size="2">See accompanying notes to interim financial statements.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">4</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="671.999832" colspan="8" bgcolor=#FFFFFF>
<p align="center">
<b><font size="2">American Technology Corporation </font> </b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="671.999832" colspan="8" bgcolor="#FFFFFF" >
<p align="center">
<font size="2"><a name="STATEMENTS OF CASH FLOWS">STATEMENTS OF CASH FLOWS</a></font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="671.999832" colspan="8" bgcolor=#FFFFFF>
<p align="center">
<font size="2">(Unaudited)</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="6.666665" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="323.999919" colspan="5" rowspan="1" >
<p align="center">
<font size="2">For the three months ended</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="6.666665" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="323.999919" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">December 31,</font></p>
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">2003</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">2002</font></p>
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Increase (Decrease) in Cash</font></b></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" >
<p>
<b><font size="2">Operating Activities:</font></b></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Net loss </font> </p>
</td>
<td width="6.666665" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="107.999973" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(1,136,427)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="107.999973" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(1,731,645)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" >
<p>
<font size="2">Adjustments to reconcile net loss to net cash</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;used in operations:</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Depreciation and amortization</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font size="2">54,196&nbsp;</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font size="2">211,454&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Allowance for doubtful accounts</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<b><font size="2">-- &nbsp;</font></b></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">2,900&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Warranty reserve</font></p>
</td>
<td width="6.666665" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(4,500)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Amortization of debt discount</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">405,000&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" >
<p>
<font size="2">Changes in assets and liabilities:</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Trade accounts receivable</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(505,220)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(59,370)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Inventories</font></p>
</td>
<td width="6.666665" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(148,694)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(351,930)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Prepaid expenses and other</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(35,111)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(8,125)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Accounts payable</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(95,188)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font size="2">122,385&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Accrued liabilities</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(158,260)</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">71,984&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" >
<p>
<font size="2">Net cash used in operating activities</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(2,029,204)</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(1,337,347)</font></p>
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="6.666665" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" >
<p>
<b><font size="2">Investing Activities:</font></b></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Purchase of equipment</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(36,308)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(9,701)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" >
<p>
<font size="2">Patent costs paid</font></p>
</td>
<td width="6.666665" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(115,360)</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(24,823)</font></p>
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Net cash used in investing activities</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(151,668)</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(34,524)</font></p>
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="6.666665" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<b><font size="2">Financing Activities:</font></b></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" >
<p>
<font size="2">Payments on capital lease</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(2,386)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(2,156)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Proceeds from exercise of common stock warrants</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">50,000&nbsp;</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" >
<p>
<font size="2">Proceeds from exercise of stock options</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">258,525&nbsp;</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">19,500&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Net cash provided by financing activities</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">306,139&nbsp;</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">17,344&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" >
<p>
<font size="2">Net increase (decrease) in cash</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(1,874,733)</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(1,354,527)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Cash, beginning of period</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">9,850,358&nbsp;</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,807,720&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" >
<p>
<font size="2">Cash, end of period</font></p>
</td>
<td width="6.666665" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="107.999973" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">7,975,625&nbsp;</font></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="25" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="107.999973" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">453,193&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="6.666665" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="479.999880" colspan="5" rowspan="1" >
<p>
<b><font size="2">Supplemental Disclosure of Cash Flow Information</font></b></p>
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;Cash paid for interest</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="107.999973" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">816&nbsp;</font></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="107.999973" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">31,291&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;Cash paid for taxes</font></p>
</td>
<td width="6.666665" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
</tr>
<tr valign="top">
<td width="265.333267" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Non-cash financing activities:</font></p>
</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="347.999913" colspan="3" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;Sale of equipment for accounts payable</font></p>
</td>
<td width="131.999967" colspan="2" rowspan="1" >
<p align="right">
<b><font size="2">--&nbsp;</font></b></p align="right">
</td>
<td width="59.999985" colspan="1" rowspan="1" >
<p>
</p>
</td>
<td width="23.999994" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="107.999973" colspan="1" rowspan="1" >
<p align="right">
<font size="2">117,000&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="257.333269" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="6.666665" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="82.666646" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="59.999985" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="131.999967" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
</table></div>
<p>
<p>
<font size="2">See accompanying notes to interim financial statements.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">5</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p align="center">
<b>AMERICAN TECHNOLOGY CORPORATION</b><br><font size="2">
<a name="NOTES TO INTERIM FINANCIAL STATEMENTS">NOTES TO
INTERIM FINANCIAL STATEMENTS</a><br>(Unaudited)</font><p>
<b><font size="2">1. OPERATIONS<br>
</font></b>
<font size="2">American Technology Corporation (the "Company") is engaged in design,
development and commercialization of sound, acoustic and other technologies. The
Company produces products based on its HyperSonic Sound (HSS), Long Range
Acoustic Device (LRAD), NeoPlanar and Purebass sound technologies.</font><p>
<font size="2">In the fourth quarter of fiscal 2003 the Company organized operations into two
segments by the end-user markets they serve. The Business Products and Licensing
Group (Business Group) licenses and markets HSS, NeoPlanar and Purebass speakers
to companies that employ audio in consumer, commercial and professional
applications. The Government and Force Protection Systems Group (Government
Group) markets LRAD, NeoPlanar and HSS products to government and military
customers and to the expanding force protection market.</font><p>
<font size="2">The Company continues to be subject to certain risks, including dependence on a
limited number of customers; reliance on third party suppliers and
manufacturers; competition; the uncertainty of the market for new sound
products; limited manufacturing, marketing and sales experience; uncertainty
regarding future warranty costs; and the uncertainty of future profitability and
positive cash flow.</font><p>
<b><font size="2">2. STATEMENT OF PRESENTATION AND MANAGEMENT'S PLAN<br>
</font></b>
<font size="2">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 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's audited
financial statements and notes thereto for the year ended September 30, 2003
included in the Company's annual report on Form 10-K.</font><p>
<font size="2">Other than cash of $7,975,625 at December 31, 2003 and accounts receivable
collections, the Company has no other material unused sources of liquidity at
this time. The Company has financed its operations primarily through the sale of
preferred stock, exercise of stock options, sale of notes, proceeds from the
sale of investment securities and margins from product sales and licensing.
Based on the Company's cash position assuming (a) currently planned expenditures
and level of operations, (b) continuation of product sales and (c) royalty
revenue from licensing agreements, management believes the Company will have
sufficient capital resources for the next twelve months. Management believes
increased product sales will provide additional operating funds. 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>
<font size="2">Management expects to incur additional operating losses as a result of
expenditures for research and development and marketing costs for sound
products. The timing and amounts of these expenditures and the extent of the
Company's operating losses will depend on future product sales levels and other
factors, some of which are beyond management's control. There can be no
assurance that revenues from products and technologies will become sufficient to
sustain operations or achieve profits in the future.</font><p>
<font size="2">Where necessary, prior year's information has been reclassified to conform with
the fiscal 2004 statement presentation.</font><p>
<b><font size="2">3. NET LOSS PER SHARE<br>
</font></b>
<font size="2">Basic earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common stockholders, after deduction for cumulative
imputed and accredited dividends, by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share reflects
the potential dilution of securities that could share in the earnings of an
entity. The Company's losses for the periods presented cause the inclusion of
potential common stock instruments outstanding to be antidilutive. Stock
options, warrants and convertible preferred stock exercisable into 5,097,143
shares of common stock were outstanding at December 31, 2003 and stock options,
warrants and convertible preferred stock and notes exercisable into 5,952,487
shares of common stock were outstanding at December 31, 2002. These securities
were not included in the computation of diluted earnings (loss) per share
because of the losses but could potentially dilute earnings (loss) per share in
future periods.</font><p>
&nbsp;<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">6</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p align="center">
<b>AMERICAN TECHNOLOGY CORPORATION</b><br><font size="2">NOTES TO
INTERIM FINANCIAL STATEMENTS<br>(Unaudited)</font><p>
<font size="2">The Company has allocated the proceeds from preferred stock issuance between the
preferred stock and warrants and also calculated the beneficial conversion
discount for each series of preferred stock. The value of the beneficial
conversion discount and the value of the warrants was recorded as a deemed
dividend and is being accreted over the conversion period of the preferred
stock. Net loss available to common stockholders was increased in each period
presented in computing net loss per share by the accretion of the value of these
imputed deemed dividends. Such imputed deemed dividends are not included in the
Company's stockholders' equity as the Company has an accumulated deficit.
Amounts are included in net loss available to common stockholders. The imputed
deemed dividends are not contractual obligations of the Company to pay such
imputed dividends.</font><p>
<font size="2">The provisions of each of the Company's series of preferred stock also provide
for a 6% per annum accretion in the conversion value (similar to a dividend).
These amounts also increase the net loss available to common stockholders. Net
loss available to common stockholders is computed as follows:</font></p>
<table border=0 cellpadding=0 cellspacing =0 width="670" >
<tr valign="top">
<td width="75" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="325" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="55" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="215" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<b><font size="2">Three Months Ended</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="325" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="55" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="215" colspan="5" rowspan="1" >
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="325" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="55" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="93" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="25" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2002</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="325" colspan="1" rowspan="1" >
<p>
<font size="2">Net loss</font></p>
</td>
<td width="55" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="13" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="80" colspan="1" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(1,136,427)</font></p align="right">
</td>
<td width="25" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="81" colspan="1" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(1,731,645)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="380" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Imputed deemed dividends on Series D and E<br>&nbsp;&nbsp;warrants issued with
preferred stock</font></p>
</td>
<td width="93" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
<font color="#FF0000">(100,839)</font></font></p align="right">
</td>
<td width="25" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
<font color="#FF0000">(56,115)</font></font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="380" colspan="2" rowspan="1" >
<p>
<font size="2">Imputed deemed dividends on Series D and E<br>&nbsp;&nbsp;preferred stock</font></p>
</td>
<td width="93" colspan="2" rowspan="1" >
<p align="right">
<font size="2"><br>
<font color="#FF0000">(145,878)</font></font></p align="right">
</td>
<td width="25" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
<p align="right">
<font size="2"><br>
<font color="#FF0000">(64,059)</font></font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="473" colspan="4" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Accretion on preferred stock at 6% stated rate:</font></p>
</td>
<td width="25" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="75" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="325" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;Series C preferred stock</font></p>
</td>
<td width="55" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="93" colspan="2" rowspan="1" >
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;--&nbsp;</font></p align="right">
</td>
<td width="25" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
<p align="right">
<font size="2" color="#FF0000">(3,000)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="325" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;Series D preferred stock</font></p>
</td>
<td width="55" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="93" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2" color="#FF0000">(7,500)</font></p align="right">
</td>
<td width="25" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2" color="#FF0000">(35,624)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="325" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;Series E preferred stock</font></p>
</td>
<td width="55" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="93" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(39,488)</font></p>
</td>
<td width="25" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">--&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="380" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Net loss available to common stockholders</font></p>
</td>
<td width="13" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="80" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(1,430,132)</font></p>
</td>
<td width="25" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="81" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(1,890,443)</font></p>
</td>
</tr>
<tr valign="top">
<td width="75" bgcolor="#FFFFFF" >
&nbsp;</td>


<td width="325" colspan="1" rowspan="1" >
&nbsp;</td>


<td width="55" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="93" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="25" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<p>
<font size="2">At December 31, 2003 the balance of deemed dividends attributable to preferred
stock warrants and to the preferred discount provision was $2,792,106. This
amount will be accreted as the preferred stock is converted or warrants
exercised and otherwise ratably over the remaining term of the Series D (June
30, 2006) and Series E Convertible Preferred Stock (December 31, 2006).</font><p>
<b><font size="2">4. STOCK-BASED COMPENSATION</font></b><p>
<font size="2">The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
for disclosure purposes. Under SFAS No. 123, the Company measures compensation
expense for its stock-based employee compensation plan using the intrinsic value
method prescribed in Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. The Company provides
pro forma disclosure of the effect on net income or loss as if the fair value
based method prescribed in SFAS No. 123 has been applied in measuring
compensation expense.</font><p>
<font size="2">For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:</font></p>
<table border=0 cellpadding=0 cellspacing =0 width="670" >
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="34" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="215" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<b><font size="2">Three Months Ended</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="215" colspan="5" rowspan="1" >
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="34" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="24" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2002</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" >
<p>
<font size="2">Net loss available to common shareholders</font></p>
</td>
<td width="34" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="78" colspan="1" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(1,430,132)</font></p align="right">
</td>
<td width="24" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="81" colspan="1" rowspan="1" >
<p align="right">
<font color="#ff0000" size="2">(1,890,443)</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Plus: Stock-based employee compensation </font> </p>
</td>
<td width="34" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="24" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="72" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;expense included in reported net loss</font></p>
</td>
<td width="34" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" >
<p align="right">
<font size="2">--</font></p align="right">
</td>
<td width="24" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
<p align="right">
<font size="2">--&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="477" colspan="4" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Less:  Total stock-based employee compensation expense</font></p>
</td>
<td width="24" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="72" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;determined using fair value based method</font></p>
</td>
<td width="34" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(245,289)</font></p>
</td>
<td width="24" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(122,076)</font></p>
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="383" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Pro forma net loss available to common stockholders</font></p>
</td>
<td width="16" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="78" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(1,675,421)</font></p>
</td>
<td width="24" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="81" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(2,012,519)</font></p>
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="24" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Net loss per common share - basic</font></p>
</td>
<td width="34" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="24" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="72" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;and diluted - pro forma</font></p>
</td>
<td width="34" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="78" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(0.09)</font></p>
</td>
<td width="24" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="81" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(0.14)</font></p>
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Net loss per common share - basic</font></p>
</td>
<td width="34" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="24" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="72" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;and diluted - as reported</font></p>
</td>
<td width="34" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="78" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(0.07)</font></p>
</td>
<td width="24" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="16" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="81" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2" color="#ff0000">(0.13)</font></p>
</td>
</tr>
<tr valign="top">
<td width="72" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="349" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="34" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="94" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="24" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
</table>
<p>
</p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">7</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p align="center">
<font size="2"><b>AMERICAN TECHNOLOGY CORPORATION</b><br>NOTES TO
INTERIM FINANCIAL STATEMENTS<br>(Unaudited)</font><p>
<b><font size="2">5. RECENT ACCOUNTING PRONOUNCEMENTS<br>
</font></b>
<font size="2">In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.   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.  SFAS No. 146 is
effective for exit or disposal activities that are initiated after June 30,
2003, with early application encouraged.   The adoption of this statement did
not have a material effect on its financial statements.</font><p>
<font size="2">In May 2003, FASB issued SFAS No. 150, <i>Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.  </i>SFAS No.
150 provides guidance on how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity.  Many of these
instruments were previously classified as equity.  This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003.  The statement requires cumulative effect transition for
financial instruments existing at the adoption date.  The adoption of this
statement did not have a material effect on its financial statements.</font><p>
<b><font size="2">6. INVENTORIES<br>
</font></b>
<font size="2">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>
<table border=0 cellpadding=0 cellspacing =0 width="670" >
<tr valign="top">
<td width="86" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="121" colspan="2" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="86" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" >
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="121" colspan="2" rowspan="1" >
<p align="center">
<b><font size="2">September 30,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="121" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" >
<p>
<font size="2">Finished goods</font></p>
</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="93" colspan="1" rowspan="1" >
<p align="right">
<font size="2">57,598&nbsp;</font></p align="right">
</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="99" colspan="1" rowspan="1" >
<p align="right">
<font size="2">13,690 &nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Work in process</font></p>
</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">--&nbsp;</font></p align="right">
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="121" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">

<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;182,638&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" >
<p>
<font size="2">Raw materials</font></p>
</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">520,040&nbsp;</font></p>
</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="121" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;232,616&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">577,638&nbsp;</font></p align="right">
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="121" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;428,944&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" >
<p>
<font size="2">Reserve for obsolescence</font></p>
</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">(20,000)</font></p>
</td>
<td width="36" colspan="1" rowspan="1" >


&nbsp;</td>
<td width="121" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(20,000)</font></p>
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
</p>
</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="93" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">557,638&nbsp;</font></p>
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="99" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">408,944&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="86" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="298" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="115" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="121" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<p>
<b><font size="2">7. INTANGIBLES<br>
</font></b>
<font size="2">Patents are carried at cost and, when granted are amortized over their estimated
useful lives. The carrying value of patents is periodically reviewed and
impairments, if any, are recognized when the expected future benefit to be
derived from an individual intangible asset is less than its carrying value.
Patents consist of the following:</font><p>
&nbsp;
<table border=0 cellpadding=0 cellspacing =0 width="670" >
<tr valign="top">
<td width="91" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="291" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: none; border-bottom-width: medium">
&nbsp;</td>
<td width="122" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<b><font size="2">September 30,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="91" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="291" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" style="border-right-style: none; border-right-width: medium" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="36" colspan="1" rowspan="1" style="border-style: none; border-width: medium" >
<p align="center">
&nbsp;</p>
</td>
<td width="122" colspan="2" rowspan="1" style="border-left-style: none; border-left-width: medium" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="91" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="291" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Patents at cost</font></p>
</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="21" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="95" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-right-style: none; border-right-width: medium">
<p align="right">
<font size="2">1,403,014&nbsp;</font></p align="right">
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-style: none; border-width: medium">
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style: none; border-left-width: medium">
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="100" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">1,287,058&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="91" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="291" colspan="1" rowspan="1" >
<p>
<font size="2">Accumulated amortization</font></p>
</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(243,052)</font></p>
</td>
<td width="36" colspan="1" rowspan="1" style="border-top-style: none; border-top-width: medium" >
&nbsp;</td>
<td width="122" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#ff0000">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(220,262)</font></p>
</td>
</tr>
<tr valign="top">
<td width="91" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="291" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Net patent</font></p>
</td>
<td width="14" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="21" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="95" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">1,159,962&nbsp;</font></p>
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="100" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">1,066,796&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="91" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="291" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="14" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="122" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<p>
<p>
<b><font size="2">8. PRODUCT WARRANTY COST<br>
</font></b>
<font size="2">The Company establishes a warranty reserve based on anticipated warranty claims
at the time product revenue is recognized. Factors affecting warranty reserve
levels include the number of units sold and anticipated cost of warranty repairs
and anticipated rates of warranty claims. The Company evaluates the adequacy of
the provision for warranty costs each reporting period.</font><p>
<font size="2">&nbsp;</font><div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">8</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p align="center">
<font size="2"><b>AMERICAN TECHNOLOGY CORPORATION</b><br>NOTES TO
INTERIM FINANCIAL STATEMENTS<br>(Unaudited)</font><p>
<font size="2">Changes in the warranty reserves during the three months ended December 31, 2003
and 2002 were as follows:</font></p>
<table border=0 cellpadding=0 cellspacing =0 width="670" >
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="15" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="270" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<b><font size="2">Three Months Ended</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="15" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="270" colspan="5" rowspan="1" >
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="15" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="118" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2002</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" >
<p>
<font size="2">Beginning balance</font></p>
</td>
<td width="15" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="94" colspan="1" rowspan="1" >
<p align="right">
<font size="2">319,500&nbsp;</font></p align="right">
</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="96" colspan="1" rowspan="1" >
<p align="right">
<font size="2">6,313&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Warranty provision</font></p>
</td>
<td width="15" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4,500)</font></p align="right">
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="118" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;--&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" >
<p>
<font size="2">Warranty payments</font></p>
</td>
<td width="15" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;--&nbsp;</font></p>
</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="118" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;--&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Ending balance</font></p>
</td>
<td width="15" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="94" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">315,000&nbsp;</font></p>
</td>
<td width="36" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="22" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="96" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">6,313&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="290" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="15" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="116" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="36" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="118" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<p>
<p>
<b><font size="2">9. STOCKHOLDERS' EQUITY <br>
</font> </b>
<font size="2">The following table summarizes changes in equity components from transactions
during the three months ended December 31,
2003:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><table border="0" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" cellspacing="0" height="189" width="670">
<tr valign="top">
<td width="252" bgcolor=#FFF3CE style="border-bottom-style: none; border-bottom-width: medium" valign="baseline">
&nbsp;</td>
<td width="129" colspan="2" bgcolor=#FFF3CE style="border-bottom-style: none; border-bottom-width: medium" valign="baseline">
&nbsp;</td>
<td width="129" colspan="2" bgcolor=#FFF3CE style="border-bottom-style: none; border-bottom-width: medium" valign="baseline">
&nbsp;</td>
<td width="78" bgcolor=#FFF3CE style="border-bottom-style: none; border-bottom-width: medium" valign="baseline">
<p align="center">
<font size="2">Additional</font></p align="center">
</td>
<td width="82" bgcolor=#FFF3CE style="border-bottom-style: none; border-bottom-width: medium" valign="baseline">
&nbsp;</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" style="border-style:none; border-width:medium; " >
&nbsp;</td>
<td width="129" colspan="2" rowspan="1" style="border-style:none; border-width:medium; " >
<p align="center">
<font size="2">Preferred Stock</font></p align="center">
</td>
<td width="129" colspan="2" rowspan="1" style="border-style: none; border-width: medium" >
<p align="center">
<font size="2">Common Stock</font></p align="center">
</td>
<td width="78" colspan="1" rowspan="1" style="border-style: none; border-width: medium" >
<p align="center">
<font size="2">Paid-In</font></p align="center">
</td>
<td width="82" colspan="1" rowspan="1" style="border-style: none; border-width: medium" >
<p align="center">
<font size="2">Accumulated</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-top-style:none; border-top-width:medium; border-bottom-style:solid; border-bottom-width:1">
&nbsp;</td>
<td width="68" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-top-style:none; border-top-width:medium; border-bottom-style:solid; border-bottom-width:1">
<p align="center">
<font size="2">Shares</font></p>
</td>
<td width="61" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-top-style:none; border-top-width:medium; border-bottom-style:solid; border-bottom-width:1">
<p align="center">
<font size="2">Amount</font></p>
</td>
<td width="65" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-top-style:none; border-top-width:medium; border-bottom-style:solid; border-bottom-width:1">
<p align="center">
<font size="2">Shares</font></p>
</td>
<td width="64" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-top-style:none; border-top-width:medium; border-bottom-style:solid; border-bottom-width:1">
<p align="center">
<font size="2">Amount</font></p>
</td>
<td width="78" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-top-style:none; border-top-width:medium; border-bottom-style:solid; border-bottom-width:1">
<p align="center">
<font size="2">Capital</font></p>
</td>
<td width="82" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-top-style:none; border-top-width:medium; border-bottom-style:solid; border-bottom-width:1">
<p align="center">
<font size="2">Deficit</font></p>
</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-bottom-style:none; border-bottom-width:medium" height="15" >
<p>
<font size="2">Balance as of October 1, 2003</font></p>
</td>
<td width="68" colspan="1" rowspan="1" style="border-left-style:none; border-left-width:medium" height="16" >
<p align="right">
<font size="2">313,250</font></p align="right">
</td>
<td width="61" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">$3&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="65" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">19,342,657</font></p align="right">
</td>
<td width="64" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">$193&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="78" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">$46,095,032</font></p align="right">
</td>
<td width="82" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">$<font color="#FF0000">(36,367,057)</font></font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-top-style: none; border-top-width: medium">
<p>
<font size="2">Stock issued upon exercise of stock options</font></p>
</td>
<td width="68" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">--</font></p align="right">
</td>
<td width="61" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">--&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="65" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">71,500</font></p align="right">
</td>
<td width="64" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">1&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="78" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">258,524</font></p align="right">
</td>
<td width="82" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">--</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" height="15" >
<p>
<font size="2">Stock issued upon exercise of warrants</font></p>
</td>
<td width="68" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">--</font></p align="right">
</td>
<td width="61" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">--&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="65" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">25,000</font></p align="right">
</td>
<td width="64" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">--&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="78" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">50,000</font></p align="right">
</td>
<td width="82" colspan="1" rowspan="1" height="15" >
<p align="right">
<font size="2">--</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Deemed dividends and accretion on<br>
&nbsp;&nbsp;convertible&nbsp;preferred stock of
$293,705</font></p>
</td>
<td width="68" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
- --</font></p align="right">
</td>
<td width="61" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
- --&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="65" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
- --</font></p align="right">
</td>
<td width="64" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
- --&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="78" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
- --</font></p align="right">
</td>
<td width="82" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2"><br>
- --</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" height="16" >
<p style="border-bottom:solid windowtext .5pt">
<font size="2">Net loss for the period</font></p>
</td>
<td width="68" colspan="1" rowspan="1" height="16" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">--</font></p>
</td>
<td width="61" colspan="1" rowspan="1" height="16" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">--&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="65" colspan="1" rowspan="1" height="16" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">--</font></p>
</td>
<td width="64" colspan="1" rowspan="1" height="16" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">--&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="78" colspan="1" rowspan="1" height="16" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">--</font></p>
</td>
<td width="82" colspan="1" rowspan="1" height="16" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2" color="#FF0000">(1,136,427)</font></p>
</td>
</tr>
<tr valign="top">
<td width="252" colspan="1" rowspan="1" bgcolor=#FFF3CE height="19">
<p style="border-bottom:double">
<font size="2">Balance as of December 31, 2003</font></p>
</td>
<td width="68" colspan="1" rowspan="1" bgcolor=#FFF3CE height="19">
<p align="right" style="border-bottom:double">
<font size="2">313,250</font></p>
</td>
<td width="61" colspan="1" rowspan="1" bgcolor=#FFF3CE height="19">
<p align="right" style="border-bottom:double">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$3&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="65" colspan="1" rowspan="1" bgcolor=#FFF3CE height="19">
<p align="right" style="border-bottom:double">
<font size="2">19,439,157</font></p>
</td>
<td width="64" colspan="1" rowspan="1" bgcolor=#FFF3CE height="19">
<p align="right" style="border-bottom:double">
<font size="2"> $194</font></p>
</td>
<td width="78" colspan="1" rowspan="1" bgcolor=#FFF3CE height="19">
<p align="right" style="border-bottom:double">
<font size="2">    $46,403,556</font></p>
</td>
<td width="82" colspan="1" rowspan="1" bgcolor=#FFF3CE height="19">
<p align="right" style="border-bottom:double">
<font size="2">$<font color="#FF0000">(37,503,484)</font></font></p>
</td>
</tr>
</table>
<p>
<p>
<font size="2">At December 31, 2003 the Company's 50,000 outstanding shares of Series D
Convertible Preferred Stock would have been convertible into 122,260 shares of
common stock and the 263,250 outstanding shares of Series E Convertible
Preferred Stock would have been convertible into 851,307 shares of common
stock.</font><p>
<font size="2">The following table summarizes information about stock option activity during
the three months ended December 31, 2003:</font></p>
 <table border="0" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" cellspacing="0">
<tr valign="top">
<td width="461.333218" colspan="2" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
&nbsp;</td>
<td width="101.333308" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
<p align="center">
<font size="2">Number of<br>Options</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
<p align="center">
<font size="2">Weighted Average<br>exercise
price</font></p>
</td>
</tr>
<tr valign="top">
<td width="461.333218" colspan="2" rowspan="1" style="border-left-style:none; border-left-width:medium; border-right-style:none; border-right-width:medium; border-bottom-style:none; border-bottom-width:medium" >
<p>
<font size="2">Outstanding October 1, 2003</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" style="border-left-style: none; border-left-width: medium; border-top-style:solid; border-top-width:1" >
<p align="right">
<font size="2">1,612,274&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" style="border-top-style: solid; border-top-width: 1" >
<p align="center">
<font size="2">$4.00</font></p>
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-top-style: none; border-top-width: medium">
&nbsp;</td>
<td width="437.333224" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-top-style: none; border-top-width: medium">
<p>
<font size="2">Canceled/expired</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2" color="#FF0000">(145,000)</font><font size="1" color="#FF0000">&nbsp;&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="125.333302" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<font size="2">$6.00</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="437.333224" colspan="1" rowspan="1" >
<p>
<font size="2">Exercised</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" >
<p align="right">
<font size="2" color="#FF0000">(71,500)&nbsp;&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="125.333302" colspan="1" rowspan="1" >
<p align="center">
<font size="2">$3.62</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
&nbsp;</td>
<td width="437.333224" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
<p>
<font size="2">Granted</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
<p align="right">
<font size="2">325,000&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
<p align="center">
<font size="2">$4.76</font></p>
</td>
</tr>
<tr valign="top">
<td width="461.333218" colspan="2" rowspan="1" >
<p style="border-bottom:solid windowtext .5pt">
<font size="2">Outstanding December 31, 2003</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" style="border-top-style: solid; border-top-width: 1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">1,720,774&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" style="border-top-style: solid; border-top-width: 1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">$4.00</font></p>
</td>
</tr>
<tr valign="top">
<td width="461.333218" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p style="border-bottom:double">
<font size="2">Exercisable at December 31, 2003</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">1,029,285&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:double">
<font size="2">$3.66</font></p>
</td>
</tr>
</table>
<p>
<p>
<font size="2">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 3.3 years.
</font> <p>
<font size="2">The following table summarizes information about warrant activity during the
three months ended December 31, 2003:</font></p>
<div style="position:relative; left: 0">
  <table border="0" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" cellspacing="0">
<tr valign="top">
<td width="461.333218" colspan="2" rowspan="1" bgcolor=#FFF3CE style="border-bottom-style: solid; border-bottom-width: 1">
&nbsp;</td>
<td width="101.333308" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">Number of<br>Warrants</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">Weighted Average<br>exercise
price</font></p>
</td>
</tr>
<tr valign="top">
<td width="461.333218" colspan="2" rowspan="1" style="border-top-style: solid; border-top-width: 1" >
<p style="border-bottom:solid windowtext .5pt">
<font size="2">Outstanding October 1, 2003</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">2,427,802&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">$3.85</font></p>
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="437.333224" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Canceled/expired</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">--&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="125.333302" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<font size="2">--</font></p align="center">
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="437.333224" colspan="1" rowspan="1" style="border-bottom-style: none; border-bottom-width: medium" >
<p>
<font size="2">Exercised</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" style="border-bottom-style: none; border-bottom-width: medium" >
<p align="right">
<font size="2">(25,000)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="125.333302" colspan="1" rowspan="1" style="border-bottom-style: none; border-bottom-width: medium" >
<p align="center">
<font size="2">$2.00</font></p align="center">
</td>
</tr>


<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-right-style: none; border-right-width: medium; border-bottom-style: solid; border-bottom-width: 1">
&nbsp;</td>
<td width="437.333224" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style: none; border-left-width: medium; border-right-style: none; border-right-width: medium; border-top-style: none; border-top-width: medium; border-bottom-style: solid; border-bottom-width: 1">
<p>
<font size="2">Granted</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style: none; border-left-width: medium; border-right-style: none; border-right-width: medium; border-top-style: none; border-top-width: medium; border-bottom-style: solid; border-bottom-width: 1">
<p align="right">
<font size="2">--&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" bgcolor=#FFF3CE style="border-left-style: none; border-left-width: medium; border-right-style: none; border-right-width: medium; border-top-style: none; border-top-width: medium; border-bottom-style: solid; border-bottom-width: 1">
<p align="center">
<font size="2">--</font></p>
</td>
</tr>
<tr valign="top">
<td width="461.333218" colspan="2" rowspan="1" >
<p style="border-bottom:double">
<font size="2">Outstanding December 31, 2003</font></p>
</td>
<td width="101.333308" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">2,402,802&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="125.333302" colspan="1" rowspan="1" >
<p align="center" style="border-bottom:double">
<font size="2">$3.87</font></p>
</td>
</tr>
</table></div>
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">9</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p align="center">
<font size="2"><b>AMERICAN TECHNOLOGY CORPORATION</b><br>NOTES TO
INTERIM FINANCIAL STATEMENTS<br>(Unaudited)</font><p>
<font size="2">At December 31, 2003, the following stock purchase warrants were outstanding
arising from offerings and other transactions, each exercisable into one common
share:</font></p align="center">
  <table border="0" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" cellspacing="0" width="546">
<tr valign="top">
<td width="114" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="88" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="53" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="107" bgcolor=#FFFFFF>
<p align="center">
<b><font size="2">Exercise</font></b></p align="center">
</td>
<td width="47" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="137" bgcolor=#FFFFFF>
<p align="center">
<b><font size="2">Expiration</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>Number</b></font></p>
</td>
<td width="53" colspan="1" rowspan="1" >
<p align="center">
<b><font size="2">&nbsp;</font></b></p align="center">
</td>
<td width="107" colspan="1" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>Price</b></font></p>
</td>
<td width="47" colspan="1" rowspan="1" >
<p align="center">
<b><font size="2">&nbsp;</font></b></p align="center">
</td>
<td width="137" colspan="1" rowspan="1" >
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>Date</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="47" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="114" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" >
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;50,000&nbsp;&nbsp; </font>    </p align="right">
</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$10.00&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" >
<p align="right">
<font size="2">January 5, 2004</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;75,000&nbsp;&nbsp; </font>    </p align="right">
</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$11.00&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">March 31, 2005</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" >
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;812,500&nbsp;&nbsp; </font>    </p align="right">
</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$2.00&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" >
<p align="right">
<font size="2">September 30, 2006</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;495,880&nbsp;&nbsp; </font>    </p align="right">
</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$3.01&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">March 31, 2007</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" >
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;454,547&nbsp;&nbsp; </font>    </p align="right">
</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$6.75&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" >
<p align="right">
<font size="2">July 10, 2007</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">


<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;100,000&nbsp;&nbsp; </font>    </p align="right">
</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$4.25&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">September 30, 2007</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" >
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;364,875&nbsp;&nbsp; </font>    </p align="right">
</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$3.25&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" >
<p align="right">
<font size="2">December 31, 2007</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;50,000&nbsp;&nbsp;    </font></p>
</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$3.63&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">April 8, 2007</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="114" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:double">
<font size="2">  2,402,802&nbsp;&nbsp;    </font></p>
</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="114" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="88" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="107" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="47" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="137" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
</table>
<p>
<p>
<b><font size="2">10. BUSINESS SEGMENT DATA AND MAJOR CUSTOMER<br>
</font></b>
<font size="2">The Company is engaged in design, development and commercialization of sound,
acoustic and other technologies. In the fourth quarter of fiscal 2003 the
Company organized operations into two segments by the end-user markets they
serve. The Company's reportable segments are strategic business units that sell
the Company's products to distinct distribution channels. The Business Products
and Licensing Group (Business Group) licenses and markets HSS, NeoPlanar and
Purebass products to companies that employ audio in consumer, commercial and
professional applications. The Government and Force Protection Systems Group
(Government Group) markets LRAD, NeoPlanar and HSS products to government and
military customers and to the expanding force protection market. The segments
are managed separately because each segment requires different selling and
marketing strategies as the class of customers within each segment is
different.</font><p>
<font size="2">The Company does not allocate operating expenses or assets between its two
reportable segments. Accordingly the measure of profit for each reportable
segment is based on gross profit. Although the segments became separately
managed only in the last quarter of fiscal 2003, the Company has segmented
historical operations for comparable customers for comparison.</font></p>
<table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="89.333311" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="233.333275" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<b><font size="2">Three Months Ended</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="233.333275" colspan="5" rowspan="1" >
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2002</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" >
<p>
<font size="2">Revenues:</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="119.999970" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="119.999970" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Business Group</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">81,939&nbsp;</font></p align="right">
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">388,353&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="119.999970" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="119.999970" colspan="2" rowspan="1" >
<p>
<font size="2">Government Group</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;692,839&nbsp;</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;34,946&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">774,778&nbsp;</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">423,299&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor="#FFFFFF" >
&nbsp;</td>


<td width="89.333311" colspan="1" rowspan="1" >
&nbsp;</td>


<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="233.333275" colspan="5" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="233.333275" colspan="5" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2002</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="119.999970" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="119.999970" colspan="2" rowspan="1" >
<p>
<font size="2">Gross Profit (Loss):</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="119.999970" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="119.999970" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Business Group</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(3,612)</font></p align="right">
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">84,002&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="119.999970" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="119.999970" colspan="2" rowspan="1" >
<p>
<font size="2">Government Group</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;369,912&nbsp;</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;17,662&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">366,300&nbsp;</font></p>
</td>
<td width="29.333326" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="83.999979" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">101,664&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="89.333311" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="89.333311" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="29.333326" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="101.333308" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<p>
<p>
<font size="2">For the three months ended December 31, 2003 sales to General Dynamics Armament
and Technical Products, Inc. and its affiliate Bath Iron Works accounted for 76%
of total revenues and at December 31, 2003 accounted for 55% of outstanding
accounts receivable, which were subsequently collected. In February 2004, the
Company terminated for cause two licensing and sales agreements with General
Dynamics Armament and Technical Products, Inc. (GD-ATP), originally entered into
in February 2003. The Company does not believe that the termination of the
GD-ATP agreements will have an adverse effect on future results of operations.
See "Item 2 - Recent Developments" below.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">10</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p align="center">
<b><font size="2">AMERICAN TECHNOLOGY CORPORATION</font></b><font size="2"><br>NOTES TO INTERIM FINANCIAL
STATEMENTS<br>(Unaudited)</font><p>
<b><font size="2">11. LEGAL PROCEEDINGS<br>
</font></b>
<font size="2">In September 2003, the Company filed a complaint against eSOUNDideas, Inc., in
the Superior Court of California, County of San Diego, alleging breach of
contract and seeking a declaratory judgement to the effect that a License,
Purchase and Marketing Agreement dated September 28, 2000 (the "ESI License
Agreement") with eSOUNDideas, a California partnership, was properly terminated
in May 2003. The principals of eSOUNDideas are Greg O. Endsley and Douglas J.
Paschall.  The principals also founded a corporation, eSOUNDideas, Inc., which
purported to assume the contractual obligations of eSOUNDideas.  The Company
amended the complaint in November 2003 to include eSOUNDideas (the general
partnership), Mr. Endsley and Mr. Paschall as defendants.  For convenience, the
following discussion refers to eSOUNDideas and eSOUNDideas, Inc. collectively as
"ESI."  In November 2003, the Company filed complaints in the Superior Court of
California, County of San Diego, against Mr. Endsley and Paschall seeking
declaratory judgments that options granted to each of Mr. Endsley and Mr.
Paschall in April 2001 were terminated in October 2002.</font><p>
<font size="2">The ESI License Agreement formerly appointed ESI as an exclusive distributor of
HSS products specifically targeted to the point of sale/purchase, kiosk and
display, and the event, trade show and exhibit markets in North America for five
years.  In June 2002, the Company and ESI purported to enter into an amendment
to the ESI License Agreement, extending the term to ten years commencing on the
first delivery of a commercial HSS product to an end user, and eliminating
minimum purchase requirements for the first three years. The Company believes
the amendment was invalid as it was given in consideration for a large order
from ESI which was later withdrawn by ESI due to a dispute over the payment and
delivery terms of such order. In May 2003, the Company gave notice to ESI of
termination of the ESI License Agreement. The Company based its termination on
its belief that ESI had failed to fulfill certain covenants contained in the ESI
License Agreement related to efforts and resources required to maximize the
distribution and sales of HSS products in its product categories.  Under the
terms of the ESI License Agreement, the termination was effective immediately,
but ESI had sixty days to cure conditions giving rise to termination and

reinstate the agreement.  ESI did not tender a cure within such sixty day
period.</font><p>
<font size="2">The defendants in these cases have filed a cross-complaint against the Company
alleging breach of contract in connection with the ESI License Agreement and the
stock options granted to Mr. Endsley and Mr. Paschall, breach of the implied
covenant of good faith and fair dealing, intentional interference with contract,
negligent interference with contract, intentional interference with prospective
economic advantage, negligent interference with prospective economic advantage,
defamation, fraud, and violation of California Business and Professions Code
&#167;17200.  The defendants seek actual and punitive damages in unstated
amounts and other relief.</font><p>
<font size="2">The Company intends to vigorously pursue its complaints against the defendants
in these cases, and to vigorously challenge the defendants' cross-complaint.</font><p>
<font size="2">Related to the Company's April 2000 purchase of the NeoPlanar speaker
technology, the Company has been in dispute with a predecessor owner of the
technology regarding a minimum film royalty for 2002 of approximately $228,000.
The Company agreed to arbitrate the dispute in front of a single arbitrator in
Seattle, Washington.  The technology purchase agreement required a minimum
royalty in 2002 to maintain exclusive film supply. The Company believes the
minimum royalty for 2002 was not due and film exclusivity was terminated. In
September 2003 the Company accrued $292,500 as the estimated cost to settle this
matter and to buyout all future per unit film royalties. In December 2003 the
Company reached a non-binding agreement to settle this matter for a payment of
$25,000 and the issuance of 50,000 shares of common stock. However, the
definitive documentation for this settlement is still under negotiation and the
dispute may not therefore settle on the foregoing terms.</font><p>
<font size="2">The Company may at times be
involved in litigation in the ordinary course of business. Except as set forth
above, there are no pending material legal proceedings to which the Company is a
party or to which any of its property is subject.</font><p>
<b><font size="2">12. INCOME TAXES<br>
</font></b>
<font size="2">At December 31, 2003, 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. At September 30, 2003 the
Company had for federal income tax purposes net operating loss carryforwards of
approximately $28,500,000 which expire through 2024 of which certain amounts are
subject to limitations under the Internal Revenue Code of 1986, as
amended.</font><p>
&nbsp;<p>
&nbsp;<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">11</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><a name="Item 2.">Item 2. </a>Management's Discussion and Analysis of Financial Condition and
Results of Operations</b><p>
<b><font size="2">Forward Looking Statements</font></b><p>
<i><font size="2">This Report contains certain statements of a forward-looking nature relating
to future events or the future performance.&nbsp; Words such as</font></i><font size="2">
"<i>expects,</i>" "<i>anticipates,</i>" "<i>intends,</i>" "<i>plans,</i>"
"<i>believes,</i>" "<i>seeks,</i>" "<i>estimates</i>"<i> and similar expressions
or variations of such words are intended to identify forward-looking statements,
but are not the only means of identifying forward-looking statements.&nbsp;
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially.&nbsp; In evaluating
such statements, prospective investors should specifically consider various
factors identified in this Report, including the matters set forth below under
the caption</i> "<i>Business Risks</i>"</font><i><font size="2"> , which could cause actual results to
differ materially from those indicated by such forward-looking
statements.</font></i><p>
<b><font size="2">Overview</font></b><p>
<font size="2">We are an innovator of proprietary sound reproduction technologies and products.
Our HyperSonic Sound (HSS) technology is a new method of sound reproduction that
uses parametric acoustics to create sound "in the air." Sound is generated along
an air column using ultrasonic frequencies, those above the normal range of
hearing. The HSS sound beam is highly directional and maintains sound volume
over longer distances than traditional loudspeakers. We believe HyperSonic
Sound's unique features are useful in new sound applications. We believe we are
the leader in developing and commercializing parametric loudspeakers.</font><p>
<font size="2">We also have developed additional sound reproduction technologies. Our Long
Range Acoustic Device (LRAD) technology produces variable intensity acoustical
sound intended for use in long-range delivery of directional sound information,
effectively a supercharged megaphone. LRAD products are used as directed
long-range hailing and warning systems. Our NeoPlanar technology is a thin film
magnetic speaker that produces sound of high quality, low distortion and high
volume. NeoPlanar applications include high-end sound systems and public
address. Our PureBass extended range woofer employs unique cabinet construction,
novel vent configurations and multiple acoustic filters to minimize distortion
and provide high output. It provides a high frequency interface with our
NeoPlanar panels and other upper range satellite speaker systems.</font><p>
<font size="2">We are focusing our marketing efforts on providing sound reproduction products
and components to customers and licensing our technologies for customer
applications. When we supply systems or components used in other products to
customers, distributors or OEMs, we include our intellectual property fees in
the selling prices of the systems or components. We currently produce HSS
systems and NeoPlanar panels as components of a sound system. When we license a
sound 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>
<font size="2">Our various technologies are high risk in nature. 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. Unanticipated technical or manufacturing obstacles can
arise at any time and disrupt sales or licensing activities and result in
lengthy and costly delays. Our technologies may not achieve market acceptance
sufficient to sustain operations or achieve future profits.</font><p>
<b><font size="2">Recent Developments</font></b><p>
<font size="2">In February 2004, we terminated for cause two licensing and sales agreements
with General Dynamics Armament and Technical Products, Inc. (GD-ATP), originally
entered into in February 2003.  GD-ATP was the original licensee under one
agreement, and took assignment of the rights of Bath Iron Works Corporation,
another subsidiary of General Dynamics Corporation, under the other agreement.
The agreements formerly gave GD-ATP the right to purchase, market and resell
NeoPlanar and HIDA (High Intensity Directional Acoustics) products and
components with exclusive rights for specified applications to certain
government customers, including the Department of Defense, Department of Homeland Security and certain Federal, State and local agencies.  GD-ATP has
disputed our right to terminate the agreements for cause.</font><div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">13</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<font size="2">Revenues under the GD-ATP agreements and a prior professional services agreement
with Bath Iron Works represented approximately 76% of our revenues during the
quarter ended December 31, 2003, and 24% of our revenues during the fiscal year
ended September 30, 2003. A total of 55% of our accounts receivable at December
31, 2003 related to revenues pursuant to these agreements, all such receivable
amounts were collected subsequent to December 31, 2003. </font> <p>
<font size="2">We do not however believe that our termination of the GD-ATP agreements will
have an adverse effect on our future results of operations, as we have been
providing sales and technical support to GD-ATP, Bath Iron Works and their
customers pursuant to the terms of the agreements, and we have substantial
internal resources to pursue and serve customers that were formerly subject to
the GD-ATP agreements. We believe these resources will be more effective than
the resources formerly employed by GD-ATP.  We also intend to utilize other
external resources and partners that we believe will result in better exposure
for our NeoPlanar and LRAD technologies to government and military customers. We
cannot however assure you that our termination of the GD-ATP agreements will not
adversely affect our financial position or results of operations.  We intend to
enforce our contractual rights and to defend vigorously any action that GD-ATP
brings under the agreements.  However, legal proceedings may be costly and are
inherently uncertain in outcome, and accordingly, any legal action brought
against us by GD-ATP might cause a material adverse effect on our financial
position and results of operations.</font><p>
<b><font size="2">Critical Accounting Policies</font></b><p>
<font size="2">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's Discussion and Analysis of Financial Condition and
Results of Operations when such policies affect our reported and expected
financial results.</font><p>
<font size="2">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 accordance with
accounting principles generally accepted in the United States of America for
interim financial information. Actual results could materially differ from those
estimates under different assumptions and conditions and operating results for
the three month periods presented are not necessarily indicative of the results
that may be expected for the year. 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>
<i><font size="2">Revenue Recognition. </font>  </i><font size="2">We derive our revenue primarily from two sources:
(i) component and product sale revenues and (ii) contract and license fee
revenue. Component and product sale 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 remaining 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 ultimate
customer accepts the product 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>
<i><font size="2">Intangible Assets</font></i><font size="2">.  Intangible assets include purchased technology and
patents which are amortized over their estimated useful lives. The carrying
value of such assets are periodically reviewed and impairments, if any, are
recognized when the expected future benefit to be derived from an individual
intangible asset is less than its carrying value.</font><p>
<i><font size="2">Warranty Reserve</font></i><font size="2">. We establish a warranty reserve based on anticipated
warranty claims at the time product revenue is recognized. Factors affecting
warranty reserve levels include the number of units sold and anticipated cost of
warranty repairs and anticipated rates of warranty claims. We evaluate the
adequacy of the provision for warranty costs each reporting period.</font><p>
<i><font size="2">Guarantees and Indemnifications</font></i><font size="2">.  Under our bylaws, we have agreed to
indemnify our officers and directors for certain events. We also enter into
certain indemnification agreements in the normal course of our business. The
Company has no liabilities recorded for such indemnities.</font><p>
<i><font size="2">Stock-Based Compensation</font></i><font size="2">. We have adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," for disclosure purposes. Under SFAS No. 123, we
measure compensation expense for our stock-based employee compensation plan
using the intrinsic value method prescribed in Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. We provide pro forma disclosure of the effect on net income or
loss as if the fair value based method prescribed in SFAS No. 123 has been
applied in measuring compensation expense. </font> </p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">14</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<i><font size="2">Research and Development Expenses. </font> </i><font size="2">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>
<i><font size="2">Deferred Tax Asset. </font> </i><font size="2">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>
<b><font size="2">Off-Balance Sheet Arrangements</font></b><p>
<font size="2">We do not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
"special purpose entities" (SPEs).</font><p>
<b><font size="2">Results of Operations</font></b><p>
<u><font size="2">Revenues<br>
</font></u>
<font size="2">Revenues increased 83% for the three month period ended December 31, 2003 (first
quarter fiscal 2004) to $774,778 compared to $423,299 for the comparable first
three months of fiscal 2003. Fiscal 2004 first quarter revenues included
$618,584 of product and component sales and $156,194 of contract and license
revenues. Fiscal 2003 first quarter revenues included $387,967 of product sales
and $35,332 of contract and license revenues. First quarter 2003 revenues
included $83,221 for portable consumer products. Portable consumer product
revenues represented products sourced by us, private labeled under our name and
resold to sporting good stores and other retailers. Throughout fiscal 2003 we
reduced our marketing emphasis on portable consumer products in order to focus
financial, personnel and facility resources on our sound technologies. As a
result, there were no sales of portable consumer products in the first quarter
of fiscal 2004.</font><p>
<font size="2">Contract and license revenues for the quarters ending December 31, 2003 and 2002
were $156,194 and $35,332. At December 31, 2003 and 2002 we had $301,708 and
$250,001 recorded as deferred revenue for existing contracts and licenses. At
December 31, 2003 we also recorded a customer deposit of $86,117 for an order in
process.</font><p>
<font size="2">As we have only recently commenced product manufacturing and sales, have limited
record of recurring sales and because difficulties producing HSS systems in

fiscal 2003 caused delays in order fulfillment, we do not consider order backlog
to be an important index of future performance at this time. Our order backlog
was approximately $530,000 and $130,000 at December 31, 2003 and 2002. Backlog
orders are subject to cancellation or rescheduling by our customers.</font><p>
<font size="2">Late in fiscal 2003, with the addition of new personnel, we organized operations
into two segments by the end-user markets they serve. Our Business Products and
Licensing Group (Business Group) licenses and markets HSS, NeoPlanar and
Purebass products to companies which employ audio in consumer, commercial and
professional applications. Our Government and Force Protection Systems Group
(Government Group) markets LRAD, NeoPlanar and HSS products to government and
military customers and to the expanding force protection market. Although the
segments became separately managed in the last quarter of fiscal 2003, we have
segmented historical operations for comparable end-user customers for comparison
purposes.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">15</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<font size="2">Presented below is a summary of revenues by business segment:</font></p>
<table border=0 cellpadding=0 cellspacing =0 width="632" style="border-collapse: collapse" bordercolor="#111111" >
<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="254" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="239" colspan="5" rowspan="1" >
<p align="center">
<b><font size="2">Three Months Ended</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="254" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="239" colspan="5" rowspan="1" >
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="254" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" style="border-bottom-style: solid; border-bottom-width: 1" >
<p align="center">
<b><font size="2">2003</font></b></p align="center">
</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="95" colspan="2" rowspan="1" style="border-bottom-style: solid; border-bottom-width: 1" >
<p align="center">
<b><font size="2">2002</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="254" bgcolor="#FFF3CE" >
<p>
<font size="2">Revenues:</font></p>
</td>
<td width="17" bgcolor="#FFF3CE" >
&nbsp;</td>
<td width="23" bgcolor="#FFF3CE" >
&nbsp;</td>
<td width="97" colspan="2" bgcolor="#FFF3CE" style="border-top-style: solid; border-top-width: 1" >
&nbsp;</td>
<td width="47" bgcolor="#FFF3CE" >
&nbsp;</td>
<td width="95" colspan="2" bgcolor="#FFF3CE" style="border-top-style: solid; border-top-width: 1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="271" colspan="2" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;Business Group</font></p>
</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="19" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="78" colspan="1" rowspan="1" >
<p align="right">
<font size="2">81,939</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="18" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="77" colspan="1" rowspan="1" >
<p align="right">
<font size="2">388,353</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="271" colspan="2" bgcolor="#FFF3CE" >
<p>
<font size="2">&nbsp;&nbsp;Government Group</font></p>
</td>
<td width="23" bgcolor="#FFF3CE" >
&nbsp;</td>
<td width="97" colspan="2" bgcolor="#FFF3CE" style="border-bottom-style: solid; border-bottom-width: 1" >
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;692,839 </font> </p align="right">
</td>
<td width="47" bgcolor="#FFF3CE" >
&nbsp;</td>
<td width="95" colspan="2" bgcolor="#FFF3CE" style="border-bottom-style: solid; border-bottom-width: 1" >
<p align="right">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;34,946 </font> </p align="right">
</td>
</tr>

<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="254" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="19" colspan="1" rowspan="1" style="border-top-style: solid; border-top-width: 1; border-bottom-style: double; border-right-style:none; border-right-width:medium" >
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="78" colspan="1" rowspan="1" style="border-top-style: solid; border-top-width: 1; border-bottom-style: double; border-right-style:none; border-right-width:medium" ><p align="right">
<font size="2">774,778</font></p align="right">
</td>
<td width="47" colspan="1" rowspan="1" style="border-left-style: none; border-left-width: medium" >
&nbsp;</td>
<td width="18" colspan="1" rowspan="1" style="border-top-style: solid; border-top-width: 1; border-bottom-style: double; border-right-style:none; border-right-width:medium" ><p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="77" colspan="1" rowspan="1" style="border-top-style: solid; border-top-width: 1; border-bottom-style: double; border-right-style:none; border-right-width:medium" ><p align="right">
<font size="2">423,299</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="99" rowspan="1" >
&nbsp;</td>
<td width="254" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="97" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="47" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="95" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<p>
<p>
<font size="2">Business Group revenues for the three months ended December 31, 2003 included
HSS and NeoPlanar product sales. Business Group revenues for the comparable
three months of the prior year included $83,221 for portable consumer products
with the balance from initial HSS startup sales and NeoPlanar product sales. HSS
sales declined and shipments were sporadic in the last three quarters of fiscal
2003 as we worked through manufacturing and material issues. In the first
quarter of fiscal 2004 we began to slowly ramp HSS shipments to selected
customers. We expect Business Group HSS and NeoPlanar product shipments to ramp
up during the balance of fiscal 2004.</font><p>
<font size="2">Government Group revenues for the three months ended December 31, 2003 included
sales of $536,645 of LRAD and NeoPlanar products and $156,194 of revenues from
engineering and contract work. Government Group revenues for the prior year's
first quarter were primarily from contract work for the development of our LRAD
technology. Our Government Group has only recently been formed and until
recently was highly dependent on the contracts described above under "Recent
Developments," which have been terminated by us for cause.  Accordingly, we do
not believe historical revenues are indicative of future revenues.</font><p>
<font size="2">For the first quarter of fiscal 2004 sales to General Dynamics Armament and
Technical Products, Inc. and its affiliate Bath Iron Works accounted for 76% of
revenues and at December 31, 2003 accounted for 55% of outstanding accounts
receivable, which were subsequently collected. See "Recent Developments"
above.</font><p>
<u><font size="2">Gross Profit<br>
</font></u>
<font size="2">Presented below is the gross profit or loss by business segment.</font>
<table border=0 cellpadding=0 cellspacing =0 width="632" >
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="258" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="239" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<b><font size="2">Three Months Ended</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="258" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="239" colspan="5" rowspan="1" >
<p align="center">
<b><font size="2">December 31,</font></b></p align="center">
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="258" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="91" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2003</b></font></p>
</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="95" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2"><b>2002</b></font></p>
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="275" colspan="2" rowspan="1" >
<p>
<font size="2">Gross Profit (Loss):</font></p>
</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="91" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="95" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>
<td width="275" colspan="2" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Business Group</font></p>
</td>
<td width="23" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="19" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="72" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font color="#ff0000" size="2">(3,612)</font></p align="right">
</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="18" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">$</font></p align="right">
</td>
<td width="77" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">84,002</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="275" colspan="2" rowspan="1" >
<p>
<font size="2">&nbsp;&nbsp;&nbsp;Government Group</font></p>
</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="91" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;369,912&nbsp;</font></p>
</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="95" colspan="2" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;17,662 </font></p>
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor=#FFFFFF>
&nbsp;</td>

<td width="258" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>

<td width="17" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="19" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="72" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">366,300&nbsp;</font></p>
</td>
<td width="53" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="18" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$</font></p>
</td>
<td width="77" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">101,664</font></p>
</td>
</tr>
<tr valign="top">
<td width="95" bgcolor="#FFFFFF" >
&nbsp;</td>
<td width="258" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="23" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="91" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="53" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="95" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<p>
<p>
<font size="2">The overall gross profit for the three months ended December 31, 2003 was 47%,
an increase from the 24% reported for the comparable first quarter of the prior

year. We experienced a small gross loss on Business Group operations for the
first quarter due to a slow ramping of sales efforts following manufacturing and
warranty issues encountered in fiscal 2003 on HSS systems. For the 2003 fiscal
year we had a gross loss in Business Group operations primarily as a result of
warranty costs incurred in the last quarter of fiscal 2003. Accordingly, we do
not believe historical gross profit results are indicative of future results. We
expect Business Group product sales to produce positive margins in the balance
of fiscal 2004 as we grow manufacturing capacity. Our Government Group has only
recently been formed and until recently was highly dependent on the contracts
described above under "Recent Developments," which have been terminated by us
for cause.  Accordingly, we do not believe gross profit historical results are
indicative of future gross profit results. Gross profit percentage is highly
dependent on sales prices, volumes, personnel allocations and assignments,
purchasing costs and overhead allocations. Our various sound products have
different margins so product sales mix can materially affect gross profits. We
continue to make model changes including raw material and component changes thus
changing cost inputs. Margins may vary significantly from period to period.</font><p>
<u><font size="2">Selling, General and Administrative Expenses<br>
</font></u>
<font size="2">Selling, general and administrative expenses as a percentage of sales were 138%
for the first fiscal 2004 quarter compared to 179% in the comparable period for
fiscal 2003. These costs in the first quarter of fiscal 2004 totaled $1,072,314
an increase of $315,997 from the $756,317 incurred in the first quarter of
fiscal 2003. Personnel costs increased $238,000 in the current quarter compared
to the prior period as a result of personnel additions made in late fiscal 2003
including the formation of our Government Group. Legal costs decreased by
$99,500 but may vary significantly quarter to quarter due to licensing and
contract initiatives, legal disputes and other matters. Other increases in the
current year included a $36,000 increase in audit and professional fees due to
regulatory changes and requirements, a $24,000 increase in filing and listing
fees resulting primarily from stock issuances in 2003, a $45,000 increase in
occupancy costs resulting from increased activity and a $10,000 increase in
computer expenses related to new systems and increased
activity.</font><p>
&nbsp;<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">16</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<font size="2">We may expend additional resources on marketing our sound technologies in the
future periods which may increase selling, general and administrative
expenses.</font><p>
<u><font size="2">Research and Development Expenses<br>
</font></u>
<font size="2">Research and development expenses declined from fiscal 2003 to 2004. Research
and development expenses as a percentage of sales were 58% for the first fiscal
2004 quarter compared to 137% in the comparable period for fiscal 2003. These
costs in the first quarter of fiscal 2004 totaled $448,971 a decrease of
$132,450 from the $581,421 incurred in the first quarter of fiscal 2003.
Personnel and consulting costs decreased in the first quarter of 2004 by $80,000
while component and prototype related costs increased by $57,000. Fewer
personnel are involved in current research and development but we continue to
test new prototypes and production methods. Fiscal 2003 research and development
costs included $105,207 of amortization expense related to purchased technology.
There was no comparable amortization in the most recent quarter as the purchased
technology is fully amortized. </font> <p>
<font size="2">Research and development costs vary period to period due to the timing of
projects, the availability of funds for research and development and the timing
and extent of use of outside consulting, design and development firms. We expect
fiscal 2004 research and development costs to remain at comparable levels to
fiscal 2003 or at lower levels based on current staffing.</font><p>
<u><font size="2">Loss From Operations<br>
</font></u>
<font size="2">Total operating expenses were $1,521,285 for the three months ended December 31,
2003, comparable to the $1,337,738 for the comparable period ended December 31,
2002. Our loss from operations was $1,154,985 for the first quarter of fiscal
2004 compared to $1,236,074 for the first quarter of fiscal 2003. We expect
increased product sales and contributions in fiscal 2004 to reduce the loss from
operations from fiscal 2003 levels.</font><p>
<u><font size="2">Other Income (Expense)<br>
</font></u>
<font size="2">The major item in other income (expense) is interest expense. In the first
quarter of fiscal 2004 we incurred interest expense of $816 a reduction of
$497,086 from interest expense of $497,902 in the first fiscal 2003 quarter,
which included non-cash amortization of debt discount of $405,000. During fiscal
2003 our outstanding long-term debt was converted to equity causing the decline
in interest expense. We do not expect any significant interest costs in fiscal
2004.</font><p>
<u><font size="2">Net Loss<br>
</font></u>
<font size="2">The net loss for first three months of fiscal 2004 was $1,136,427 compared to
the net loss of $1,731,645 for the first three months of the prior year. The
reduction in the net loss resulted primarily from increased revenues and reduced
interest expense.</font><p>
<u><font size="2">Net Loss Available to Common Stockholders<br>
</font></u>
<font size="2">Net loss available to common stockholders was increased in each period presented
in computing net loss per share by the accretion of the value of imputed deemed
dividends arising from the beneficial conversion discount and the value of
warrants associated with convertible preferred stock. The imputed deemed
dividends are not contractual obligations to pay such imputed dividends. Net
loss available to common stockholders is also increased by the 6% accretion
(similar to a dividend) on outstanding preferred stock. These amounts aggregated
$293,705 in the first quarter of fiscal 2004 and $158,798 in the first quarter
of fiscal 2003. Accordingly the net loss available to common stockholders was
$1,430,132 and $1,890,443 each period.</font><p>
<b><font size="2">Liquidity and Capital Resources</font></b><p>
<font size="2">We have experienced significant negative cash flow from operating activities
including developing and introducing our sound technologies. Our net cash used
in operating activities was $2,029,204 for the three months ended December 31,
2003. As of December 31, 2003, the net loss of $1,136,427 included certain
expenses not requiring the use of cash totaling $49,696. In addition, cash was
used in operating activities through an increase of $505,220 in accounts

receivable, an increase of $148,694 in inventory, an increase of $35,111 in
prepaid expenses and a decrease of $253,448 in accounts payable and accrued
liabilities.</font><p>
<font size="2">At December 31, 2003, we had accounts receivable of $689,382 as compared to
$184,162 at September 30, 2003. This represented approximately 81 days of
revenues. Terms with individual customers vary greatly. We typically require
pre-payment or a maximum of thirty-day terms for our sound technology components
and products. Our receivables can also 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 and the timing of contract
payments.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">17</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<font size="2">For the first quarter of fiscal 2004, we used $36,308 for the purchase of
equipment and software and made a $115,360 investment in patents and new patent
applications. We anticipate a continued investment in patents in the balance of
fiscal 2004. Dollar amounts to be invested on these patents are not currently
estimable by management.</font><p>
<font size="2">At December 31, 2003, we had working capital of $7,556,197 compared to working
capital of $8,484,210 at September 30, 2003. </font> <p>
<font size="2">We have financed our working capital requirements primarily through sales of
common and preferred stock and warrants, exercises of stock options and
warrants, sales of convertible and non-convertible notes, and margins from
product sales. In the first quarter of 2004 we received $308,525 from the
exercise of stock options and warrants.</font><p>
<font size="2">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 have sufficient cash for
operations for the next twelve months. We believe increased sales of HSS, LRAD
and NeoPlanar products will also contribute cash during the next twelve months.
We have 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>
<font size="2">Other than cash of $7,975,625 at December 31, 2003 and accounts receivable
collections, we have no other material unused sources of liquidity at this time.
We have financed our operations primarily through the sale of preferred stock,
exercise of stock options, sale of notes, proceeds from the sale of investment
securities and margins from product sales and licensing. We expect to incur
additional operating losses as a result of expenditures for research and
development and marketing costs for sound products. The timing and amounts of
these expenditures and the extent of our operating losses will depend on future
product sales levels and other factors, some of which are beyond management's
control. There can be no assurance that revenues from products and technologies
will become sufficient to sustain operations or achieve profits in the
future.</font><p>
<b><font size="2">Contractual Commitments and Commercial Commitments</font></b><p>
<font size="2">The following table summarizes our contractual obligations, including purchase
commitments at December 31, 2003, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods:</font></p>
 <table border="0" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" cellspacing="0">
<tr valign="top">
<td width="269.333266" colspan="1" rowspan="1" bgcolor=#FFF3CE>
&nbsp;</td>
<td width="377.333239" colspan="5" rowspan="1" bgcolor=#FFF3CE>
<p align="center">
<font size="2">Payments Due by Period</font></p>
</td>
</tr>
<tr valign="top">
<td width="269.333266" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="77.333314" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="77.333314" colspan="1" rowspan="1" >
<p align="center">
<font size="2">Less than 1</font></p>
</td>
<td width="71.999982" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="71.999982" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="77.333314" colspan="1" rowspan="1" >
<p align="center">
<font size="2">More Than</font></p>
</td>
</tr>
<tr valign="top">
<td width="269.333266" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p style="border-bottom:solid windowtext .5pt">
<font size="2">Contractual Obligations</font></p>
</td>
<td width="80" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">Total</font></p>
</td>
<td width="77.333314" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">Year</font></p>
</td>
<td width="71.999982" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">1-3 Year</font></p>
</td>
<td width="71.999982" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">3-5 Years</font></p>
</td>
<td width="77.333314" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="center" style="border-bottom:solid windowtext .5pt">
<font size="2">5 Years</font></p>
</td>
</tr>
<tr valign="top">
<td width="269.333266" colspan="1" rowspan="1" >
<p>
<font size="2">Capital leases</font></p>
</td>
<td width="80" >
<p align="right">
<font size="2">$35,217&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="77.333314" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$12,806&nbsp;&nbsp;</font></p align="right">
</td>
<td width="71.999982" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$22,411&nbsp;&nbsp;</font></p align="right">
</td>
<td width="71.999982" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$-0-&nbsp;&nbsp;</font></p align="right">
</td>
<td width="77.333314" colspan="1" rowspan="1" >
<p align="right">
<font size="2">$-0-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="269.333266" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p>
<font size="2">Operating leases</font></p>
</td>
<td width="80" bgcolor=#FFF3CE>
<p align="right">
<font size="2">89,217&nbsp;&nbsp;&nbsp;</font></p align="right">
</td>
<td width="77.333314" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">30,176&nbsp;&nbsp;</font></p align="right">
</td>
<td width="71.999982" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">48,292&nbsp;&nbsp;</font></p align="right">
</td>
<td width="71.999982" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">10,749&nbsp;&nbsp;</font></p align="right">
</td>
<td width="77.333314" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right">
<font size="2">-0-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;&nbsp;</font></p align="right">
</td>
</tr>
<tr valign="top">
<td width="269.333266" colspan="1" rowspan="1" >
<p style="border-bottom:solid windowtext .5pt">
<font size="2">Employment agreements</font></p>
</td>
<td width="80" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">394,000&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="77.333314" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">201,500&nbsp;&nbsp;</font></p>
</td>
<td width="71.999982" colspan="1" rowspan="1" >


<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">192,500&nbsp;&nbsp;</font></p>
</td>
<td width="71.999982" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">-0-&nbsp;&nbsp;</font></p>
</td>
<td width="77.333314" colspan="1" rowspan="1" >
<p align="right" style="border-bottom:solid windowtext .5pt">
<font size="2">-0-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;&nbsp;</font></p>
</td>
</tr>
<tr valign="top">
<td width="269.333266" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p style="border-bottom:double">
<font size="2">Total contractual cash obligations</font></p>
</td>
<td width="80" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$518,434&nbsp;&nbsp;&nbsp;</font></p>
</td>
<td width="77.333314" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$244,482&nbsp;&nbsp;</font></p>
</td>
<td width="71.999982" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$263,203&nbsp;&nbsp;</font></p>
</td>
<td width="71.999982" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$10,749&nbsp;&nbsp;</font></p>
</td>
<td width="77.333314" colspan="1" rowspan="1" bgcolor=#FFF3CE>
<p align="right" style="border-bottom:double">
<font size="2">$-0-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;    &nbsp;&nbsp;</font></p>
</td>
</tr>
</table>
<p>
<p>
<font size="2">Our lease for our executive office, laboratory, production and warehouse space
expired in July 2003, but we continue to occupy the space on a month-to-month
basis. We are in the process of negotiating an amendment of our lease agreement
to extend the term through July 2006. We occupy approximately 23,500 square feet
in these premises with aggregate monthly payments of $28,258, inclusive of
utilities and basic maintenance. We intend to reduce our square footage in
August 2004, which would reduce our aggregate monthly payments.</font><p>
<b><font size="2">New Accounting Pronouncements</font></b><p>
<font size="2">A number of new pronouncements have been issued for future implementation as
discussed in the footnotes to our interim financial statements (see page 8, Note
5). 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 align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">18</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><font size="2">Business Risks</font></b><p>
<font size="2">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,
2003, including our financial statements and the related notes.</font><p>
<b><font size="2">We have a history of net losses. We expect to continue to incur net losses
and we may not achieve or maintain profitability. </font> </b><p>
<font size="2">We have incurred significant operating losses and anticipate continued losses in
fiscal 2004. At December 31, 2003, we had an accumulated deficit of $37.5
million.<b> </b>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>
<b><font size="2">We are an early stage company introducing new products and technologies. If
commercially successful products are not produced in a timely manner, we may be
unprofitable or forced to cease operations. </font> </b><p>
<font size="2">Our HSS, NeoPlanar, PureBass and LRAD 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 us or by
original equipment manufacturers (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. 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 products has taken longer than anticipated by management and
could be subject to additional delays. Customers may not wait for our products
and may elect to purchase products from competitors. We have experienced
manufacturing quality control problems with some of our initial commercial HSS
systems, 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 </font> <p>
<font size="2">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>
<b><font size="2">Our products have never been produced in quantity, and we may incur
significant and unpredictable warranty costs as these products are mass
produced.</font></b><font size="2"> </font>  <b><font size="2">We have incurred substantial warranty costs related to our
first generation HSS systems, which caused a negative gross margin for the
fiscal year ended September 30, 2003.</font></b><p>
<font size="2">None of our products has been mass produced, and certain of our technologies,
including HSS and LRAD, are substantially different from proven, mass produced
sound transducer designs.  We may incur substantial and unpredictable warranty
costs from post-production product or component failures.  We generally warrant
our products to be free from defects in materials and workmanship for a period
up to one year from the date of purchase, depending on the product.</font><p>
<font size="2">Due to performance failures of components in some of our first generation of HSS
systems, we are voluntarily replacing emitters on an estimated 700 Generation I
HSS units. At December 31, 2003 we had a warranty reserve of $315,000 with
$275,000 scheduled for this replacement program. Future warranty costs could
further adversely affect our financial position, results of operations and
business prospects.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
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  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><font size="2">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. </font> </b><p>
<font size="2">Our historical revenues have included sales of portable consumer products. The
majority of our fiscal 2003 and fiscal 2004 to date revenues were generated from
our sound reproduction technologies, and we expect these to be the source of
substantially all of our future revenues. 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>
<ul>
<li><font size="2">our ability to develop and supply sound reproduction components to
customers, distributors or OEMs or to license our technologies; </font> </li>
<li><font size="2">market acceptance of and changes in demand for our products or products of
our customers; </font> </li>


<li><font size="2">gains or losses of significant customers, distributors or strategic
relationships; </font> </li>
<li><font size="2">unpredictable volume and timing of customer orders; </font> </li>
<li><font size="2">the availability, pricing and timeliness of delivery of components for our
products and OEM products; </font> </li>
<li><font size="2">fluctuations in the availability of manufacturing capacity or manufacturing
yields and related manufacturing costs; </font> </li>
<li><font size="2">the timing of new technological advances, product announcements or
introductions by us, by OEMs or licensees and by our competitors; </font> </li>
<li><font size="2">product obsolescence and the management of product transitions and

inventory; </font> </li>
<li><font size="2">unpredictable warranty costs associated with new product modes;</font></li>
<li><font size="2">production delays by customers, distributors, OEMs or by us or our
suppliers; </font> </li>
<li><font size="2">seasonal fluctuations in sales; </font> </li>
<li><font size="2">the conditions of other industries, such as military and commercial
industries, into which our technologies may be licensed; </font> </li>
<li><font size="2">general consumer electronics industry conditions, including changes in
demand and associated effects on inventory and inventory practices; and </font> </li>
<li><font size="2">general economic conditions that could affect the timing of customer orders
and capital spending and result in order cancellations or
rescheduling.</font></li></ul>
<p>
<font size="2">Some or all of these factors could adversely affect demand for OEM products
incorporating our sound reproduction products or technologies, and therefore
adversely affect our future operating results.</font><p>
<font size="2">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>
<b><font size="2">We recently terminated our agreements with General Dynamics Armament and
Technical Products, Inc.  Our business was formerly highly dependent on our
level of sales to that company and its affiliate. GD-ATP has disputed our right
to terminate the agreements for cause.</font></b><p>
<font size="2">In February 2004, we terminated for cause two licensing and sales agreements
with General Dynamics Armament and Technical Products, Inc. (GD-ATP), originally
entered into in February 2003.  GD-ATP was the original licensee under one
agreement, and took assignment of the rights of Bath Iron Works Corporation,
another subsidiary of General Dynamics Corporation, under the other agreement.
The agreements formerly gave GD-ATP the right to purchase, market and resell
NeoPlanar and HIDA (High Intensity Directional Acoustics) products and
components with exclusive rights for specified applications to certain
government customers, including the Department of Defense, Department of
Homeland Security and certain Federal, State and local agencies.  GD-ATP has
disputed our right to terminate the agreements for cause.</font><p>
<font size="2">Revenues under the GD-ATP agreements and a prior professional services agreement
with Bath Iron Works Corporation represented approximately 76% of our revenues
during the quarter ended December 31, 2003, and 24% of our revenues during the
fiscal year ended September 30, 2003. A total of 55% of our accounts receivable
at December 31, 2003 related to revenues pursuant to these agreements, all such
receivable amounts were collected subsequent to December 31, 2003. </font>
</p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
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  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<font size="2">Our termination of the GD-ATP agreements could adversely affect our financial
position and results of operations.  If GD-ATP commences legal proceedings
concerning our right to terminate the agreements, such legal proceedings may be
costly and inherently uncertain in outcome, and could cause a material adverse
effect on our financial position and results of operations.  See "Recent
Developments" above.</font><p>
<b><font size="2">Our expenses may vary from period to period, which could affect quarterly
results and our stock price. </font> </b><p>
<font size="2">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>
<ul>
<li><font size="2">the timing and extent of our research and development efforts;
</font> </li>
<li><font size="2">investments and costs of maintaining or protecting our intellectual
property;</font></li>
<li><font size="2">the extent of marketing and sales efforts to promote our products and
technologies; and </font> </li>
<li><font size="2">the timing of personnel and consultant hiring. </font> </li></ul>
<p>
<b><font size="2">Sound reproduction markets are subject to rapid technological change, so our
success will depend on our ability to develop and introduce new technologies.
</font>
</b><p>
<font size="2">Technology and standards in the sound reproduction markets evolve rapidly,
making timely and cost-effective product innovation essential to success in the
marketplace. The introduction of products with improved technologies or features
may render our technologies obsolete and unmarketable. If we cannot develop
products in a timely manner in response to industry changes, or if our
technologies do not perform well, our business and financial condition will be
adversely affected. The life cycles of our technologies are difficult to
estimate, particularly those such as HSS and LRAD 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>
<b><font size="2">Our HSS technology is subject to government regulation, which could lead to
unanticipated expense or litigation. </font> </b><p>
<font size="2">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 customer 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
customer 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.</font><p>
<b><font size="2">We may face personal injury and other liability claims that harm our
reputation and adversely affect our sales and financial condition.</font></b><p>
<font size="2">Some of our products are capable of sufficient acoustic output to cause damage
to human hearing or human health if used improperly, such as when the products
are used at close ranges or for long periods of exposure.  A person injured in
connection with the use of our products may bring legal action against us to
recover damages on the basis of theories including personal injury, negligent
design, dangerous product or inadequate warning.  We may also be subject to
lawsuits involving allegations of misuse of our products.  Our product liability
insurance coverage may be insufficient to pay all such claims.  Product
liability insurance may become too costly for us or may become unavailable for
us in the future.  We may not have sufficient resources to satisfy any product
liability claims not covered by insurance which would materially and adversely
affect our financial position.  Significant litigation could also result in a
diversion of management's attention and resources, and negative publicity.</font><p>
<b><font size="2">We may not be successful in obtaining the necessary licenses required for us
to sell some of our products abroad. </font> </b><p>
<font size="2">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.  We may not be able to obtain the necessary licenses in order to
conduct business abroad.  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.  During that time, Congress may take action to
block the proposed sale.  Failure to receive required licenses or authorization
would hinder our ability to sell some of our products outside the United
States.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">21</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><font size="2">Our operations could be harmed by factors including political instability,
natural disasters, fluctuations in currency exchange rates and changes in
regulations that govern international transactions.</font></b><p>
<font size="2">We sell or products worldwide. The risks inherent in international trade may
reduce our international sales and harm our business and the businesses of our
customers and our suppliers. These risks include:</font></p>
<ul>
<li><font size="2">changes in tariff regulations;</font></li>
<li><font size="2">political instability, war, terrorism and other political risks;</font></li>
<li><font size="2">foreign currency exchange rate fluctuations;</font></li>
<li><font size="2">establishing and maintaining relationships with local distributors and
dealers;</font></li>
<li><font size="2">lengthy shipping times and accounts receivable payment cycles;</font></li>
<li><font size="2">import and export licensing requirements;</font></li>
<li><font size="2">compliance with a variety of foreign laws and regulations, including
unexpected changes in taxation and regulatory requirements;</font></li>
<li><font size="2">greater difficulty in safeguarding intellectual property than in the U.S.;
and</font></li>
<li><font size="2">difficulty in staffing and managing geographically diverse
operations.</font></li></ul>
<p>
<font size="2">These and other risks may preclude or curtail international sales or increase
the relative price of our products compared to those manufactured in other
countries, reducing the demand for our products.</font><p>
<b><font size="2">Many potential competitors who have greater resources and experience than we


do may develop products and technologies that make ours obsolete. </font> </b><p>
<font size="2">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>
<b><font size="2">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. </font> </b><p>
<font size="2">As we do not have all of the production, distribution, 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, government and sound reproduction markets to assist us in
producing, distributing, marketing and selling products that include our sound
technologies. </font> <p>
<font size="2">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>
<b><font size="2">We will be dependent on outside manufacturers, and we do not have established
manufacturing relationships to support our production schedules. </font> </b><p>
<font size="2">During fiscal 2003, we terminated our manufacturing relationship with HST, Inc.,
formerly our sub-contract manufacturer of our HSS and NeoPlanar products.  In
addition, Amtec Manufacturing, previously the sole manufacturer of our PureBass
subwoofer units, recently went out of business.  In addition to in-house
manufacturing of our products, we will need to establish relationships with
outside manufacturers to be able to be able to meet our production schedules.
Failure to establish quality contract manufacturing could reduce future
revenues, adversely affecting financial condition and results of
operations.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
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  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><font size="2">We rely on outside suppliers to provide a large number of components
incorporated in our products.</font></b><p>
<font size="2">Our products have a large number of components produced by outside suppliers.
In addition, for certain of these items, we qualify only a single source, which
can magnify the risk of shortages and decrease our ability to negotiate with our
suppliers on the basis of price.  In particular, we depend on our HSS piezo-film
supplier to provide expertise and materials used in our proprietary HHS
emitters.  If shortages occur, or if we experience quality problems with
suppliers, then our production schedules could be significantly delayed or costs
significantly increased, which would have a material adverse effect on our
business, liquidity, results of operation and financial position.</font><p>
<b><font size="2">Our contracts and subcontracts that are funded by the U.S. government or
foreign governments are subject to government regulations and audits and other
requirements.</font></b><p>
<font size="2">Government contracts require compliance with various contract provisions and
procurement regulations. The adoption of new or modified procurement regulations
could have a material adverse effect on our business, financial condition or
results of operations or increase the costs of competing for or performing
government contracts. If we violate any of these regulations, then we may be
subject to termination of these contracts, imposition of fines or exclusion from
government contracting and government-approved subcontracting for some specific
time period. In addition, our contract and subcontract costs and revenues may be
subject to adjustment as a result of audits by government auditors. </font> <p>
<b><font size="2">We derive revenue from government contracts and subcontracts, which are often

non-standard, may involve competitive bidding, may be subject to cancellation
with or without penalty and may produce volatility in earnings and revenue.
</font>
</b><p>
<font size="2">Our government business has involved and is expected in the future to involve
providing products and services under contracts or subcontracts with U.S.
federal, state, local and foreign government agencies. Obtaining contracts and
subcontracts from government agencies is challenging, and contracts often
include provisions that are not standard in private commercial transactions. For
example, government contracts may: </font> </p>
<ul>
<li><font size="2">include provisions that allow the government agency to terminate the
contract without penalty under some circumstances; </font>  </li>
<li><font size="2">be subject to purchasing decisions of agencies that are subject to political
influence; </font>  </li>
<li><font size="2">contain onerous procurement procedures; and </font>  </li>
<li><font size="2">be subject to cancellation if government funding becomes unavailable.
</font>
</li></ul>
<p>
<font size="2">Securing government contracts can be a protracted process involving competitive
bidding. In many cases, unsuccessful bidders may challenge contract awards,
which can lead to increased costs, delays and possible loss of the contract for
the winning bidder. </font> <p>
<b><font size="2">Our Government Group revenues are materially dependant on acceptance of our
LRAD products by government, military and developing force protection and
emergency response agencies, and if these agencies do not purchase our products,
our revenues will be adversely affected.</font></b><p>
<font size="2">If our LRAD product is not widely accepted by the government, military and the
developing force protection and emergency response markets, we may not be able
to identify other markets. Government, military and the developing force
protection and emergency response agencies may be influenced by claims or
perceptions that long range hailing devices are unsafe or may be used in an
abusive manner. Sales of our products to these agencies may also be delayed or
limited by these claims or perceptions.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
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  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><font size="2">Any inability to adequately protect our proprietary technologies could harm
our competitive position. </font> </b><p>
<font size="2">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 for some or all of our pending applications. Claims
allowed from existing or pending patents may not be of sufficient scope or
strength to protect the economic value of our technologies. Issued patents may
be challenged or invalidated. Further, we may not receive patents in all
countries where our products can be sold or licensed. Our competitors may also
be able to design around our patents. The electronics industry is characterized
by vigorous protection and pursuit of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. There is currently no pending litigation against us that questions
our intellectual property rights. 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>
<b><font size="2">If our key employees do not continue to work for us, our business will be
harmed because competition for replacements is intense. </font> </b><p>
<font size="2">Our performance is substantially dependent on the performance of our executive
officers and key technical employees, including Elwood G. Norris, our Chairman.
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>
<b><font size="2">We may issue preferred stock in the future, and the terms of the preferred
stock may reduce the value of your common stock. </font> </b><p>
<font size="2">We are authorized to issue up to 5,000,000 shares of preferred stock in one or
more series. Our board of directors may determine the terms of future preferred
stock without further action by our stockholders. If we issue additional
preferred stock, it could affect your rights or reduce the value of your common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell our assets to
a third party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions. </font> <p>
<b><font size="2">Our Series D and Series E Preferred Stock financings may result in dilution
to our common stockholders.  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.</font></b><p>
<font size="2">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.</font><p>
<font size="2">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. The conversion rate cannot however be
lower than $2.00. 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
December 31, 2003, the outstanding 50,000 shares of Series D Preferred Stock
were convertible into an aggregate of 122,260 common shares. 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.  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 for warrants on 495,880 common shares will be subject to further reduction
if we sell securities for less than an effective price of $3.01 per
share.</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
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  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<font size="2">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.  The conversion rate cannot however
be lower than $2.00. As of December 31, 2003, the 263,250 outstanding shares of
Series E Preferred Stock were convertible into an aggregate of 851,307 common
shares. The Series E Warrants  on 364,875 common shares also contain an
antidilution adjustment for certain security sales by the Company below $3.25
per share.</font><p>
<font size="2">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.  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.
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.  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.  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.</font><p>
<b><font size="2">Our stock price is volatile and may continue to be volatile in the

future</font></b><font size="2">.</font><p>
<font size="2">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>
<ul>
<li><font size="2">our anticipated or actual operating results; </font> </li>
<li><font size="2">developments concerning our sound reproduction technologies;
</font> </li>
<li><font size="2">technological innovations or setbacks by us or our competitors;
</font> </li>
<li><font size="2">conditions in the consumer electronics market; </font> </li>
<li><font size="2">announcements of merger or acquisition transactions; and
</font> </li>
<li><font size="2">other events or factors and general economic and market
conditions.</font></li></ul><p>
<font size="2">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>
<b><font size="2"><a name="Item 3.">Item 3. </a>Quantitative and Qualitative Disclosures about Market Risk.</font></b><p>
<font size="2">Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse changes in market prices,
including interest rate risk and other relevant market rate or price risks. We
do not use derivative financial instruments in our investment portfolio.</font><p>
<font size="2">We are exposed to some market risk through interest rates, related to our
investment of current cash and cash equivalents of approximately $8.0 million.
Based on this balance, a change of one percent in interest rate would cause a
change in interest income of $80,000. The risk is not considered material and we
manage such risk by continuing to evaluate the best investment rates available
for short-term high quality investments.</font><p>
<b><font size="2"><a name="Item 4.">Item 4. </a>Controls and Procedures.</font></b><p>
<font size="2">We maintain disclosure controls and procedures designed to ensure that material
information related to American Technology Corporation, including our
consolidated subsidiaries, is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms.</font></p>
<p style="margin-left:45"><font size="2">(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As of the end of the
period covered by this report, we carried out an evaluation under the
supervision and with the participation of management, including our Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules&nbsp;13a-15(e)&nbsp;and&nbsp;15d-15(e)&nbsp;under the Securities Exchange
Act of 1934). Based upon that evaluation, our Principal Executive Officer and
Principal Financial Officer concluded, as of the date of such evaluation, that
the design and operation of such disclosure controls and procedures were
effective.</font></p><p>
</p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">25</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a></p>
<p style="margin-left:45"><font size="2">(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In October 2003, we
implemented a new integrated accounting and supply chain management software
system. We have adapted certain of our internal controls to the new system, and
we will continue to evaluate, document and monitor any required changes to
internal controls in connection with the full implementation of the new system.
Other than as described above, there were no significant changes in our internal
controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
of the Exchange Act) that occurred during our most recently completed fiscal
quarter.</font></p>
<p>
<font size="2">Limitations.  Our management, including our Principal Executive Officer and
Principal Financial Officer, does not expect that our disclosure controls or
internal controls over financial reporting will prevent all errors or all
instances of fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and any design may not
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.</font><p>
<b><a name="PART II. OTHER INFORMATION">PART II. OTHER INFORMATION</a></b><p>
<b><font size="2"><a name="Item 1. Legal Proceedings.">Item 1. Legal Proceedings.</a></font></b><p>
<font size="2">Reference is made to Footnote 11 on page 10 of this report for information
regarding Legal Proceedings.</font><p>
<b><font size="2"><a name="Item 2. Changes in Securities and Use of Proceeds.">Item 2. Changes in Securities and Use of Proceeds.</a></font></b><p>
<font size="2">During the quarter ended December 31, 2003, we issued 25,000 shares upon the
exercise of outstanding common stock purchase warrants, for total proceeds of
$50,000. These securities were offered and sold without 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 may not be
offered or sold in the United States in the absence of an effective registration

statement or exemption from the registration requirements under the Securities
Act. An appropriate legend was placed on the shares issued.  The shares issued
are included in a currently effective registration statement for their
resale.</font><p>
<b><font size="2"><a name="Item 3. Defaults Upon Senior Securities.">Item 3. Defaults Upon Senior Securities.</a></font></b><p>
<font size="2">Not applicable</font><p>
<b><font size="2">
<a name="Item 4. Submission of Matters to a Vote of Security Holders.">Item 4. Submission of Matters to a Vote of Security Holders.</a></font></b><p>
<font size="2">Not applicable</font><p>
<b><font size="2"><a name="Item 5. Other Information.">Item 5. Other Information.</a></font></b><p>
<font size="2">Not applicable</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">26</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div><p>
<a href="#INDEX"><font size="2">TOC</font></a><p>
<b><font size="2"><a name="Item 6. Exhibits and Reports on Form 8-K.">Item 6. Exhibits and Reports on Form 8-K.</a></font></b></p>
<table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="633.333175" colspan="2" rowspan="1" >
<p>
<b><font size="2">(a) Exhibits:</font></b></p>
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="41.333323" colspan="1" rowspan="1" >
<p>
<font size="2">10.1</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">Employment Agreement of Bruce Ehlers dated October 3, 2003.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="41.333323" colspan="1" rowspan="1" >
<p>
<font size="2">10.2</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">Employment Agreement of Joseph A. Zerucha dated December 1, 2003.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="41.333323" colspan="1" rowspan="1" >
<p>
<font size="2">31.1</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">Certification of Elwood G. Norris, Principal Executive Officer, pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="41.333323" colspan="1" rowspan="1" >
<p>
<font size="2">31.2</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">Certification of Carl Gruenler, Principal Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="41.333323" colspan="1" rowspan="1" >
<p>
<font size="2">32.1</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, executed by Elwood G. Norris, Principal
Executive Officer, and Carl Gruenler, Principal Financial Officer.</font></p>
</td>
</tr>
</table>
<p>
</p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="633.333175" colspan="2" rowspan="1" >
<p>
<b>
<font size="2">(b) Reports on Form 8-K:</font></b></p>
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="614.666513" colspan="1" rowspan="1" >
<p>
<font size="2">On November 6, 2003, we filed a Form 8-K containing disclosure in Item 5 and
Item 7.</font></p>
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="614.666513" colspan="1" rowspan="1" >
<p>
<font size="2">On December 10, 2003, we filed a Form 8-K containing disclosure in Item 5 and
Item 7.</font></p>
</td>
</tr>
<tr valign="top">
<td width="23.999994" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="17.333329" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="614.666513" colspan="1" rowspan="1" >
<p>
<font size="2">On December 29, 2003, we filed a Form 8-K containing disclosure furnished in
Item 12.</font></p>
</td>
</tr>
</table></div>
<p>
<p align="center">
<b><font size="2"><a name="SIGNATURES">SIGNATURES</a></font></b><p>
<font size="2">Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.</font></p>
 <table border=0 cellpadding=0 cellspacing =0 width="657" >
<tr valign="top">
<td width="331" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="326" colspan="1" rowspan="1" >
<p>
<font size="2">AMERICAN TECHNOLOGY CORPORATION</font></p>
</td>
</tr>
<tr valign="top">
<td width="657" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="657" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
</table>
<table border=0 cellpadding=0 cellspacing =0 width="651" >
<tr valign="top">
<td width="331" colspan="1" rowspan="1" >
<p>
<font size="2">Date:  February 12, 2004</font></p>
</td>
<td width="28" colspan="1" rowspan="1" >
<p>
<font size="2">By: </font> </p>
</td>
<td width="292" colspan="1" rowspan="1" >
<p style="border-bottom:solid windowtext .5pt">
<font size="2">/s/ CARL GRUENLER</font></p>
</td>
</tr>
</table>
<table border=0 cellpadding=0 cellspacing =0 width="670" >
<tr valign="top">
<td width="355" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="315" colspan="1" rowspan="1" >
<p>
<font size="2">Carl Gruenler, Vice President, Military Operations<br>and Interim Chief
Financial Officer<br>(Principal Financial and Accounting Officer and
duly<br>authorized to sign on behalf of the Registrant)</font></p>
</td>
</tr>
</table>
<p>
</p align="center">
<div align="center" color="#000080" style="position:relative; left: -5">
  <font size="2">27</font><hr size="3" color="#999999" STYLE="page-break-after: always">
  <font size="2">&nbsp; </font> </div>


</body>

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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<FILENAME>atco_10qex10-1.htm
<TEXT>
<html>

<head>
<title>exhibit 10.1</title>
</head>

<body>

<p>
&nbsp;<p align="right">
<b><font size="2">Exhibit 10.1</font></b><p>
<font size="2">October 3, 2003</font><p>
<font size="2">Bruce Ehlers<br>934 Olive Crest Dr.<br>Olivehain, CA 92024</font><p>
<font size="2">Dear Bruce:</font><p>
<font size="2">American Technology Corporation ("ATC") is pleased to present you with this
employment offer under the following terms and conditions:</font></p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Title: </font> </p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">Senior Vice President of Engineering</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >

&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Start Date:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">September 29, 2003</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Annual Base Salary:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">$155,000.00</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Bonus:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">20% annual performance based bonus: (determined by Board of Directors)</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Stock Options:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">You will receive 75,000 stock options 30 days after employment. The options will
vest quarterly over a 2-year period commencing after 6 months of employment.
Vesting will commence on March 31, 2003. The exercise price will be the closing
bid price on the date of issuance.  Effective date of issuance is October 29,
2003. </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Travel &amp; Entertainment:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">A budget will be established for T&amp;E per Company forecasts.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Benefits:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">Medical and dental insurance, ATC will provide coverage in terms stated in our
Policy Manual. Premiums for both medical and dental insurance for employee and
dependents are covered at 100% for HMO levels. If available, the employee can
elect to upgrade the coverage at the cost to the employee. Benefits commence on
first day of the month of employment. Life insurance coverage is part of the
Dental plan and is covered by ATC.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">ATC observes 9 paid holidays per calendar year. Our Personal Days Off ("PDO")
policy is a combination of vacation and sick days. PDO hours are accrued per pay
period.  Your schedule is as follows: </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="173.333290" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="482.666546" colspan="1" rowspan="1" >
<p>
<font size="2">Year one - 3 weeks or 4.62 hours per pay period;</font></p>
</td>
</tr>
<tr valign="top">
<td width="173.333290" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="482.666546" colspan="1" rowspan="1" >
<p>
<font size="2">Year five - 4 weeks or 6.15 hours per pay period.</font></p>
</td>
</tr>
<tr valign="top">
<td width="173.333290" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="482.666546" colspan="1" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="173.333290" colspan="2" rowspan="1" >
&nbsp;</td>
<td width="482.666546" colspan="1" rowspan="1" >
<p>
<font size="2">Vacation Accruals (PDO) will max out at 200 hours.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">A 401k package is available with multiple investment options and a company match
of 25% of Employees deferral up to 6%.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Position Description:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">This position will be responsible for directing all engineering and research and
development activities for the company including the design of new products,
modification of existing designs, improve production techniques, and develop
test procedures.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Policy Manual:</font></p>
</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">Additional terms of your employment may be set forth in ATC's Policy Manual, as
revised from time to time. </font>  </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="171.999957" colspan="1" rowspan="1" >
<p>
<font size="2">Arbitration:</font></p>


</td>
<td width="483.999879" colspan="2" rowspan="1" >
<p>
<font size="2">You will be required to sign the attached Mutual Agreement to Arbitrate
("Arbitration Agreement"). (see exhibit)</font></p>
</td>
</tr>
</table></div>
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div><p>
<p>
<font size="2">You are entitled to all the published benefits of the company including, but not
limited to those listed above. You are subject to a review after your completion
of the 90-day probationary period to determine satisfaction of fulfilling job
responsibilities as directed by Kalani Jones, COO. After successful completion
of the probationary period and review you are eligible for time off accrued
during the probationary period.</font><p>
<font size="2">Please sign this offer in the space provided below signifying that you have read
and accept the terms herein. Let me say that everyone at ATC is looking forward
to having a person of your caliber join the team and hope you feel welcome.</font><p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="359.999910" colspan="1" rowspan="1" >
<p>
<font size="2">Sincerely,</font></p>
</td>
<td width="295.999926" colspan="1" rowspan="1" >
<p>
<font size="2">/S/ BRUCE EHLERS</font></p>
</td>
</tr>
<tr valign="top">
<td width="359.999910" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="295.999926" colspan="1" rowspan="1" >
<p>
<font size="2">Bruce Ehlers</font></p>
</td>
</tr>
</table></div>
<p>
<p>
<font size="2">/s/ RENEE WARDEN<br>Renee Warden<br>Director of Human
Resources&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div>

</body>

</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<FILENAME>atco_10qex10-2.htm
<TEXT>
<html>

<head>
<title>exhibit 10.2</title>
</head>

<body>

<p>
<p align="right">
<b><font size="2">Exhibit 10.2</font></b><p>
<font size="2">December 1, 2003&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><p>
<font size="2">Joe Zerucha<br>(626) 826-5903</font><p>
<font size="2">Dear Joe Zerucha:</font><p>
<font size="2">American Technology Corporation ("ATC") is pleased to present you with this
employment offer under the following terms and conditions:</font></p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Title: </font> </p>
</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">Vice President Sales and Marketing</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Tentative Start Date:</font></p>
</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">December 1, 2003 (negotiable)</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Annual Base Salary:</font></p>
</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>

<font size="2">$150,000</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Bonus:</font></p>
</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">You will participate in a sales incentive compensation plan that is currently
under development. This plan will be reviewed and approved by the Board of
Directors Compensation Committee.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Stock Options:</font></p>
</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">Management will recommend to the Compensation Committee at its first meeting
following your start date that you be granted stock options to purchase 75,000
shares of common stock.  The options will have an exercise price equal to the
fair market value of our common stock (determined in accordance with our 2002
Stock Option Plan) on the date the Compensation Committee approves the grant,
and will be exercisable for [five] years after grant, subject to earlier
termination as set forth in the 2002 Stock Option Plan.  The options will vest
over [two] years, with one quarter of the shares vesting [six months] after the
grant date, and the balance vesting [quarterly] until the [second] anniversary
of the grant date.  These options will be incentive stock options to the extent
they can qualify as incentive stock options under the Internal Revenue Code.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Benefits:</font></p>
</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">Medical and dental insurance: ATC will provide coverage in terms stated in our
Policy Manual. Premiums for both medical and dental insurance for employee and
dependents are covered at 100% for HMO levels. If available, the employee can
elect to upgrade the coverage at the cost to the employee. Benefits commence on
first day of the month of employment. Life insurance coverage is part of the
Dental plan and is covered by ATC.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">ATC observes 9 paid holidays per calendar year. Our Personal Days Off ("PDO")
policy is a combination of vacation and sick days. PDO hours are accrued per pay
period.  Your schedule is as follows: </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">Year 1-4:  3 weeks or 4.62 hours per pay period (15 days);</font></p>
</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">Over 4:     4 weeks or 6.15 hours per pay period (20 days).</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">Vacation Accruals (PDO) will max out at 200 hours. </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">A 401k package is available with multiple investment options and a company match
of 25% of Employees deferral up to 6%.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="525.333202" colspan="1" rowspan="1" >
<p>
<font size="2">ATC will reimburse you for educational and travel expenses associated with the
LEIP education program.</font></p>
</td>
</tr>
</table></div>
<p>
</p align="center">
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div><p>
</p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Position Description:</font></p>
</td>
<td width="523.999869" colspan="1" rowspan="1" >
<p>
<font size="2">You will work for the Chief Operating Officer, responsibilities
include:<br>Sales, Marketing and Investor Relations.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Policy Manual:</font></p>
</td>
<td width="523.999869" colspan="1" rowspan="1" >
<p>
<font size="2">Additional terms of your employment may be set forth in ATC's Policy Manual, as
revised from time to time, copy enclosed.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="2" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="131.999967" colspan="1" rowspan="1" >
<p>
<font size="2">Arbitration:</font></p>
</td>
<td width="523.999869" colspan="1" rowspan="1" >
<p>
<font size="2">You will be required to sign the attached Mutual Agreement to Arbitrate
("Arbitration Agreement"). (see exhibit)</font></p>
</td>
</tr>
</table></div>
<p>
<p>
<font size="2">You are entitled to all the published benefits of the company including, but not
limited to those listed above. You are subject to a review after your completion
of the 90-day probationary period to determine satisfaction of fulfilling job
responsibilities as directed by Kalani Jones, Chief Operating Officer.  After
successful completion of the probationary period and review, you are eligible
for time off accrued during the probationary period.</font><p>
<font size="2">Please sign this offer in the space provided below signifying that you have read
and accept the terms herein. Let me say that everyone at ATC is looking forward
to having a person of your caliber join the team and hope you feel welcome!</font><p>
<font size="2">Sincerely,&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><p>
<font size="2">/s/ KALANI JONES<br>Kalani Jones&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br>Chief
Operating Officer</font><p>
<font size="2">Chairman Reviewed: _________</font><p>
<font size="2"><br></font><b><font size="2">Offer Accepted:</font></b><p>
<u><font size="2">/s/ JOE ZERUCHA</font></u><font size="2"><br>Joe Zeruch</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div>

</body>

</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>5
<FILENAME>atco_10qex31-1.htm
<TEXT>
<html>

<head>
<title>exhibit 31.1</title>
</head>

<body>

<p>
<p align="right">
<b><font size="2">Exhibit 31.1</font></b><p align="center">
<b><font size="2">CERTIFICATION</font></b><p>
<font size="2">I, Elwood G. Norris, certify that: </font> <p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">1.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">I have reviewed this quarterly report on Form 10-Q of American Technology
Corporation; </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
<p>
</p>
</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">2.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">Based on my knowledge, this annual 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 annual report;
</font>
</p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
<p>
</p>
</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">3.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">Based on my knowledge, the financial statements, and other financial information
included in this annual 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 annual report; </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
<p>
</p>
</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">4.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">The registrant's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have: </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">a)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 annual report is being prepared; </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">b)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">[paragraph omitted pursuant to SEC Release Nos. 33-2838 and 34-47986]</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">c)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation;</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">d)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">disclosed in this annual report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter, which is the registrant's forth fiscal quarter, that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">5.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions): </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">a)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">all significant deficiencies and material weaknesses in the design or operation
of internal controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and </font> </p>
</td>
</tr>

<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">b)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls over financial
reporting. </font> </p>
</td>
</tr>
</table></div>
<p>
<p>
<font size="2">Dated: February 12, 2004 </font> <p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;/s/ ELWOOD G. NORRIS</font><p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Elwood G. Norris,
<br>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Chairman of the
Board<br>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (Principal Executive
Officer)</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div>

</body>

</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>6
<FILENAME>atco_10qex31-2.htm
<TEXT>
<html>

<head>
<title>exhibit 31.2</title>
</head>

<body>

<p>
<p align="right">
<b><font size="2">Exhibit 31.2</font></b><p align="center">
<b><font size="2">CERTIFICATION</font></b><p>
<font size="2">I, Carl Gruenler, certify that: </font> </p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">1.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">I have reviewed this quarterly report on Form 10-Q of American Technology
Corporation; </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
<p>
</p>
</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">2.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">Based on my knowledge, this annual 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 annual report;
</font>
</p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
<p>
</p>
</td>
</tr>

<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">3.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">Based on my knowledge, the financial statements, and other financial information
included in this annual 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 annual report; </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
<p>
</p>
</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">4.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">The registrant's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have: </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">a)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 annual report is being prepared; </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">b)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">[paragraph omitted pursuant to SEC Release Nos. 33-2838 and 34-47986]</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">c)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation;</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">d)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">disclosed in this annual report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter, which is the registrant's forth fiscal quarter,  that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.</font></p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
<p>
<font size="2">5.</font></p>
</td>
<td width="625.333177" colspan="2" rowspan="1" >
<p>
<font size="2">The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions): </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">a)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">all significant deficiencies and material weaknesses in the design or operation
of internal controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and </font> </p>
</td>
</tr>
<tr valign="top">
<td width="657.333169" colspan="3" rowspan="1" >
&nbsp;</td>
</tr>
<tr valign="top">
<td width="30.666659" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="34.666658" colspan="1" rowspan="1" >
<p>
<font size="2">b)</font></p>
</td>
<td width="590.666519" colspan="1" rowspan="1" >
<p>
<font size="2">any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls over financial
reporting.</font></p>
</td>
</tr>
</table></div>
<p>
<p>
<font size="2">Dated: February 12, 2004 </font> <p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;/s/ CARL GRUENLER</font><p>
<font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Carl
Gruenler<br>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Vice President, Military Operations
and Interim Chief Financial Officer<br>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (Principal
Financial Officer)</font></p align="center">
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div>

</body>

</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>7
<FILENAME>atco_10qex32-1.htm
<TEXT>
<html>

<head>
<title>exhibit 32.1</title>
</head>

<body>

<p>
<p align="right">
<b><font size="2">Exhibit 32.1</font></b><p align="center">
<b><font size="2">CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER</font></b><font size="2"><br><b>PURSUANT TO</b><br><b>18 U.S.C. SECTION 1350,</b><br><b>AS
ADOPTED PURSUANT TO</b><br></font><b><font size="2">SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002</font></b><p>
<p>
<font size="2">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
capacity as an officer of American Technology Corporation (the "Company"), that,
to his knowledge, the Quarterly Report of the Company on Form 10-Q, for the
fiscal quarter ended December 31, 2003 fully complies with the requirements of
Section 13(a) 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 as of the dates and
for the periods presented in the financial statements included in such
report.</font><p>
<p>
<font size="2">Dated: February 12, 2004</font><p>
<p>
<font size="2">/s/ ELWOOD G. NORRIS</font><p>
</p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="37.333324" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="618.666512" colspan="1" rowspan="1" >
<p>
<font size="2">Elwood G. Norris,<br>Chairman of the Board<br>
(Principal Executive Officer)</font></td>
</tr>
</table></div>
<p>
<p>
<font size="2">Dated: February 12, 2004</font><p>
<p>
<font size="2">/s/ CARL GRUENLER</font><p>
</p>
<div style="position:relative; left: 0"><table border=0 cellpadding=0 cellspacing =0 >
<tr valign="top">
<td width="39.999990" colspan="1" rowspan="1" >
&nbsp;</td>
<td width="617.333179" colspan="1" rowspan="1" >
<p>
<font size="2">Carl Gruenler<br>Vice President, Military Operations and Interim Chief Financial
Officer<br>(Principal Financial Officer)</font></p>
</td>
</tr>
</table></div>
<p>
</p align="center">
<div align="center" color="#000080" style="position:relative; left: -5"><hr size="3" color="#999999" STYLE="page-break-after: always">
  <p>
  <font size="2">&nbsp; </font> </div><p>
</p>


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