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<SEC-DOCUMENT>0001019687-04-001682.txt : 20040804
<SEC-HEADER>0001019687-04-001682.hdr.sgml : 20040804
<ACCEPTANCE-DATETIME>20040804075425
ACCESSION NUMBER:		0001019687-04-001682
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		8
CONFORMED PERIOD OF REPORT:	20040630
FILED AS OF DATE:		20040804

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:		04949944

	BUSINESS ADDRESS:	
		STREET 1:		13114 EVENING CREEK DRIVE SOUTH
		CITY:			SAN DIEGO
		STATE:			CA
		ZIP:			92128
		BUSINESS PHONE:		6196792114

	MAIL ADDRESS:	
		STREET 1:		13114 EVENING CREEK DRIVE SOUTH
		CITY:			SAN DIEGO
		STATE:			CA
		ZIP:			92128
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>atco_10q-063004.htm
<TEXT>
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<P align=center><FONT face="Times New Roman, Times, Serif" size=2><B><font size="4">UNITED STATES<br>
</font></B></FONT><FONT face="Times New Roman, Times, Serif" size=4><B>SECURITIES AND EXCHANGE COMMISSION<br>
</B></FONT><FONT face="Times New Roman, Times, Serif" size=2>Washington, D.C. 20549</FONT></P>
<P align=center><b><FONT size=4 face="Times New Roman, Times, Serif">FORM 10-Q</FONT></b></P>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td colspan="2"><FONT face="Times New Roman, Times, Serif" size=2>(Mark one) </FONT></td>
  </tr>
  <tr>
    <td width="5%" valign="top"><FONT face=Wingdings size=3>x</FONT><FONT face="Times New Roman, Times, serif" size=3>&nbsp;</FONT></td>
    <td><font size="2" face="Times New Roman, Times, serif">QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td colspan="2" valign="top"><FONT face="Times New Roman, Times, Serif" size=2>For the quarterly period ended June 30, 2004</FONT></td>
  </tr>
  <tr align="center">
    <td colspan="2" valign="top">&nbsp;</td>
  </tr>
  <tr align="center">
    <td colspan="2" valign="top"><FONT face="Times New Roman, Times, Serif" size=2>or</FONT></td>
  </tr>
</table>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td valign="top">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td width="5%" valign="top"><FONT face=Wingdings size=3>o</FONT></td>
    <td><font size="2" face="Times New Roman, Times, serif">TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td colspan="2" valign="top"><FONT face="Times New Roman, Times, Serif" size=2>For the transition period from </FONT><FONT face="Times New Roman, Times, serif" size=2><U>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp; &nbsp; &nbsp; &nbsp;</U> to <U>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp; &nbsp; &nbsp; &nbsp;</U>.</FONT></td>
  </tr>
</table>
<P align=center><FONT face="Times New Roman, Times, Serif" size=2>Commission File Number: <U>0-24248</U></FONT></P>
<P align=center><FONT face="Times New Roman, Times, Serif" size=5><B>AMERICAN TECHNOLOGY CORPORATION<br>
</B></FONT><FONT face="Times New Roman, Times, Serif" size=2>(Exact name of registrant as specified in its charter)</FONT></P>
<TABLE width="100%" border="0" align="center" cellPadding="0" cellSpacing="0" style="FONT-SIZE: 10pt">
  <!-- Begin Table Head -->
  <TR vAlign=bottom>
    <TD width="52%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
  </TR>
  <!-- End Table Head -->
  <!-- Begin Table Body -->
  <TR vAlign=bottom>
    <TD vAlign=top align='center'><FONT face="Times New Roman, Times, Serif" size=2>Delaware</FONT></TD>
    <TD vAlign=top align='center'><FONT face="Times New Roman, Times, Serif" size=2>87-03261799</FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD vAlign=top align='center'><hr align="center" width="52" size="1" color="black"></TD>
    <TD align='center' vAlign=top><hr align="center" width="75" size="1" color="black"></TD>
  </TR>
  <TR vAlign=bottom>
    <TD vAlign=top align='center'><FONT face="Times New Roman, Times, Serif" size=2>(State or other jurisdiction</FONT><font size="2" face="Times New Roman, Times, serif"> of <br>
    </font><FONT face="Times New Roman, Times, Serif" size=2> incorporation or organization)</FONT><font size="2" face="Times New Roman, Times, serif">&nbsp;    </font></TD>
    <TD align='center' vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;(I.R.S. Empl. Ident. No.)</FONT></TD>
  </TR>
  <!-- End Table Body -->
</TABLE>
<br>
<table width="100%"  border="0" align="center" cellpadding="0" cellspacing="0">
  <tr>
    <td width="52%" align="center"><FONT face="Times New Roman, Times, Serif" size=2>13114 Evening Creek Drive South, San Diego, California</FONT></td>
    <td width="48%" align="center"><FONT face="Times New Roman, Times, Serif" size=2>92128</FONT></td>
  </tr>
  <tr>
    <td align="center"><hr align="center" width="310" size="1" color="black"></td>
    <td align="center"><hr align="center" width="40" size="1" color="black"></td>
  </tr>
  <tr>
    <td align="center"><FONT face="Times New Roman, Times, Serif" size=2>(Address of principal executive offices)</FONT></td>
    <td align="center"><font face="Times New Roman, Times, Serif" size=2>&nbsp;(Zip Code)</font></td>
  </tr>
</table>
<br>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td align="center"><FONT face="Times New Roman, Times, Serif" size=2>(858) 679-2114<U></U></FONT></td>
  </tr>
  <tr>
    <td align="center"><hr align="center" width="85" size="1" color="black"></td>
  </tr>
  <tr>
    <td align="center"><FONT face="Times New Roman, Times, Serif" size=2>(Registrant&#146;s telephone number, including area code)</FONT></td>
  </tr>
</table>
<P><FONT face="Times New Roman, Times, Serif" 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. </FONT><FONT face=Wingdings size=3>x</FONT><FONT face="Times New Roman, Times, serif" size=3>&nbsp;</FONT><FONT face="Times New Roman, Times, Serif" size=2>YES </FONT><FONT face=Wingdings size=3>o</FONT> <FONT face="Times New Roman, Times, Serif" size=2>NO </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes </FONT><FONT face=Wingdings size=3>o</FONT> <FONT face="Times New Roman, Times, Serif" size=2>No </FONT><FONT face=Wingdings size=3>x</FONT><FONT face="Times New Roman, Times, serif" size=3>&nbsp;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Indicate the number of shares outstanding of each of the issuer&#146;s classes of common stock, as
of July 31, 2004.</FONT></P>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td colspan="2" align="left"><FONT face="Times New Roman, Times, Serif" size=2>Common Stock, $0.00001 par value</FONT></td>
    <td width="38%" align="center"><FONT face="Times New Roman, Times, Serif" size=2>19,808,819</FONT></td>
    <td width="5%" align="center">&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2" align="center"><hr align="left" width="200" size="1" color="black"></td>
    <td align="center"><hr align="center" width="65" size="1" color="black"></td>
    <td align="center">&nbsp;</td>
  </tr>
  <tr>
    <td width="8%" align="center">&nbsp;</td>
    <td width="49%" align="left"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;(Class)</FONT></td>
    <td align="center"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;(Number of Shares)</FONT></td>
    <td align="center">&nbsp;</td>
  </tr>
</table>
<br>
<hr size="1" noshade  style="margin-top: -2px">
  <hr size="5" noshade style="margin-top: -10px">
<p style="PAGE-BREAK-BEFORE: always">
<P align=center><FONT face="Times New Roman, Times, Serif" size=2><b>AMERICAN TECHNOLOGY CORPORATION</b><b><br>
</b>INDEX</FONT></P>
<table width="100%" cellpadding="0" cellspacing="0">
  <tr>
    <td colspan="3" valign="top"><font size="2" face="Times New Roman, Times, serif">PART I. FINANCIAL INFORMATION </font></td>
    <td valign="top"><b><font size="2" face="Times New Roman, Times, serif">Page</font></b></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td width="86%" valign="top">&nbsp;</td>
    <td valign="top">&nbsp;</td>
  </tr>
  <tr>
    <td valign="top" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;</td>
    <td valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 1.&nbsp;&nbsp;&nbsp;&nbsp;</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">Financial Statements: </font></td>
    <td valign="top">&nbsp;</td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top">&nbsp;</td>
    <td valign="top">&nbsp;</td>
  </tr>
  <tr>
    <td width="3%" valign="top">&nbsp;</td>
    <td width="5%" valign="top" nowrap>&nbsp;</td>
    <td valign="top"><a href="#a1"><font size="2" face="Times New Roman, Times, serif"> Balance Sheets as of June 30, 2004 </font></a></td>
    <td width="6%" valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif"> &nbsp;&nbsp;<a href="#a1">and September 30, 2003 (unaudited) </a></font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">3</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp; </font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><a href="#a2"><font size="2" face="Times New Roman, Times, serif"> Statements of Operations for the three and nine months ended </font></a></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;<a href="#a2">June 30, 2004 and 2003 (unaudited) </a></font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">4</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp; </font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><a href="#a3"><font size="2" face="Times New Roman, Times, serif"> Statements of Cash Flows for the nine months ended </font></a></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;<a href="#a3">June 30, 2004 and 2003 (unaudited) </a></font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">5</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp; </font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><a href="#a4"><font size="2" face="Times New Roman, Times, serif">Notes to Interim Financial Statements </font></a></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">6</font></td>
  </tr>
  <tr>
    <td colspan="3" valign="top">&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp; </font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 2.</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif"><a href="#a5">Management&#146;s Discussion and Analysis of Financial Condition </a></font></td>
    <td valign="top">&nbsp;</td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">
&nbsp;&nbsp;<a href="#a5">and Results of Operations</a> </font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">13</font></td>
  </tr>
  <tr>
    <td colspan="3" valign="top">&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 3.</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif"> <a href="#a6">Quantitative and Qualitative Disclosures about Market Risk</a> </font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">28</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 4.</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif"> <a href="#a7">Controls and Procedures</a> </font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">28</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td colspan="3" valign="top"><font size="2" face="Times New Roman, Times, serif"> PART II. OTHER INFORMATION </font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">28</font></td>
  </tr>
  <tr>
    <td valign="top">&nbsp;</td>
    <td valign="top" nowrap>&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></td>
  </tr>
  <tr>
    <td height="22" valign="top">&nbsp;</td>
    <td height="22" valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 1.</font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif"> <a href="#a9">Legal Proceedings</a> </font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif">28</font></td>
  </tr>
  <tr>
    <td height="22" valign="top">&nbsp;</td>
    <td height="22" valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 2.</font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif"> <a href="#a10">Changes in Securities and Use of Proceeds </a></font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif">28</font></td>
  </tr>
  <tr>
    <td height="22" valign="top">&nbsp;</td>
    <td height="22" valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 3.</font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif"><a href="#a11">Defaults upon Senior Securities</a></font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif">29</font></td>
  </tr>
  <tr>
    <td height="22" valign="top">&nbsp;</td>
    <td height="22" valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 4.</font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif"> <a href="#a12">Submission of Matters to a Vote of Security Holders </a></font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif">29</font></td>
  </tr>
  <tr>
    <td height="22" valign="top">&nbsp;</td>
    <td height="22" valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 5.</font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif"> <a href="#a13">Other Information</a> </font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif">29</font></td>
  </tr>
  <tr>
    <td height="22" valign="top">&nbsp;</td>
    <td height="22" valign="top" nowrap><font size="2" face="Times New Roman, Times, serif">Item 6. </font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif"> <a href="#a14">Exhibits and Reports on Form 8-K </a></font></td>
    <td height="22" valign="top"><font size="2" face="Times New Roman, Times, serif">29</font></td>
  </tr>
  <tr>
    <td colspan="3" valign="top">&nbsp;</td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">&nbsp; </font></td>
  </tr>
  <tr>
    <td colspan="3" valign="top"><a href="#a15"><font size="2" face="Times New Roman, Times, serif"> SIGNATURES </font></a></td>
    <td valign="top"><font size="2" face="Times New Roman, Times, serif">30</font></td>
  </tr>
</table>
<br>

<hr noshade size="5">
<p style="PAGE-BREAK-BEFORE: always">

<p><font size="2" face="Times New Roman, Times, serif">    <b>PART I. FINANCIAL INFORMATION</b></font></p>
<p><b><font size="2" face="Times New Roman, Times, serif">Item 1. Financial Statements.</font></b>
<p align="center"><b><font size="2" face="Times New Roman, Times, serif">American Technology Corporation</font></b><font size="2" face="Times New Roman, Times, serif"><br>
    <a name="a1"></a>BALANCE SHEETS<br>
(Unaudited)</font></p>


<TABLE cellSpacing=0 cellPadding=0 width=100% border=0>
  <TR vAlign=bottom>
    <TD align="CENTER" noWrap></TD>
    <TD colSpan=2 align="CENTER" noWrap><FONT face="Times New Roman, Times, Serif" size=1><B>June 30,</B></FONT><FONT face="Times New Roman, Times, Serif" size=1><B><br>
    2004</B></FONT></TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD colSpan=2 align="CENTER" noWrap><FONT face="Times New Roman, Times, Serif" size=1><B>September 30,<br>
    </B></FONT><FONT face="Times New Roman, Times, Serif" size=1><B>2003 (a)</B></FONT></TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR SIZE=1 Color="black"></TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=1 Color="black"></TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>ASSETS</B></FONT></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Current Assets:</B></FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Cash</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>5,486,133</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>9,850,358</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Trade accounts receivable, less allowance of</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp; $25,000 each period for doubtful accounts</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>1,386,924</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>184,162</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Inventories, net</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>897,808</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>408,944</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Prepaid expenses and other</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>254,958</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>33,849</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Total current assets</B></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>8,025,823</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>10,477,313</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Equipment</B>, net</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>406,610</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>200,262</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Patents</B>, net</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,249,247</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,066,796</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Total assets</B></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>9,681,680</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>11,744,371</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>LIABILITIES AND STOCKHOLDERS&#146; EQUITY</B></FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Current Liabilities:</B></FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;Accounts payable</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,034,429</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>604,343</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;Accrued liabilities:</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; Payroll and related</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>393,450</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>463,788</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; Deferred revenue and deposits</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>322,481</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>276,708</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; Warranty reserve</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>365,145</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>319,500</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; Other</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>150,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>318,849</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Capital lease short-term portion</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>10,694</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>9,915</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap bgcolor="#EAF9E8"><FONT face="Times New Roman, Times, Serif" size=2><B>Total current liabilities</B></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>2,276,199</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>1,993,103</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Long-Term Liabilities:</B></FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Capital lease long-term portion</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>14,977</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>23,097</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Total liabilities</B></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,291,176</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,016,200</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Commitments and contingencies</B></FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap>&nbsp;</TD>
    <TD align=right>&nbsp;</TD>
    <TD noWrap align=right>&nbsp;</TD>
    <TD align=left>&nbsp;</TD>
    <TD align=right>&nbsp;</TD>
    <TD noWrap align=right>&nbsp;</TD>
    <TD align=left>&nbsp;</TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Stockholders&#146; equity</B></FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Preferred stock, $0.00001 par value; 5,000,000 shares authorized:</FONT></TD>
    <TD noWrap>&nbsp;</TD>
    <TD noWrap>&nbsp;</TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Series D Preferred stock 250,000 shares designated: 50,000</FONT></TD>
    <TD noWrap>&nbsp;</TD>
    <TD noWrap>&nbsp;</TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;issued and outstanding each period. Liquidation preference</FONT></TD>
    <TD noWrap>&nbsp;</TD>
    <TD noWrap>&nbsp;</TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp; of $565,000 and $542,000, respectively.</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Series E Preferred stock 350,000 shares designated: 233,250</FONT></TD>
    <TD noWrap>&nbsp;</TD>
    <TD noWrap>&nbsp;</TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;and 263,250 issued and outstanding. Liquidation preference</FONT></TD>
    <TD noWrap>&nbsp;</TD>
    <TD noWrap>&nbsp;</TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp; of $2,520,000 and $2,725,000, respectively.</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>3</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>3</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Common stock, $0.00001 par value; 50,000,000 shares authorized;</FONT></TD>
    <TD noWrap>&nbsp;</TD>
    <TD noWrap>&nbsp;</TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;19,807,319 and&nbsp;&nbsp;19,342,657 shares issued and outstanding</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>198</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>193</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Additional paid-in capital</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>47,449,394</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>46,095,032</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Accumulated deficit</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(40,059,091</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(36,367,057</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Total stockholders&#146; equity</B></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>7,390,504</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>9,728,171</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Total liabilities and stockholders&#146; equity</B></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>9,681,680</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>11,744,371</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
  </TR>
</TABLE>
<P><font size="2" face="Times New Roman, Times, serif">See accompanying notes to interim financial statements.<br>
  (a) Derived from the audited financial statements as of September 30, 2003. </font></P>
<P align="center"><font size="2" face="Times New Roman, Times, serif">3</font></P>
<hr noshade size="5">
<p style="PAGE-BREAK-BEFORE: always">
<P align="center"><b><font size="2" face="Times New Roman, Times, serif">American Technology Corporation</font></b><font size="2" face="Times New Roman, Times, serif"><br>
    <a name="a2" id="a2"></a>STATEMENTS OF OPERATIONS<br>
(Unaudited)</font><B><PAGE></B> </P>
<TABLE cellSpacing=0 cellPadding=0 width=100% border=0>
  <TR vAlign=bottom>
    <TD noWrap align="CENTER"></TD>
    <TD noWrap align="CENTER" colSpan=5>
    <FONT face="Times New Roman, Times, Serif" size=2>For the three months ended<br>
      June 30,</FONT></TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD noWrap align="CENTER" colSpan=5>
    <FONT face="Times New Roman, Times, Serif" size=2>For the nine months ended<br>
      June 30,</FONT></TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=5><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=5><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, serif" size=1>&nbsp;&nbsp;</FONT></TD>
    <TD colspan="2" align=center>
    <FONT face="Times New Roman, Times, serif" size="2">2004</FONT></TD>
    <TD align=center><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" align=center>
    <FONT face="Times New Roman, Times, serif" size="2">2003</FONT></TD>
    <TD align=center><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" align=center>
    <FONT face="Times New Roman, Times, serif" size="2">2004</FONT></TD>
    <TD align=center><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" align=center>
    <FONT face="Times New Roman, Times, serif" size="2">2003</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, serif" size=1>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TD>
    <TD colSpan=2><HR SIZE=1 Color="black">
    </TD>
    <TD><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colSpan=2><HR SIZE=1 Color="black">
    </TD>
    <TD><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colSpan=2><HR SIZE=1 Color="black">
    </TD>
    <TD><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colSpan=2><HR SIZE=1 Color="black">
    </TD>
    <TD><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD><FONT face="Times New Roman, Times, Serif" size=2><B>Revenues:</B></FONT></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Product sales</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,089,359</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>274,718</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>4,201,193</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>808,296</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Contract and license</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>17,922</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>38,894</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>174,116</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>166,557</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Total revenues</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,107,281</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>313,612</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>4,375,309</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>974,853</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Cost of revenues</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>1,006,319</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>186,101</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>2,360,021</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>858,520</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Gross profit</B></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,100,962</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>127,511</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,015,288</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>116,333</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Operating expenses:</B></FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Selling, general and administrative</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,614,351</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,728,296</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>3,766,137</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>3,393,605</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Research and development</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>890,299</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>714,376</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>1,983,518</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>2,023,095</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Total operating expenses</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,504,650</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,442,672</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>5,749,655</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>5,416,700</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Loss from operations</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(1,403,688</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(2,315,161</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(3,734,367</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(5,300,367</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Other income (expense):</B></FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Interest income</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>13,731</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>1,348</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>44,596</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>5,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Interest expense</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(454</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(68,039</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(2,263</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(670,769</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Other</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(800</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(2,467</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Total other income (expense)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>13,277</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(67,491</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>42,333</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(668,236</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Net loss</B></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(1,390,411</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(2,382,652</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(3,692,034</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(5,968,603</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Dividend requirements on convertible preferred stock</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>387,019</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>628,445</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,087,570</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,593,736</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Net loss available to common stockholders</B></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(1,777,430</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(3,011,097</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(4,779,604</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(7,562,339</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Net loss per share of common stock - basic and diluted</B></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(0.09</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(0.19</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(0.24</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(0.51</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Average weighted number of common shares outstanding</B></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>19,719,657</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>15,447,015</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>19,534,343</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>14,902,786</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=2 Color="black">
    </TD>
    <TD></TD>
  </TR>
</TABLE>
<P><font size="2" face="Times New Roman, Times, serif">See accompanying notes to interim financial statements.</font></P>
<P align="center"><font size="2" face="Times New Roman, Times, serif">4</font></P>
<hr noshade size="5">
<p align="center" style="PAGE-BREAK-BEFORE: always">
<b><font size="2" face="Times New Roman, Times, serif">American Technology Corporation</font></b><font size="2" face="Times New Roman, Times, serif"><br>
<a name="a3" id="a3"></a>STATEMENTS OF CASH FLOWS <br>
(Unaudited)</font><B><PAGE></B>
<TABLE cellSpacing=0 cellPadding=0 width=100% border=0>
  <TR vAlign=bottom>
    <TD align="CENTER" noWrap></TD>
    <TD noWrap align="CENTER" colSpan=5>
    <FONT face="Times New Roman, Times, Serif" size=2>For the nine months ended<br>
      June 30,</FONT></TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TD>
    <TD colSpan=5><HR color=black SIZE=1>
    </TD>
    <TD><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=1>&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD colspan="2" align=center>
    <FONT face="Times New Roman, Times, serif" size=2>2004</FONT></TD>
    <TD align=center><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TD>
    <TD colspan="2" align=center>
    <font face="Times New Roman, Times, serif" size="2">&nbsp;2003</font></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=1>&nbsp;&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR SIZE=1 Color="black">
    </TD>
    <TD></TD>
    <TD colSpan=2><HR SIZE=1 Color="black">
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Increase (Decrease) in Cash</B></FONT></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
    <TD width="1%" align=right></TD>
    <TD width="10%" align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD width="2%" align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Operating Activities:</B></FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Net loss</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(3,692,034</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(5,968,603</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Adjustments to reconcile net loss to net cash</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; used in operations:</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; Depreciation and amortization</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>164,920</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>497,880</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; Allowance for doubtful accounts</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(1,140</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp; Warranty reserve</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>83,233</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>63,568</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Common stock issued for services and compensation</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>410,816</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Options and warrants issued for services</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>179,995</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Provision for litigation costs</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>150,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>950,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp; Amortization of debt discount</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>405,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Changes in assets and liabilities:</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp; Trade accounts receivable</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(1,202,762</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>97,013</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp; Inventories</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(488,864</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(219,443</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp; Prepaid expenses and other</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(221,109</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(15,106</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp; Accounts payable</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>430,086</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(333,033</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp; Change in warranty reserve</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(37,588</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp; Accrued liabilities</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(95,414</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>124,587</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Net cash used in operating activities</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(4,909,532</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(3,808,466</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Investing Activities:</B></FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Purchase of equipment</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(299,623</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(9,700</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Patent costs paid</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(254,096</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(30,777</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Net cash used in investing activities</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(553,719</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(40,477</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Financing Activities:</B></FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Payments on capital lease</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(7,341</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(7,252</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Proceeds from issuance of convertible promissory notes</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>500,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Proceeds from issuance of preferred stock</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,432,500</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Cash paid for offering costs</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>(176,222</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Proceeds from exercise of stock options and warrants</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,106,367</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>401,490</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Net cash provided by financing activities</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>1,099,026</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>3,150,516</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Net increase (decrease) in cash</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(4,364,225</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>(698,427</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Cash, beginning of period</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>9,850,358</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>1,807,720</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
    <TD colSpan=2><HR color=black SIZE=1>
    </TD>
    <TD></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Cash, end of period</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>5,486,133</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,109,293</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap>&nbsp;</TD>
    <TD colspan="2" align=right><HR SIZE=2 Color="black"></TD>
    <TD align=left></TD>
    <TD colspan="2" align=right><HR SIZE=2 Color="black"></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2><B>Supplemental Disclosure of Cash Flow Information</B></FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Cash paid for interest</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,263</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>72,521</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Cash paid for taxes</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>Non-cash financing activities:</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Sale of equipment for accounts payable</FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>117,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Secured notes converted to Series E preferred stock</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>1,000,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD colSpan=3 noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Common stock issued on repayment of 8% promissory note</FONT></TD>
    <TD><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>681,845</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Common stock issued on conversion of preferred stock</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>320,414</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,169,396</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
  <TR vAlign=bottom bgcolor="#EAF9E8">
    <TD noWrap bgcolor="#EAF9E8"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Common stock issued for legal settlement accrual</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>248,000</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
    <TD align=right></TD>
    <TD align=right noWrap><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
  </TR>
  <TR vAlign=bottom>
    <TD noWrap><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;Subordinated notes and accrued interest paid in common stock</FONT></TD>
    <TD align=right></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=left></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD noWrap align=right><FONT face="Times New Roman, Times, Serif" size=2>2,435,032</FONT></TD>
    <TD align=left><FONT face="Times New Roman, Times, Serif" size=2></FONT></TD>
  </TR>
</TABLE>
<P><font size="2" face="Times New Roman, Times, serif">See accompanying notes to interim financial statements.</font></P>
<P align="center"><font size="2" face="Times New Roman, Times, serif">5</font></P>
<hr noshade size="5">
<p align="center" style="PAGE-BREAK-BEFORE: always">
<P align="center"><font face="Times New Roman, Times, serif"><b> <font size="2">AMERICAN TECHNOLOGY CORPORATION </font></b><font size="2"></font></font><font size="2" face="Times New Roman, Times, serif"><br>
    <a name="a4" id="a4"></a>NOTES TO INTERIM FINANCIAL STATEMENTS<br>
(Unaudited)</font><B><PAGE></B> </P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>1. OPERATIONS</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>American Technology Corporation (the &#147;Company&#148;) 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>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>2. STATEMENT OF PRESENTATION AND MANAGEMENT&#146;S PLAN</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 and nine month periods are not necessarily indicative of the results that may
be expected for the year. The interim financial statements and notes thereto should be read in conjunction
with the Company&#146;s audited financial statements and notes thereto for the year ended September
30, 2003 included in the Company&#146;s annual report on Form 10-K.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Other than cash of $5,486,133 at June 30, 2004 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 common and preferred stock and warrants, sale of notes and margins
from product sales and licensing. Based on the Company&#146;s cash position assuming (a) currently
planned expenditures and level of operations and (b) continuation of product sales, 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>Management expects the Company 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&#146;s operating losses will depend on future product
sales levels and other factors, some of which are beyond management&#146;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>
<P><FONT face="Times New Roman, Times, Serif" size=2>Where necessary, prior year&#146;s information has been reclassified to conform with the fiscal 2004
statement presentation.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>3. NET LOSS PER SHARE</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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&#146;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 5,071,647
shares of common stock were outstanding at June 30, 2004 and stock options, warrants and convertible
preferred stock and notes exercisable into 5,280,825 shares of common stock were outstanding at June
30, 2003. 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>
<P><FONT face="Times New Roman, Times, Serif" 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&#146;s stockholders&#146; 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>
<P align="center"><font size="2" face="Times New Roman, Times, serif">6</font></P>
<hr noshade size="5">
<p align="center" style="PAGE-BREAK-BEFORE: always"><font face="Times New Roman, Times, serif"><b><font size="2">AMERICAN TECHNOLOGY CORPORATION </font></b><font size="2"></font></font><font size="2" face="Times New Roman, Times, serif"></font><FONT face="Times New Roman, Times, Serif" size=2><font size="2" face="Times New Roman, Times, serif"><br>
NOTES TO INTERIM FINANCIAL STATEMENTS<br>
(Unaudited)</font><B><PAGE></B> </FONT>
<p align="left"><FONT face="Times New Roman, Times, Serif" size=2>  The provisions of each of the Company&#146;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. </FONT><FONT face="Times New Roman, Times, Serif" size=2>Net loss available to common stockholders is computed as follows:</FONT></p>
<TABLE WIDTH=100% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="5" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">Three Months Ended<br>
      June 30, </font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="5" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">Nine Months Ended<br>
      June 30,</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2004</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2003</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2004</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2003</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Net loss</FONT></TD>
    <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (1,390,411</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (2,382,652</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (3,692,034</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (5,968,603</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Imputed deemed dividends on Series D and E</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;warrants issued with preferrd stock</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(100,179</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(310,046</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(347,292</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(442,062</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Imputed deemed dividends on Series D and E</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;preferred stock</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(243,396</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(256,675</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(603,386</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(996,267</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Accretion on preferred stock at 6% stated rate</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(43,444</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(61,724</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(136,892</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(155,407</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Net loss available to common stockholders</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (1,777,430</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (3,011,097</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (4,779,604</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (7,562,339</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
  </TR>
</TABLE>
<p><FONT face="Times New Roman, Times, Serif" size=2>At June 30, 2004 the balance of deemed dividends attributable to preferred stock warrants and to the
  preferred discount provision was $2,088,145. 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>4. </B><B>STOCK-BASED COMPENSATION</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In December 2002, the FASB issued FAS No. 148, &#147;Accounting for Stock-Based Compensation &#151;
Transition and Disclosure&#148;, which amended FAS No. 123, &#147;Accounting for Stock-Based Compensation.&#148;
The new standard provides alternative methods of transition for a voluntary change to the fair market
value based method for accounting for stock-based employee compensation. Additionally, the statement
amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement is effective for the Company&#146;s
financial statements for the fiscal year ended September 30, 2003 and the Company adopted the disclosure
requirements effective October 1, 2002. In compliance with FAS No. 148, the Company has elected to
continue to follow the intrinsic value method in accounting for its stock-based employee compensation
plan as defined by APB No. 25. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes
option-pricing model with the following weighted average assumptions used for grants in 2004 and
2003, respectively: dividend yield of zero percent for all years; expected volatility of 60 to 75percent
in 2004 and expected volatility of 68 to 84&nbsp;percent in 2003; risk-free interest rates of 1.32
to 2.76 percent; and expected lives of 2.21 to 5&nbsp;years. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options&#146; vesting period. The Company&#146;s pro forma information is as follows follows:</FONT></P>

<P>
<TABLE WIDTH=100% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="5" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">Three Months Ended<br>
      June 30, </font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="5" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">Nine Months Ended<br>
      June 30,</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2004</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2003</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2004</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b><font size="1" face="Times New Roman, Times, serif">2003</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Net loss available to common shareholders</FONT></TD>
    <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=8% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (1,777,430</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=8% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (3,011,097</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=8% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (4,779,604</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=8% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (7,562,339</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Plus: Stock-based employee compensation</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;expense included in reported net loss</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Less: Total stock-based employee compensation expense</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;determined using fair value based method</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(150,489</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(342,040</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(658,344</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(722,267</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Pro forma net loss available to common stockholders</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (1,927,919</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (3,353,137</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (5,437,948</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (8,284,606</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Net loss per common share - basic</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
	    <TD COLSPAN="12"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;and diluted -as reported</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.09</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.19</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.24</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.51</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT bgcolor="#EAF9E8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Net loss per common share - basic</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
	    <TD COLSPAN="12"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;and diluted - pro forma</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.10</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.22</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.28</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (0.56</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD COLSPAN=3></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
  </TR>
</TABLE>
<P align="center"><font size="2" face="Times New Roman, Times, serif">7</font></P>
<hr noshade size="5">
<p align="center" style="PAGE-BREAK-BEFORE: always">
<P align="center"><font face="Times New Roman, Times, serif"><b><font size="2">AMERICAN TECHNOLOGY CORPORATION </font></b><font size="2"></font></font><font size="2" face="Times New Roman, Times, serif"></font><font size="2" face="Times New Roman, Times, serif"><br>
NOTES TO INTERIM FINANCIAL STATEMENTS<br>
(Unaudited)</font><B><PAGE></B> </P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>5. RECENT ACCOUNTING PRONOUNCEMENTS</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In December 2003, the FASB issued FIN&nbsp;46-R, &#147;Consolidation of Variable Interest Entities&nbsp;&#151;
an interpretation of ARB&nbsp;51&nbsp;(revised December 2003)&#148;, which replaces FIN&nbsp;46.
FIN&nbsp;46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent to the
issuance of FIN&nbsp;46, including modifications of the scope of FIN&nbsp;46. For all non-special
purpose entities (&#147;SPE&#148;) created prior to February&nbsp;1, 2003, public entities will be
required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after
March&nbsp;15, 2004. For all entities (regardless of whether the entity is an SPE) that were created
subsequent to January&nbsp;31, 2003, public entities are already required to apply the provisions
of FIN 46, and should continue doing so unless they elect to adopt the provisions of Fin 46-R early
as of the first interim or annual reporting period ending after December&nbsp;15, 2003. If they do
not elect to adopt FIN&nbsp;46-R early, public entities would be required to apply FIN&nbsp;46-R
to those post-January&nbsp;31, 2003 entities as of the end of the first interim or annual reporting
period ending after March&nbsp;15, 2004. The adoption of FIN 46-R for non-SPEs did not have a material
impact to the Company&#146;s financial position, results of operations or cash flows. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>6. INVENTORIES</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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></P>
<P>
<TABLE WIDTH=85% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">June 30, <br>
      2004
    </font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">September 30, <br>
      2003
    </font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Finished goods</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=15% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 51,489</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=15% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 13,690</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Work in process</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>182,638</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Raw materials</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>866,319</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>232,616</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>917,808</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>428,944</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Reserve for obsolescence</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(20,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(20,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 897,808</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 408,944</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>7. CUSTOMER CONCENTRATION</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>For the nine months ended June 30, 2004 sales to two customers accounted for 51% and 28% of total revenues,
respectively. For the three months ended June 30, 2004 sales to three customers accounted for 62%,
22% and 13% of total revenues, respectively. At June 30, 2004 the accounts receivable from these
three customers accounted for 40%, 28% and 6% of accounts receivable, respectively, and no other
customer accounted for more than 10% of accounts receivable. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Some of the Company&#146;s past reliance on a limited number of customers has been due to the Company&#146;s
former strategy of pursuing sales in key markets through distributors who often had exclusive rights
to sell to specific customers or for specific uses. The Company&#146;s current strategy is to pursue
markets and customers directly or through non-exclusive distributors. However many of the Company&#146;s
government sales are made to military contractors who resell to the ultimate end-user agency. Accordingly,
the Company may still be dependent on the success and timing of large orders from individual customers
that may not be recurring, or may not recur in a predictable fashion. Accordingly, sales to individual
customers may continue to represent significant percentages of future sales volume, and the loss
or delay in orders to individual customers may significantly impair quarterly results of operations.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>8. INTANGIBLES</B></FONT></P>
<P><font size="2" face="Times New Roman, Times, serif">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>
<TABLE WIDTH=85% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">June 30, <br>
    2004
    </font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">September 30, <br>
    2003
    </font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Patents at cost</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=15% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 1,541,154</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=15% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 1,287,058</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Accumulated amortization</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(291,907</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(220,262</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Net patent</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 1,249,247</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 1,066,796</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR Color="Black" SIZE="2"></TD>
    <TD></TD>
  </TR>
</TABLE>

<P align="center"><font size="2" face="Times New Roman, Times, serif">8</font></P>
<hr noshade size="5">
<p align="center" style="PAGE-BREAK-BEFORE: always">
<p align="center"><font face="Times New Roman, Times, serif"><b> <font size="2">AMERICAN TECHNOLOGY CORPORATION <br>
</font></b><font size="2">NOTES TO INTERIM FINANCIAL STATEMENTS <br>
(Unaudited) </font></font></p>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>9. PRODUCT WARRANTY COST</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>Changes in the warranty reserves during the three and nine months ended June 30, 2004 and 2003 were as follows:</FONT></P>
<TABLE WIDTH=80% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="5" ALIGN=center><b>
    <FONT FACE="Times New Roman, Times, serif" SIZE=2>Three Months Ended<BR>
      June 30,</FONT></b></TD>
    <TD ALIGN=center><font face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="5" ALIGN=center><b>
    <FONT FACE="Times New Roman, Times, serif" SIZE=2>Nine Months Ended<BR>
      June 30,</FONT></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <FONT FACE="Times New Roman, Times, serif" SIZE=2>2004</FONT></b></TD>
    <TD ALIGN=center><font face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" ALIGN=center><b>
    <FONT FACE="Times New Roman, Times, serif" SIZE=2>2003</FONT></b></TD>
    <TD ALIGN=center><font face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" ALIGN=center><b>
    <FONT FACE="Times New Roman, Times, serif" SIZE=2>2004</FONT></b></TD>
    <TD ALIGN=center><font face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" ALIGN=center><b>
    <FONT FACE="Times New Roman, Times, serif" SIZE=2>2003</FONT></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Beginning balance</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 325,000</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 47,855</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 319,500</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 6,313</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Warranty provision</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>57,300</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>22,026</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>83,233</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>63,568</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT bgcolor="#EAF9E8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Warranty payments</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(17,155</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(37,588</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Ending balance</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 365,145</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 69,881</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 365,145</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 69,881</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>10. STOCKHOLDERS&#146; EQUITY </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following table summarizes changes in equity components from transactions during the nine months
ended June 30, 2004:&nbsp;</FONT></P>
<TABLE CELLPADDING=0 CELLSPACING=0 BORDER=0 WIDTH=100%>
    <TR VALIGN=Bottom>
      <TD ALIGN=LEFT>&nbsp;</TD>
      <TD colspan="5" ALIGN=center>&nbsp;</TD>
      <TD ALIGN=center>&nbsp;</TD>
      <TD colspan="5" ALIGN=center>&nbsp;</TD>
      <TD ALIGN=center>&nbsp;</TD>
      <TD colspan="2" rowspan="3" ALIGN=center>
      <font size="2" face="Times New Roman, Times, serif">Additional<br>
      Paid-In <br>
      Capital <br>
      </font></TD>
      <TD ALIGN=center>&nbsp;</TD>
      <TD colspan="2" rowspan="3" ALIGN=center>
      <font size="2" face="Times New Roman, Times, serif">Accumulated<br>
      Deficit <br>
      </font></TD>
      <TD ALIGN=center>&nbsp;</TD>
    </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="5" ALIGN=center>
    <font size="2" face="Times New Roman, Times, serif"> Preferred Stock </font></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD colspan="5" ALIGN=center>
    <font size="2" face="Times New Roman, Times, serif"> Common Stock </font></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD ALIGN=center>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TD>
    <TD colspan="2" ALIGN=center>
    <font size="2" face="Times New Roman, Times, serif"> Shares </font></TD>
    <TD ALIGN=center><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" ALIGN=center>
    <font size="2" face="Times New Roman, Times, serif"> Amount </font></TD>
    <TD ALIGN=center><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" ALIGN=center>
    <font size="2" face="Times New Roman, Times, serif"> Shares </font></TD>
    <TD ALIGN=center><font size="1" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" ALIGN=center>
    <font size="2" face="Times New Roman, Times, serif"> Amount </font></TD>
    <TD ALIGN=center><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TD>
    <TD ALIGN=center><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TD>
    <TD ALIGN=center><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Balance as of October 1, 2003</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=7% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>313,250</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=7% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=7% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>19,342,657</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=7% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 193</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=7% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 46,095,032</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=7% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (36,367,057</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Stock issued upon exercise of</FONT> <FONT FACE="Times New Roman, Times, Serif" SIZE=2>stock options</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>291,073</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>3</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1,056,364</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Stock issued upon exercise of</FONT>&nbsp;<FONT FACE="Times New Roman, Times, Serif" SIZE=2>warrants </FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>25,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>50,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Stock issued upon conversion of</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT>&nbsp;&nbsp;<FONT FACE="Times New Roman, Times, Serif" SIZE=2>Series E preferred stock</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(30,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>98,589</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(1</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Legal settlement and royalty buyout</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT>&nbsp;&nbsp;<FONT FACE="Times New Roman, Times, Serif" SIZE=2>at $4.96 per share</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>50,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>247,999</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Deemed dividends and accretion on</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT>&nbsp;&nbsp;<FONT FACE="Times New Roman, Times, Serif" SIZE=2>convertible preferred stock of $1,087,570</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Net loss for the period</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(3,692,034</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Balance as of June 30, 2004</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>283,250</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>19,807,319</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 198</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 47,449,394</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (40,059,091</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
  </TR>
</TABLE>

<P><FONT face="Times New Roman, Times, Serif" size=2>At June 30, 2004 the Company&#146;s 50,000 outstanding shares of Series D Convertible Preferred Stock
would have been convertible into 125,519 shares of common stock and the 233,250 outstanding shares
of Series E Convertible Preferred Stock would have been convertible into 775,466 shares of common
stock. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following table summarizes information about stock option activity during the nine months ended
June 30, 2004:</FONT></P>
<TABLE WIDTH=477 BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT width="279">&nbsp;</TD>
    <TD colspan="2" ALIGN=center nowrap width="63">
    <font size="2" face="Times New Roman, Times, serif">Number of<br>
      Options
    </font></TD>
    <TD ALIGN=center width="24">&nbsp;</TD>
    <TD colspan="2" ALIGN=center nowrap width="102">
    <font size="2" face="Times New Roman, Times, serif">Weighted Average<br>
      exercise price
    </font></TD>
    <TD ALIGN=LEFT width="9">&nbsp;</TD>
  </TR>
  <TR>
    <TD width="279"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="63"><HR COLOR=Black SIZE=1></TD>
    <TD width="24"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="102"><HR COLOR=Black SIZE=1></TD>
    <TD width="9"></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT width="279"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Outstanding October 1, 2003</FONT></TD>
    <TD WIDTH=8 ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=55 ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1,612,274</FONT></TD>
    <TD WIDTH=24 ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=8 ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=94 ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 4.00</FONT></TD>
    <TD WIDTH=9 ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT width="279"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canceled/expired</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="55"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(418,341</FONT></TD>
    <TD ALIGN=LEFT width="24"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT width="94"><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 5.45</FONT></TD>
    <TD ALIGN=LEFT width="9"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT width="279"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Exercised</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="55"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(291,073</FONT></TD>
    <TD ALIGN=LEFT width="24"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT width="94"><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3.63</FONT></TD>
    <TD ALIGN=LEFT width="9"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT width="279"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Granted</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="55"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>915,000</FONT></TD>
    <TD ALIGN=LEFT width="24"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT width="94"><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 5.87</FONT></TD>
    <TD ALIGN=LEFT width="9"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD width="279"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="63"><HR COLOR=Black SIZE=1></TD>
    <TD width="24"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="102"><HR COLOR=Black SIZE=1></TD>
    <TD width="9"></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT width="279"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Outstanding June 30, 2004</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="55"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1,817,860</FONT></TD>
    <TD ALIGN=LEFT width="24"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT width="94"><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 4.67</FONT></TD>
    <TD ALIGN=LEFT width="9"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD width="279"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="63"><HR  COLOR=Black SIZE=2></TD>
    <TD width="24"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="102"><HR  COLOR=Black SIZE=2></TD>
    <TD width="9"></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT width="279"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Exercisable at June 30, 2004</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="55"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>893,122</FONT></TD>
    <TD ALIGN=LEFT width="24"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT width="8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT width="94"><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3.60</FONT></TD>
    <TD ALIGN=LEFT width="9"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD width="279"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="63"><HR  COLOR=Black SIZE=2></TD>
    <TD width="24"></TD>
    <TD COLSPAN=2 ALIGN=RIGHT width="102"><HR  COLOR=Black SIZE=2></TD>
    <TD width="9"></TD>
  </TR>
</TABLE>

<P><FONT face="Times New Roman, Times, Serif" size=2>Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and expire over the period
from 2004 to 2009 with an average life of 3.7 years. </FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>9</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<p align="center"><font face="Times New Roman, Times, serif"><b> <font size="2">AMERICAN TECHNOLOGY CORPORATION <br>
</font></b><font size="2">NOTES TO INTERIM FINANCIAL STATEMENTS <br>
(Unaudited) </font></font></p>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following table summarizes information about warrant activity during the nine months ended June
30, 2004:</FONT></P>
<TABLE WIDTH=70% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center nowrap>
    <font size="2" face="Times New Roman, Times, serif">Number of<br>
      Warrants</font></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD colspan="2" ALIGN=center nowrap>
    <font size="2" face="Times New Roman, Times, serif">Weighted Average</font><font size="1" face="Times New Roman, Times, serif"><b><br>
      </b>
    </font><font size="2" face="Times New Roman, Times, serif">Exercise Price
    </font></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT bgcolor="#EAF9E8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Outstanding October 1, 2003</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=12% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2,427,802</FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=12% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3.85</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canceled/expired</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(50,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 10.00</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Exercised</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>(25,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 2.00</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Issued</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&#151;</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Outstanding June 30, 2004</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2,352,802</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3.74</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
  </TR>
</TABLE>
<p><FONT face="Times New Roman, Times, Serif" size=2>
  At June 30, 2004, the following stock purchase warrants were outstanding arising from offerings and
  other transactions, each exercisable into one common share:</FONT>
</P>

<TABLE WIDTH=40% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=RIGHT>&nbsp;</TD>
    <TD ALIGN=center><b><font size="2" face="Times New Roman, Times, serif">Number </font></b></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">Exercise<br>Price </font></b></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD ALIGN=center><b><font size="2" face="Times New Roman, Times, serif">Expiration<br>
      Date</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=RIGHT>&nbsp;</TD>
    <TD ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=15% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>75,000</FONT></TD>
    <TD WIDTH=15% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD WIDTH=15% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 11.00</FONT></TD>
    <TD WIDTH=15% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT nowrap><FONT FACE="Times New Roman, Times, Serif" SIZE=2>March 31, 2005</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>812,500</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 2.00</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT nowrap><FONT FACE="Times New Roman, Times, Serif" SIZE=2>September 30, 2006</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>495,880</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3.01</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT nowrap><FONT FACE="Times New Roman, Times, Serif" SIZE=2>March 31, 2007</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>454,547</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 6.75</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT nowrap><FONT FACE="Times New Roman, Times, Serif" SIZE=2>July 10, 2007</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>100,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 4.25</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT nowrap><FONT FACE="Times New Roman, Times, Serif" SIZE=2>September 30, 2007</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>364,875</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3.25</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT nowrap><FONT FACE="Times New Roman, Times, Serif" SIZE=2>December 31, 2007</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>50,000</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 3.63</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT nowrap><FONT FACE="Times New Roman, Times, Serif" SIZE=2>April 8, 2007</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=3></TD>
    <TD ALIGN=RIGHT>&nbsp;</TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2,352,802</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD><HR COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=3></TD>
    <TD ALIGN=RIGHT>&nbsp;</TD>
    <TD></TD>
  </TR>
</TABLE>

<P><FONT face="Times New Roman, Times, Serif" size=2><B>11. BUSINESS SEGMENT DATA  </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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&#146;s reportable segments are strategic business units that sell
the Company&#146;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>
<P><FONT face="Times New Roman, Times, Serif" 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 WIDTH=80% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="5" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">Three Months Ended<br>
      June 30,
    </font></b></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD colspan="5" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">Nine Months Ended<br>
      June 30,
    </font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">2004</font></b></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">2003</font></b></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">2004</font></b></TD>
    <TD ALIGN=center>&nbsp;</TD>
    <TD colspan="2" ALIGN=center><b>
    <font size="2" face="Times New Roman, Times, serif">2003</font></b></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Revenues:</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=3% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=10% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Business Group</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 270,494</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 53,856</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 807,589</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 635,043</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Government Group</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1,836,787</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>259,756</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>3,567,720</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>339,810</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 2,107,281</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 313,612</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 4,375,309</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 974,853</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT COLSPAN=13><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Gross Profit (Loss):</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Business Group</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (167,833</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (62,015</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (244,625</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (88,619</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Government Group</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1,268,795</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>189,526</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2,259,913</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>204,952</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 1,100,962</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 127,511</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 2,015,288</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 116,333</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  COLOR=Black SIZE=2></TD>
    <TD></TD>
  </TR>
</TABLE>

<P align=center><FONT face="Times New Roman, Times, serif" size=2>10</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<p align="center"><font face="Times New Roman, Times, serif"><b> <font size="2">AMERICAN TECHNOLOGY CORPORATION <br>
</font></b><font size="2">NOTES TO INTERIM FINANCIAL STATEMENTS <br>
(Unaudited) </font></font></p>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>12. LEGAL PROCEEDINGS</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 judgment to
the effect that a License, Purchase and Marketing Agreement dated September 28, 2000 (the &#147;ESI
License Agreement&#148;) 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 &#147;ESI.&#148;&nbsp;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>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>The three cases were consolidated upon motion by the defendants and order of the court. The defendants
filed a first amended cross-complaint against the Company alleging fraud, breach of contract in connection
with the ESI License Agreement and the options, 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, and violation of California Business and Professions Code &#167;17200. The
defendants seek actual and punitive damages in unstated amounts and other relief. The Company filed
a demurrer and motion to strike as to the first amended cross-complaint, which was granted, in part,
in May 2004. In June 2004, ESI filed a second amended cross-complaint containing allegations similar
to the first amended cross-complaint and seeking the same relief. The Company has filed a demurrer
and motion to strike as to the second amended cross-complaint which will be heard by the court on
August 13, 2004. Discovery has commenced. No trial date has been set.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Related to the Company&#146;s April 2000 purchase of the NeoPlanar speaker technology, the Company
was in dispute with a predecessor owner of the technology regarding a minimum film royalty for 2002
of approximately $228,000. In March 2004 the Company settled this matter for a payment of $25,000
and the issuance of 50,000 shares of common stock, which included a buyout of all future royalties.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In February 2004, the Company gave notice of termination of 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 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 disputed the Company&#146;s
right to terminate the agreements and demanded arbitration. In April 2004 the Company announced that
it and GD-ATP had mutually agreed to resolve their disputes in an amicable manner, and to dismiss
the arbitration proceedings. GD-ATP and the Company agreed that neither was liable to the other and
that no party engaged in any wrongdoing. The resolution resulted in the termination of the two agreements,
and in the Company assuming GD-ATP&#146;s role in servicing certain LRAD customers previously serviced by GD-ATP.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>11</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<p align="center"><font face="Times New Roman, Times, serif"><b> <font size="2">AMERICAN TECHNOLOGY CORPORATION <br>
</font></b><font size="2">NOTES TO INTERIM FINANCIAL STATEMENTS <br>
(Unaudited) </font></font></p>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company may at times be involved in litigation in the ordinary course of business. The Company
will also, from time to time, when appropriate in management&#146;s estimation, record adequate reserves
in the Company&#146;s financial statements for pending litigation. 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>13. INCOME TAXES</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>At June 30, 2004, 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>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>12</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><B><FONT face="Times New Roman, Times, Serif" size=2><a name="a5"></a></FONT>
<FONT face="Times New Roman, Times, Serif">Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</FONT></B></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Forward Looking Statements</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>This Report contains certain statements of a forward-looking nature relating to future events or the
future performance. Words such as</I> &nbsp;&#147;<I>expects,</I>&#148; &#147;<I>anticipates,</I>&#148; &#147;<I>intends,</I>&#148; &#147;<I>plans,</I>&#148; &#147;<I>believes,</I>&#148; &#147;<I>seeks,</I>&#148; &#147;<I>estimates</I>&#148;<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. Prospective investors are cautioned
that such statements are only predictions and that actual events or results may differ materially.
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> &#147;<I>Business Risks</I>&#148;<I>, which could cause actual results to differ materially from those indicated by such forward-looking
statements.</I></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Overview</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We are an innovator of proprietary sound reproduction technologies and products. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our HyperSonic Sound (HSS) technology is a new method of sound reproduction that uses parametric acoustics
to create sound &#147;in the air.&#148; 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&#146;s unique
features are useful in new sound applications. We believe we are the leader in developing and commercializing
parametric loudspeakers. 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 new military sound system (5MC) offers improved intelligibility on flight decks and in other
applications. 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>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following is a summary description of our operating results for the three and nine months ended
June 30, 2004. A more detailed discussion of our operating results is included below under the heading
&#147;Results of Operations.&#148;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our third quarter of fiscal 2004 represented a continuation of business and strategic initiatives implemented
in the first quarter of fiscal 2004, including:</FONT></P>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=24></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> Organization:</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>We changed and added to our senior management team. We now have a management team with significant
experience in successfully bringing products to market.</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT><FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>We have formed separate Engineering and Advanced Development Departments. The Advanced Development
Department will continue to foster creative innovation. The Engineering Department focuses on bringing
reliable products to market.</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>We reorganized the sales and marketing of our products by the end-user markets they serve. We now have
a Business Products and Licensing Group and a Government and Force Protection Systems Group. </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=24></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> Management Process:</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>We are implementing a phase gate development process. This process provides executive review of each
project at key phases within the development cycle. The goal is to ensure development of products
which meet our cost, reliability and business goals.</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT><FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>We have instituted a rigorous engineering verification, design verification and product life testing
process. The purpose of this process is to ensure that our products are reliable and meet customer
requirements.</FONT></TD></TR></TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>13</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">

<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=24></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> Sales:</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>We are focusing greater effort on pursuing sales opportunities internally with marketing teams in the
Business Group and Government Group experienced in the target markets. In the past, we relied primarily
on outside licensees for sales and marketing of our key products.</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> We are focusing on maintaining acceptable margins for the substantial majority of our sales.</FONT></TD>
</TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>Our marketing teams are focused on sales growth and we expect continued revenue growth in the fourth
quarter of fiscal 2004.</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=24></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> Business Relationships:</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>We are establishing relationships with established national or global partners for sales, manufacturing
and distribution to accelerate the worldwide adoption of our products. We are generally pursuing
relationships on a non-exclusive basis to maximize the performance incentives for our partners and
market penetration of our products. </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=72></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>&#149;<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>Relationships are being chosen and structured carefully for complimentary fit with our strategy and
achievement of desired objectives.</FONT></TD></TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>We believe our third quarter shows positive results deriving from these initiatives. Our revenues for
the quarter ended June 30, 2004 were $2.1 million, compared to $1.5 million for the immediately preceding
second quarter of fiscal 2004, and $313,600 for the quarter ended June 30, 2003. Our gross profit
for the three and nine months ended June 30, 2004 was 52% and 46% of revenues, compared to 40% and
12% gross profit for the comparable three and nine months of the prior fiscal year. We accomplished
these significant improvements in sales and margins while increasing only modestly our total operating
expenses. Overall, we reduced our net loss from $6.0 million in the first nine months of fiscal 2003
to $3.7 million for the first nine months of fiscal 2004, and from $2.4 million in the third quarter
of fiscal 2003 to $1.4 million in the third quarter of fiscal 2004.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Management is continuing to focus efforts upon near-term revenue and gross margin improvement from
our existing, marketable products. We have increased the number of personnel to further in-house
sales and marketing, grow our Advanced Development Department to develop new products and product
applications, and to fill key management and operational positions. Personnel cost increases reflect
our objective to assemble the right teams to accelerate quality product development, build market
momentum, and generate sales. We believe our new generation HSS and LRAD products, plus quarter-over-quarter
sales increases, are direct results of building the proper staff. We are focusing resources on sales,
marketing, engineering and production of existing products, and we will closely monitor research
and development activities in future periods with a view toward establishing a compelling business
case for each Advanced Development initiative.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Recent Developments</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In April 2004, Kalani Jones was appointed President and Chief Operating Officer. He formerly served
as Chief Operating Officer. In the new position, he has assumed greater responsibilities for all
aspects of our business operations. He is also managing Sales and Marketing for our Business Group
pending the hiring of a Vice President of Sales and Marketing. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In June 2004 we announced the hiring of Michael A. Russell as our Chief Financial Officer. Carl Gruenler,
who was acting as Interim Chief Financial Officer, is now focused full-time on his duties as Vice
President of our Government Group.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In May 2004 we announced a manufacturing partnership with Pemstar, Inc. to build volume HSS&#174; and
LRAD(TM) orders. Pemstar is a leading provider of manufacturing services with over 1,000,000 square
feet in 15 manufacturing facilities located in the United States, Asia, Europe, South America and
Mexico.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>14</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>Also in May 2004 we announced that we have been developing a new flight deck voice communications system
designated as the 5MC system by the U.S. Navy. This new product was supported in part by a $436,000
contract by the U.S. Navy via a contract with Signal Solutions, Inc., a subsidiary of General Dynamics
Network Systems. Our 5MC military sound system complements our LRAD and NeoPlanar product offerings
to government customers.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In June 2004 we received our first shipments of Generation III HSS units from our contract manufacturer
(Pemstar, Inc.) and commenced testing with selected customers in anticipation of growing production
and sales starting in the fourth fiscal quarter of 2004. Generation III HSS features higher SPL (loudness),
lower distortion (cleaner sound) and attractive packaging resulting from internal and external industrial
design. With the known performance of our Generation III HSS product we are focusing our Business
Group marketing efforts on the digital signage, kiosk/display and trade show markets where we believe
HSS speakers offer customers compelling advantages by directing sound to target users and reducing
noise clutter. Existing Business Group sales and marketing personnel and those we seek to hire will
be focused on end-user customers and technology integrators and others specializing in these market
segments. In addition to direct sales to end-users, we expect to develop relationships with established
national or global partners for sales, distribution and installation of HSS products to accelerate
the worldwide adoption of HSS sound solutions. We are also in the early stages of developing opportunities
and relationships to employ HSS technology in home theater and related applications.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Critical Accounting Policies</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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&#146;s Discussion and Analysis of Financial
Condition and Results of Operations when such policies affect our reported and expected financial
results.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 and nine 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Revenue Recognition. </I>We derive our revenue primarily from two sources: (i) component and product sale revenues and associated
engineering and installation (&#147;product sales&#148;) 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 or destination, per contract, 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 engineering contracts are recognized based on milestones or completion of the contracted
services. 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Intangible Assets</I>. &nbsp;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>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Warranty Reserve</I>. 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Guarantees and Indemnifications</I>. Under our charter documents, 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. We have
no liabilities recorded for such indemnities.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>15</FONT></P>
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<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Stock-Based Compensation</I>. In December 2002, the FASB issued FAS No. 148, &#147;Accounting for Stock-Based Compensation &#151;
Transition and Disclosure&#148;, which amended FAS No. 123, &#147;Accounting for Stock-Based Compensation.&#148;
The new standard provides alternative methods of transition for a voluntary change to the fair market
value based method for accounting for stock-based employee compensation. Additionally, the statement
amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement is effective for our financial
statements for the fiscal year ended September 30, 2003 and we adopted the disclosure requirements
effective October 1, 2002. In compliance with FAS No. 148, we have elected to continue to follow
the intrinsic value method in accounting for our stock-based employee compensation plan as defined
by APB No. 25. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Research and Development Expenses. </I>Research and development expenses are salaries and related expenses associated with the development
of our proprietary sound technologies and include compensation paid to engineering personnel and
fees to outside contractors and consultants.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Deferred Tax Asset. </I>We have provided a full valuation reserve related to our substantial deferred tax assets. In the future,
if sufficient evidence of our ability to generate sufficient future taxable income in certain tax
jurisdictions becomes apparent, we may be required to reduce our valuation allowances, resulting
in income tax benefits in our consolidated statement of operations. We evaluate the realizability
of the deferred tax assets and assess the need for valuation allowance quarterly. The utilization
of the net operating loss carryforwards could be substantially limited due to restrictions imposed
under federal and state laws upon a change in ownership.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Off-Balance Sheet Arrangements</I>. We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated
entities or other persons, also known as &#147;special purpose entities&#148; (SPEs).</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Results of Operations</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Revenues</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Revenues increased 349% for the nine month period ended June 30, 2004 to $4,375,309 compared to $974,853
for the comparable first nine months of fiscal 2003. Revenues for the three months ended June 30,
2004 were $2,107,281, a 572% increase over revenues of $313,612 for the comparable three months of
fiscal 2003. Revenues for the first nine months of fiscal 2004 included $4,201,193 of product and
component sales and $174,116 of contract and license revenues. Revenues for the first nine months
of fiscal 2003 included $808,296 of product sales and $166,557 of contract and license revenues.
The increases in the 2004 period were primarily a result of several large LRAD contracts and one
large NeoPlanar contract. The nine month 2003 revenues included $83,261 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. During fiscal 2003 we ceased marketing
and selling portable consumer products in order to focus financial, personnel and facility resources
on our sound technologies. There were no sales of portable consumer products in the first nine months of fiscal 2004.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Contract and license revenues for the nine months ended June 30, 2004 and 2003 were $174,116 and $166,557.
Our focus in fiscal 2004 has been on product and component sales rather than contracted development.
At June 30, 2004 and 2003 we had $322,481 and $274,170 recorded as deferred revenue or deposits for
existing contracts, agreements and licenses.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>As we have only recently commenced product manufacturing and sales, have limited record of recurring
sales and 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 backlog
is also affected by the timing of large orders and order deliveries, especially to government customers.
Our order backlog was approximately $46,800 and $558,000 at June 30, 2004 and 2003. Backlog orders
are subject to modification, cancellation or rescheduling by our customers. Future shipments may
also be delayed due to production delays, component shortages and other production and delivery related
issues.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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, 5MC systems 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>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>16</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>Presented below is a summary of revenues by business segment:</FONT></p>
<TABLE WIDTH=70% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TH>&nbsp;</TH>
    <TH COLSPAN=5><font size="2" face="Times New Roman, Times, serif">Three Months Ended<br>
      June 30,</font></TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=5><font size="2" face="Times New Roman, Times, serif">Nine Months Ended<br>
      June 30,</font></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR VALIGN=Bottom>
    <TH><FONT FACE="Times New Roman, Times, Serif" SIZE=1></FONT></TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2004</FONT></TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2003</FONT></TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 2004</FONT></TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2003</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Revenues:</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Business Group</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 270,494</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 53,856</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 807,589</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 635,043</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Government Group</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1,836,787</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>259,756</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>3,567,720</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>339,810</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 2,107,281</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 313,612</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 4,375,309</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 974,853</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
  </TR>
</TABLE>

<P><FONT face="Times New Roman, Times, Serif" size=2>Business Group revenues for the nine months ended June 30, 2004 included both HSS and NeoPlanar product
sales. Business Group revenues for the comparable nine months of the prior year included $83,261
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 materials issues. In the first quarter of fiscal 2004 we began
to slowly ramp HSS shipments to selected customers. We expect Business Group HSS product shipments
to ramp up during the balance of fiscal 2004 and in fiscal 2005.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Government Group revenues for the nine months ended June 30, 2004 included sales of $3,400,105 of LRAD,
NeoPlanar and 5MC products and $167,615 of revenues from engineering and contract work. These revenues
derived primarily from a limited number of large orders and the timing of follow-on orders, if any,
is difficult to predict. Government Group revenues for the prior year&#146;s first nine months were
primarily from contract work related to the development of LRAD technology. Our Government Group
has only recently been formed and we do not believe historical revenues are indicative of future
revenues. We expect continued revenue growth in the last quarter of fiscal 2004.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>For the nine months ended June 30, 2004 sales to two customers accounted for 51% and 28% of total revenues,
respectively. For the three months ended June 30, 2004 sales to three customers accounted for 62%,
22% and 13% of total revenues, respectively.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Gross Profit</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Presented below is the gross profit or loss by business segment.</FONT></P>

<TABLE WIDTH=70% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
  <TR VALIGN=Bottom>
    <TH>&nbsp;</TH>
    <TH COLSPAN=6><font size="2" face="Times New Roman, Times, serif">Three Months Ended<br>
June 30,</font></TH>
    <TH>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=6><font size="2" face="Times New Roman, Times, serif">Nine Months Ended <br>
June 30,</font></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR VALIGN=Bottom>
    <TH><FONT FACE="Times New Roman, Times, Serif" SIZE=1></FONT></TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2004</FONT></TH>
    <TH>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2003</FONT></TH>
    <TH>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2004</FONT></TH>
    <TH>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2003</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Gross Profit (Loss):</FONT></TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT>&nbsp;</TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT>&nbsp;</TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT>&nbsp;</TD>
    <TD WIDTH=1% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD WIDTH=9% ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2></FONT></TD>
    <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Business Group</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (167,833</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (62,015</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (244,625</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> (88,619</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>)</FONT></TD>
  </TR>
  <TR VALIGN=Bottom bgcolor="#EAF9E8">
    <TD ALIGN=LEFT bgcolor="#EAF9E8"><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;Government Group</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>1,268,795</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>189,526</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>2,259,913</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>204,952</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=1></TD>
    <TD></TD>
  </TR>
  <TR VALIGN=Bottom>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 1,100,962</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 127,511</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 2,015,288</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
    <TD ALIGN=LEFT>&nbsp;</TD>
    <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD>
    <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 116,333</FONT></TD>
    <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
    <TD></TD>
    <TD COLSPAN=2 ALIGN=RIGHT><HR  color="black" SIZE=2></TD>
    <TD></TD>
  </TR>
</TABLE>

<P><FONT face="Times New Roman, Times, Serif" size=2>The overall gross profit for the nine months ended June 30, 2004 was 46% of revenues, a significant
improvement from the 12% gross profit reported for the comparable first nine months of the prior
year. We experienced a gross loss on Business Group operations for the first nine months of fiscal
2004 of $244,625 due to a slow ramping of sales efforts following manufacturing and materials issues
encountered in fiscal 2003 on HSS systems. We also recognized lower than standard margins on a Business
Group NeoPlanar installation that demonstrates the benefits of NeoPlanar speakers in theaters, concert
halls and other venues. 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. We expect Business
Group product sales to produce positive margins in late fiscal 2004 or early fiscal 2005 as we ship
Generation III HSS units and grow sales.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>17</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>We do not believe historical gross profit results are necessarily indicative of future results. Gross
profit percentage is highly dependent on sales prices, volumes, personnel allocations and assignments,
purchasing costs and overhead allocations. We have very limited experience with a new contract manufacturer
for HSS and LRAD products, and costs of such contract work will vary based on volumes and other factors.
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>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Selling, General and Administrative Expenses</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Selling, general and administrative expenses as a percentage of sales were 86% for the first nine months
of fiscal 2004 compared to 348% in the comparable period for fiscal 2003. These costs in the first
nine months of fiscal 2004 totaled $3,766,137, an increase of $372,532 from the $3,393,605 incurred
in the first nine months of fiscal 2003. Personnel and consulting costs increased $968,000 in the
current nine month period compared to the prior period primarily as a result of personnel additions
made in late fiscal 2003 and during fiscal 2004 including the formation of our Government Group and
recruiting and related costs. Personnel cost increases reflect our objective to assemble the right
teams to accelerate quality product development, build market momentum, and generate sales. Legal
and settlement related costs decreased by $892,000, primarily as a result of the $950,000 provision
for litigation costs, 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 an $111,000
increase in our public company and stock market obligations, a $61,000 increase in public relations
and product promotion and an $153,000 increase in occupancy costs resulting from increased activity.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Selling, general and administrative expenses for the third quarter ended June 30, 2004 were $1,614,351
compared to $1,728,296 for the comparable quarter of fiscal 2003. Personnel and consulting costs
increased $551,000 in the third quarter of fiscal 2004 compared to the comparable quarter of 2003
reflecting significant increases in sales and administrative personnel. These increases were offset
by a reduction of $780,000 in charges related to legal costs and contingencies.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We expect to expend additional resources on growing our management team and in marketing our sound
technologies in future periods, which we expect will increase selling, general and administrative
expenses.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Research and Development Expenses</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Research and development expenses declined slightly from fiscal 2003 to 2004. Research and development
expenses as a percentage of sales were 45% for the first nine months of fiscal 2004 compared to 208%
in the comparable period for fiscal 2003. These costs in the first nine months of fiscal 2004 totaled
$1,983,518, a decrease of $39,577 from the $2,023,095 incurred in the first nine months of fiscal
2003. Personnel and consulting costs increased in the first nine months of 2004 by $70,000 while
component and prototype related costs increased by $168,000. Fiscal 2003 research and development
costs included $315,636 of amortization expense related to purchased technology. There was no comparable
amortization in the most recent nine month period as the purchased technology is fully amortized. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Research and development expenses for the third quarter ended June 30, 2004 were $890,299 compared
to $714,376 for the comparable quarter of fiscal 2003. The reduction of $105,000 of purchased technology
amortization in 2003 was offset in fiscal 2004 by $235,000 increase in personnel and consulting costs
and a $67,000 increase in prototyping and testing costs primarily related to HSS systems.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 development costs to increase compared to the prior
year as we have added personnel and develop and test new applications and products based on our sound
technologies.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Loss From Operations</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Total operating expenses were $5,749,655 for the nine months ended June 30, 2004, compared to the $5,416,700
for the comparable period ended June 30, 2003. Our loss from operations was $3,734,367 for the first
nine months of fiscal 2004 representing a significant reduction compared to $5,300,367 for the first
nine months of fiscal 2003. We expect increased product sales and margin contributions in fiscal
2004 to continue to reduce the loss from operations from fiscal 2003 levels. The loss from operations
for the third fiscal quarter ended June 30, 2004 was $1,403,688. This represents a $911,473 reduction
compared to $2,315,161 loss from operations for the third fiscal quarter ended June 30, 2003. The
reduced loss from operations experienced in the most recent quarter resulted primarily from a $973,000
improvement in gross margin contribution.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>18</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Other Income (Expense)</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The major items in other income (expense) are interest expense and interest income. In the first nine
months of fiscal 2004 we incurred interest expense of $2,263 a reduction of $668,506 from interest
expense of $670,769 in the first nine months of fiscal 2003, 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 for
the balance of fiscal 2004. We recognized $44,596 in interest income for the nine months ended June
30, 2004 from invested cash balances.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Net Loss</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The net loss for first nine months of fiscal 2004 was $3,692,034 compared to the net loss of $5,968,603
for the first nine months of the prior year. The $2,276,569 reduction in the net loss resulted primarily
from increased revenues and margins and reduced interest expense. The net loss for the third fiscal
quarter of 2004 was $1,390,411, representing an improvement of $992,241 compared to the third quarter
of fiscal 2003.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Net Loss Available to Common Stockholders</U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 $1,087,570 in the first nine months of fiscal 2004 and $1,593,736
in the first nine months of fiscal 2003. Accordingly the net loss available to common stockholders
was $4,779,604 and $7,562,339 for each nine month period.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Liquidity and Capital Resources</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 $4,909,532 for
the nine months ended June 30, 2004. As of June 30, 2004, the net loss of $3,692,034 included certain
expenses not requiring the use of cash totaling $398,153. In addition, cash was used in operating
activities through an increase of $1,202,762 in accounts receivable, an increase of $488,864 in inventory
and an increase of $221,109 in prepaid expenses. Cash was provided by an increase of $297,084 in
accounts payable and accrued liabilities.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>At June 30, 2004, we had accounts receivable of $1,386,924 as compared to $184,162 at September 30,
2003. The balance at June 30, 2004 represented approximately 60 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 substantially 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>For the first nine months of fiscal 2004, we used $299,623 for the purchase of equipment and software
and made a $254,096 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>At June 30, 2004, we had working capital of $5,749,624 compared to working capital of $8,484,210 at
September 30, 2003. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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. Private equity and debt capital has generally been available to us
when needed. The availability of such capital in the future will depend on a number of factors, some
of which are outside our control. These include general market conditions, conditions in the private
equity markets where we have historically raised capital, the then-current market price of our common
stock, and our historical financial performance and future prospects. Our ability to raise capital
could also be affected by any of the risks affecting our business discussed below under the heading
&#147;Business Risks.&#148;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In July 2003, we raised approximately $9.4 million in net proceeds from an equity financing, and since
that financing, we have not needed outside capital to fund our operations. Cash from financing activities
of $1,099,026 consisted almost entirely of option and warrant exercises, the timing and amount of
which are not in our control.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>19</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>Based on our current cash position and assuming (a) currently planned expenditures and level of operations
and (b) continuation of product sales, 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>Other than cash of $5,486,133 at June 30, 2004 and accounts receivable collections, we have no other
material unused sources of liquidity at this time. We expect to incur additional operating losses
as a result of expenditures for research and development and marketing costs for 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&#146;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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Contractual Commitments and Commercial Commitments</B></FONT></P>
<P align=left><FONT face="Times New Roman, Times, Serif" size=2>The following table summarizes our contractual obligations, including purchase commitments at June
30, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in
future periods:</FONT></P>
<TABLE WIDTH=80% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=Bottom>
  <TD ALIGN=LEFT>&nbsp;</TD>
  <TD colspan="8" ALIGN=RIGHT><p align="center">
  <font size="2" face="Times New Roman, Times, serif">Payments Due by Period</font></p></TD>
  <TD ALIGN=RIGHT>&nbsp;</TD>
  <TD width="1%" ALIGN=RIGHT>&nbsp;</TD>
  <TD width="10%" ALIGN=RIGHT>&nbsp;</TD>
  <TD ALIGN=RIGHT>&nbsp;</TD>
  <TD width="1%" ALIGN=RIGHT>&nbsp;</TD>
  <TD width="10%" ALIGN=RIGHT>&nbsp;</TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
</TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Contractual Obligations</FONT></TD>
     <TD colspan="2" ALIGN=center><b><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></b><FONT FACE="Times New Roman, Times, serif" SIZE=2>Total</FONT></TD>
     <TD WIDTH="4%" ALIGN=center colspan="4">
     <FONT FACE="Times New Roman, Times, serif" SIZE=2>Less than 1<br>
     Year</FONT></TD>
     <TD colspan="2" ALIGN=center>
     <FONT FACE="Times New Roman, Times, serif" SIZE=2>1-3 Years</FONT></TD>
     <TD WIDTH=2% ALIGN=center>&nbsp;</TD>
     <TD colspan="2" ALIGN=center>
     <FONT FACE="Times New Roman, Times, serif" SIZE=2>3-5 Years</FONT></TD>
     <TD WIDTH=2% ALIGN=center>&nbsp;</TD>
     <TD colspan="2" ALIGN=center><p>
     <font size="2" face="Times New Roman, Times, serif">More Than<br>
     5 Years</font></p></TD><TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR>
  <TD><HR align="left" width="115" SIZE=1 COLOR=Black></TD>
  <TD COLSPAN=2><HR COLOR=Black SIZE=1></TD>
  <TD></TD>
  <TD COLSPAN=2><HR COLOR=Black SIZE=1></TD>
  <TD></TD>
  <TD colspan="2"><HR COLOR=Black SIZE=1></TD>
  <TD></TD>
  <TD COLSPAN=2><HR COLOR=Black SIZE=1></TD>
  <TD></TD>
  <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD>
  <TD></TD>
</TR>
<TR VALIGN=Bottom bgcolor="#eaf9e8">
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Capital leases</FONT></TD><TD width="1%" ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD width="9%" ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>  25,612</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD width="1%" ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD width="8%" ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>  12,806</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD width="1%" ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD width="8%" ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>  12,806</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD width="8%" ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> -0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD width="8%" ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> -0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Operating leases</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>526,756</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>250,880</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>262,440</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13,436</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR VALIGN=Bottom bgcolor="#eaf9e8">
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Purchase obligations</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>73,400</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>73,400</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Employment agreements</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>30,500</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>30,500</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR>
     <TD></TD>
     <TD COLSPAN=2><HR COLOR=Black SIZE=1></TD>
     <TD></TD>
     <TD COLSPAN=2><HR COLOR=Black SIZE=1></TD>
     <TD></TD>
     <TD colspan="2"><HR COLOR=Black SIZE=1></TD>
     <TD></TD>
     <TD COLSPAN=2><HR COLOR=Black SIZE=1></TD>
     <TD></TD>
     <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=1></TD><TD></TD></TR>
<TR VALIGN=Bottom bgcolor="#eaf9e8">
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Total contractual cash obligations</FONT></TD><TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 656,268</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 367,586</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> 275,246</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>     13,436</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=left><FONT FACE="Times New Roman, Times, Serif" SIZE=2>$</FONT></TD><TD ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2> -0-</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR>
     <TD></TD>
     <TD COLSPAN=2><HR COLOR=Black SIZE=2></TD>
     <TD></TD>
     <TD COLSPAN=2><HR COLOR=Black SIZE=2></TD>
     <TD></TD>
     <TD COLSPAN=2><HR COLOR=Black SIZE=2></TD>
     <TD></TD>
     <TD COLSPAN=2><HR COLOR=Black SIZE=2></TD>
     <TD></TD>
     <TD COLSPAN=2 ALIGN=RIGHT><HR COLOR=Black SIZE=2></TD><TD></TD></TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>In January 2004 we executed a new operating lease on our corporate offices, which resulted in a substantial
increase in our operating lease commitments.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Other than included above we had no purchase obligations or long-term debt obligations at June 30,
2004.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>New Accounting Pronouncements</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Business Risks</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We have a history of net losses. We expect to continue to incur net losses and we may not achieve or
maintain profitability. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We have incurred significant operating losses and anticipate continued losses in fiscal 2004. At June
30, 2004, we had an accumulated deficit of $40 million. We need to generate additional revenue to
be profitable in future periods. Failure to achieve profitability, or maintain profitability if achieved,
may cause our stock price to decline.</FONT></P>

<P align=center><FONT face="Times New Roman, Times, serif" size=2>20</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>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. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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
  technologies have been sporadic 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 technologies may not
  achieve market acceptance. Our various sound projects are high risk in nature, and unanticipated
  technical obstacles can arise at any time and result in lengthy and costly delays or result in a
  determination that further exploitation is unfeasible. If we do not successfully exploit our technologies,
  our financial condition and results of operations and business prospects would be adversely affected. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our products have never been produced in quantity, and we may incur significant and unpredictable warranty
costs as these products are mass produced.</B> &nbsp;<B>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.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>None of our products has been mass produced in quantity, 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>
<P><FONT face="Times New Roman, Times, Serif" 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 June 30, 2004 we had a warranty
reserve of $365,145 with $241,000 allocated for this replacement program. Future warranty costs could
further adversely affect our financial position, results of operations and business prospects.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We do not have the ability to predict future operating results. Our quarterly and annual revenues will
likely be subject to fluctuations caused by many factors, any of which could result in our failure
to achieve our revenue expectations. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our historical revenues have included sales of portable consumer products. The majority of our fiscal
2003 and all of our 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>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>our ability to develop and supply sound reproduction components to customers, distributors or OEMs
or to license our technologies; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>market acceptance of and changes in demand for our products or products of our customers; </FONT></TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2> gains or losses of significant customers, distributors or strategic relationships; </FONT></TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>unpredictable volume and timing of customer orders; </FONT></TD>
</TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
<TR>
<TD width="48" vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>the availability, pricing and timeliness of delivery of components for our products and OEM products;
</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing
costs; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>the timing of new technological advances, product announcements or introductions by us, by OEMs or
licensees and by our competitors; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>product obsolescence and the management of product transitions and inventory; </FONT></TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>unpredictable warranty costs associated with new product models;</FONT></TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>production delays by customers, distributors, OEMs or by us or our suppliers; </FONT></TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>seasonal fluctuations in sales; </FONT></TD>
</TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
<TR>
<TD width="48" vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR></TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>the conditions of other industries, such as military and commercial industries, into which our technologies
may be licensed; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>general consumer electronics industry conditions, including changes in demand and associated effects
on inventory and inventory practices; and </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>general economic conditions that could affect the timing of customer orders and capital spending and
result in order cancellations or rescheduling.</FONT></TD></TR></TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>21</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>Some or all of these factors could adversely affect demand for our products, and therefore adversely
affect our future operating results.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Some of our operating expenses are relatively fixed in the short term. We may be unable to rapidly
adjust spending to compensate for any unexpected sales or license revenue shortfalls, which could
harm our quarterly operating results. We do not have the ability to predict future operating results
with any certainty. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our expenses may vary from period to period, which could affect quarterly results and our stock price.
</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> the timing and extent of our research and development efforts; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> investments and costs of maintaining or protecting our intellectual property;</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> the extent of marketing and sales efforts to promote our products and technologies; and </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> the timing of personnel and consultant hiring. </FONT></TD></TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Sound reproduction markets are subject to rapid technological change, so our success will depend on
our ability to develop and introduce new technologies. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our HSS technology is subject to government regulation, which could lead to unanticipated expense or
litigation. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>22</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We may face personal injury and other liability claims that harm our reputation and adversely affect
our sales and financial condition.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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&#146;s attention and resources, and negative publicity.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We may not be successful in obtaining the necessary licenses required for us to sell some of our products
abroad. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>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.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
  <TD width="36" align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2> changes in tariff regulations;</FONT></TD>
</TR>
<TR>
  <TD align="right" vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>political instability, war, terrorism and other political risks;</FONT></TD>
</TR>
<TR>
  <TD align="right" vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>foreign currency exchange rate fluctuations;</FONT></TD>
</TR>
<TR>
  <TD align="right" vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>establishing and maintaining relationships with local distributors and dealers;</FONT></TD>
</TR>
<TR>
  <TD align="right" vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2> lengthy shipping times and accounts receivable payment cycles;</FONT></TD>
</TR>
<TR>
  <TD align="right" vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>import and export licensing requirements;</FONT></TD>
</TR>
<TR>
  <TD align="right" vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
<TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2>compliance with a variety of foreign laws and regulations, including unexpected changes in taxation
and regulatory requirements;</FONT></FONT></TD></TR>
<TR>
<TD align="right" vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT><FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>greater difficulty in safeguarding intellectual property than in the U.S.; and</FONT></TD>

</TR>
<TR>
  <TD align="right" vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT><FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>difficulty in staffing and managing geographically diverse operations.</FONT></TD>
</TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Many potential competitors who have greater resources and experience than we do may develop products
and technologies that make ours obsolete. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P align="center"><FONT face="Times New Roman, Times, serif" size=2>23</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our agreements with General Dynamics Armament and Technical Products, Inc. were recently terminated. Our business was formerly highly dependent on our level of sales to that company and its affiliates.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In April 2004, we and General Dynamics Armament and Technical Products, Inc. (GD-ATP), agreed to the
  formal termination of two licensing and sales agreements 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 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.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Revenues under the GD-ATP agreements and a prior professional services agreement with Bath Iron Works
Corporation represented approximately 16% of our revenues during the nine months ended June 30, 2004,
and 24% of our revenues during the fiscal year ended September 30, 2003. Subsequent to the termination
of the agreements we have continued to make sales to General Dynamics divisions and affiliates. Our
future results of operations could suffer unless we continue to sell successfully to customers and
markets formerly subject to the GD-ADP agreements.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our business has been highly dependent on a limited number of customers.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>For the nine months ended June 30, 2004 sales to two customers accounted for 51% and 28% of total revenues,
respectively. For the three months ended June 30, 2004 sales to three customers accounted for 62%,
22% and 13% of total revenues, respectively. Some of the past reliance on a limited number of customers
has been due to the former strategy of pursuing sales in key markets through distributors who often
had exclusive rights to sell to specific customers or for specific uses. Our current strategy is
to pursue markets and customers directly or through non-exclusive distributors. However many of our
government sales are made to military contractors who resell to the ultimate end-user agency. Accordingly,
we may still be dependent on the success and timing of large orders from individual customers that
may not be recurring, or may not recur in a predictable fashion. Accordingly, sales to individual
customers may continue to represent significant percentages of future sales volume, and the loss
or delay in orders to individual customers may significantly impair quarterly results of operations
and could cause our stock price to decline.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Commercialization of our sound technologies depends on collaborations with other companies. If we are
not able to maintain or find collaborators and strategic alliance relationships in the future, we
may not be able to develop our sound technologies and products. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our strategy includes establishing 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our success will therefore depend in part 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
may be adversely affected. Any future relationships may require us to share control over our development,
manufacturing and marketing programs or to relinquish rights to certain versions of our sound and
other technologies. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We will be dependent on outside manufacturers to support our production schedules. We have recently
changed manufacturers.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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, ceased operations. In May 2004 we established
a manufacturing partnership with Pemstar, Inc., an established contract manufacturer. Our experience
with this new relationship is limited, and we cannot yet predict cost and production timing at a
level of assurance that would come with a longer term relationship. Any difficulties in establishing
a long-term contract manufacturing relationship could reduce future revenues and margins, adversely
affecting financial condition and results of operations.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We rely on outside suppliers to provide a large number of components incorporated in our products.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 HSS 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>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>24</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P align=left><FONT face="Times New Roman, Times, Serif" size=2><B>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.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>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. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>include provisions that allow the government agency to terminate the contract without penalty under
some circumstances;&nbsp;</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>be subject to purchasing decisions of agencies that are subject to political influence;&nbsp;</FONT></TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2> contain onerous procurement procedures; and&nbsp;</FONT></TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
  <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>be subject to cancellation if government funding becomes unavailable. </FONT></TD>
</TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P align=left><FONT face="Times New Roman, Times, Serif" size=2><B>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.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Any inability to adequately protect our proprietary technologies could harm our competitive position.
</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>25</FONT></P>
<HR noshade SIZE=5>


<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>If our key employees do not continue to work for us, our business will be harmed because competition
for replacements is intense. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our performance is substantially dependent on the performance of our executive officers and key technical
employees, including Elwood G. Norris, our Chairman, and Kalani Jones, our President and Chief Operating
Officer. We are dependent on our ability to retain and motivate high quality personnel, especially
highly skilled technical personnel. Our future success and growth also depend on our continuing ability
to identify, hire, train and retain other highly qualified technical, managerial and sales personnel.
Competition for such personnel is intense, and we may not be able to attract, assimilate or retain
other highly qualified technical, managerial or sales personnel in the future. The inability to attract
and retain the necessary technical, managerial or sales personnel could cause our business, operating
results or financial condition to suffer. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value
of your common stock. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>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.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" 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 June 30, 2004, the outstanding 50,000
shares of Series D Preferred Stock were convertible into an aggregate of 125,519 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>
<P><FONT face="Times New Roman, Times, Serif" 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 June 30, 2004, the 233,250 outstanding shares of Series E Preferred
Stock were convertible into an aggregate of 775,466 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>
<P><FONT face="Times New Roman, Times, Serif" 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.</FONT>
<P align="center"><FONT face="Times New Roman, Times, serif" size=2>26</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<p><FONT face="Times New Roman, Times, Serif" size=2>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><FONT face="Times New Roman, Times, Serif" size=2><B>Our stock price is volatile and may continue to be volatile in the future</B>.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
<TD vAlign=top width=39></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> our anticipated or actual operating results; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=39></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> developments concerning our sound reproduction technologies; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=39></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> technological innovations or setbacks by us or our competitors; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=39></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> conditions in the consumer electronics market; </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=39></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> announcements of merger or acquisition transactions; and </FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=39></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>-<FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT> other events or factors and general economic and market conditions.</FONT></TD></TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>27</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a6"></a>Item 3. Quantitative and Qualitative Disclosures about Market Risk.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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>
<P><FONT face="Times New Roman, Times, Serif" size=2>We are exposed to some market risk through interest rates, related to our investment of current cash
and cash equivalents of approximately $5.5 million. Based on this balance, a change of one percent
in interest rate would cause a change in interest income of $55,000. 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>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a7"></a>Item 4. Controls and Procedures.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>(a) Disclosure Controls and Procedures. 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. 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 Co-Principal Executive
Officers 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 Co-Principal Executive Officers
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><FONT face="Times New Roman, Times, Serif" size=2>(b) Changes in Internal Controls Over Financial Reporting. 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 face="Times New Roman, Times, Serif" size=2>Limitations of Disclosure Controls and Procedures. Our management, including our Co-Principal Executive
Officers 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&#146;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>
<P><B><FONT face="Times New Roman, Times, Serif" size=2><a name="a8"></a></FONT>
<FONT face="Times New Roman, Times, Serif">PART II. OTHER INFORMATION</FONT></B></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a9"></a>Item 1. Legal Proceedings.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Reference is made to Footnote 12 on page 11 of this report for information regarding Legal Proceedings.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a10"></a>Item 2. Changes in Securities and Use of Proceeds.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Not applicable</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>28</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a11"></a>Item 3. Defaults Upon Senior Securities.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Not applicable</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a12"></a>Item 4. Submission of Matters to a Vote of Security Holders.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>At the Company&#146;s Annual Meeting of Stockholders held on May 27, 2004, the following individuals
were elected to the Board of Directors: Elwood G. Norris, Kalani Jones, Richard M. Wagner, David
J. Carter and Daniel Hunter. For each elected director, the results of the voting were:</FONT></P>
<TABLE WIDTH=70% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=Bottom>
     <TH COLSPAN=2><FONT FACE="Times New Roman, Times, Serif" SIZE=1></FONT></TH>
     <TH>
     <FONT face="Times New Roman, Times, Serif" size=2>Affirmative Votes</FONT></TH>
     <TH><font size="1"></font></TH>
     <TH>
     <FONT face="Times New Roman, Times, Serif" size=2>Votes Withheld</FONT></TH>
     <TH>&nbsp;</TH>
</TR>
<TR VALIGN=Bottom>
  <TD ALIGN=LEFT>&nbsp;</TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
  <TD ALIGN=center><HR COLOR=Black SIZE=1></TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
  <TD ALIGN=center><HR COLOR=Black SIZE=1></TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
</TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Elwood G. Norris</FONT></TD>
     <TD WIDTH=1% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD WIDTH=25% ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13,506,156</FONT></TD>
        <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD WIDTH=20% ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>155,030</FONT></TD>
        <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Kalani Jones</FONT></TD><TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13,545,712</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>115,474</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Richard M. Wagner</FONT></TD><TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13,548,448</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>112,738</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>David J. Carter</FONT></TD><TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13,548,948</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>112,238</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
<TR VALIGN=Bottom>
     <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Daniel Hunter</FONT></TD><TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13,554,098</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>107,088</FONT></TD>
        <TD ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our stockholders also voted to ratify the selection of BDO Seidman, LLP as our independent auditors
for the fiscal year ending September 30, 2004. The results of the voting on this proposal were:</FONT></P>
<TABLE WIDTH=70% BORDER=0 align="center" CELLPADDING=0 CELLSPACING=0>
<TR VALIGN=Bottom>
     <TH>
     <FONT face="Times New Roman, Times, Serif" size=2>Affirmative Votes</FONT></TH>
     <TH><font size="1"></font></TH>
     <TH>
     <FONT face="Times New Roman, Times, Serif" size=2>Negative Votes</FONT></TH>
     <TH><font size="1"></font></TH>
     <TH>
     <FONT face="Times New Roman, Times, Serif" size=2>Abstentions</FONT></TH>
     <TH><font size="1"></font></TH>
     <TH>
     <FONT face="Times New Roman, Times, Serif" size=2>Broker Non-Votes</FONT></TH>
     <TH>&nbsp;</TH>
</TR>
<TR VALIGN=Bottom>
  <TD ALIGN=center><HR COLOR=Black SIZE=1></TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
  <TD ALIGN=center><HR COLOR=Black SIZE=1></TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
  <TD ALIGN=center><HR COLOR=Black SIZE=1></TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
  <TD ALIGN=center><HR COLOR=Black SIZE=1></TD>
  <TD ALIGN=LEFT>&nbsp;</TD>
</TR>
<TR VALIGN=Bottom>
     <TD WIDTH=23% ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>13,619,207</FONT></TD>
        <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD WIDTH=23% ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>21,332</FONT></TD>
        <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD WIDTH=23% ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>20,647</FONT></TD>
        <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD>
     <TD WIDTH=23% ALIGN=center><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-0-</FONT></TD>
     <TD WIDTH=2% ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;</FONT></TD></TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>The foregoing proposal was approved and accordingly ratified.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a13"></a>Item 5. Other Information.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Not applicable</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a14"></a>Item 6. Exhibits and Reports on Form 8-K.</B></FONT></P>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">

<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><B>(a)&nbsp;&nbsp;</B></FONT></TD>
  <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><B>Exhibits:</B></FONT></TD>
  </TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>10.1</FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Employment Agreement of Michael A. Russell dated June 17, 2004.</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>10.2</FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Severance Agreement of Joe Zerucha dated June 14, 2004.</FONT></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>31.1<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>Certification of Elwood G. Norris, Co-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></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>31.2</FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Certification of Kalani Jones, Co-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></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>31.3</FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Certification of Michael A. Russell, 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></TD></TR>
<TR>
<TD vAlign=top></TD>
<TD vAlign=top></TD>
<TD vAlign=top>&nbsp;</TD></TR>
<TR>
<TD vAlign=top width=48></TD>
<TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>32.1</FONT></TD>
<TD vAlign=top><FONT face="Times New Roman, Times, Serif" 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 and Kalani Jones, Co-Principal Executive Officers, and
Michael A. Russell, Principal Financial Officer.</FONT></TD></TR>
<TR>
  <TD vAlign=top></TD>
  <TD vAlign=top>&nbsp;</TD>
  <TD vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT><FONT face="Times New Roman, Times, Serif" size=2><B>(b)&nbsp; </B></FONT></TD>
  <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><B>Reports on Form 8-K:</B></FONT></TD>
  </TR>
<TR>
  <TD align="right" vAlign=top></TD>
  <TD colspan="2" vAlign=top>&nbsp;</TD>
</TR>
<TR>
  <TD align="right" vAlign=top></TD>
  <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>On April 28, 2004, we filed a Form 8-K containing disclosure in Items 5 and 7, therein.</FONT></TD>
</TR>
<TR>
  <TD align="right" vAlign=top></TD>
  <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>On June 25, 2004, we filed a Form 8-K containing disclosure in Items 5 and 7, therein.</FONT></TD>
</TR>
</TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>29</FONT></P>
<HR noshade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P align=center><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a15"></a>SIGNATURES</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td width="50%">&nbsp;</td>
    <td colspan="2"><FONT face="Times New Roman, Times, Serif" size=2>AMERICAN TECHNOLOGY CORPORATION</FONT></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td width="5%">&nbsp;</td>
    <td width="45%">&nbsp;</td>
  </tr>
  <tr>
    <td><FONT face="Times New Roman, Times, Serif" size=2>Date:&nbsp;&nbsp;August
    4, 2004</FONT></td>
    <td nowrap><FONT face="Times New Roman, Times, Serif" size=2>By:&nbsp;&nbsp;</FONT></td>
    <td><FONT face="Times New Roman, Times, Serif" size=2> /s/ MICHAEL A. RUSSELL&nbsp;</FONT></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size="2" face="Times New Roman, Times, serif">&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><FONT face="Times New Roman, Times, Serif" size=2>Michael A. Russell, Chief Financial Officer</FONT></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><FONT face="Times New Roman, Times, Serif" size=2>(Principal Financial and Accounting Officer and duly</FONT></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><FONT face="Times New Roman, Times, Serif" size=2> authorized to sign on behalf of the Registrant)</FONT></td>
  </tr>
</table>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>30</FONT></P>
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<BODY>
<P align="right"><FONT face="Times New Roman, Times, Serif" size=2><B><U>EXHIBIT 10.1</U></B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><IMG height=72
src="image001.jpg" width=271></FONT></P>
<P align=right><FONT face="Times New Roman, Times, Serif" size=2><B></B></FONT></P>
<p><FONT face="Times New Roman, Times, Serif" size=2>June 15,
2004</FONT></p>
<p>&nbsp;</p>
<p><FONT face="Times New Roman, Times, Serif" size=2>Michael A.
    Russell</FONT><FONT face="Times New Roman, Times, Serif" size=2><br>
    4733 Shadwell
    Place</FONT><FONT face="Times New Roman, Times, Serif" size=2><br>
    San Diego
    CA&nbsp; 92130</FONT>
</p>
<P align=left><FONT face="Times New Roman, Times, Serif" size=2>Dear
Mike,</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>American Technology
Corporation (&#147;Company &#148;) is very pleased to confirm our offer of employment. This
offer is contingent upon satisfactory results of all reference, education, and
background checks (Release and Authorization Attached) and is based on the
following terms and conditions:</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>Title: </FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Chief
      Financial Officer, with responsibilities that will include Finance,
      Investor Relations and Legal.</FONT></TD></TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>Start Date:</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>We have
      an anticipated your start date as Tuesday, July 6, 2004.</FONT></TD></TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>Salary:</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Your
      starting salary as an exempt employee will be $7,115.38 gross bi-weekly,
      which is $185,000.00 annually.</FONT></TD></TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>Bonus:</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>You will
      be paid an annual bonus with the potential of 25% of your base salary
      based upon meeting company, department, and individual objectives, which
      will be mutually agreed upon by yourself and Kalani Jones and approved by
      the Board of Directors. The bonus period is equal to 12 months and begins
      on your date of hire. </FONT></TD></TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>Stock Options:</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif"
      size=2>Management
      will recommend to the Board of Directors and the Compensation Committee
      thereof, that, as an inducement material to you entering into employment
      with the Company, you be granted stock options to purchase&nbsp;100,000
      shares of common stock. The grant will occur at the first meeting of the
      Board of Directors and Compensation Committee held after your start date,
      or by unanimous written consent, and in either case will occur not later
      than 30 days following your start date. The recommended options will have
      an exercise price equal to the fair market value of our common stock on
      the date the Board of Directors approves the grant after receiving a
      recommendation for approval from the Compensation Committee. The
      recommended options will be exercisable for five (5) years after grant,
      subject to earlier termination upon termination of your continuous
      service. The recommended options will vest over four (4) years, with one
      fourth (1/4) of the shares vesting twelve (12) months after grant date,
      and the balance vesting in equal quarterly installments through and
      including the fourth anniversary of the grant date. These recommended
      options will be issued outside of the 2002 Stock Option Plan, and
      accordingly will be non-statutory stock options and will not qualify for
      incentive stock option (ISO) treatment under the Internal Revenue
      Code.</FONT></TD>
  </TR></TABLE>

<br>
<HR noShade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always"></P>
<P align=left><FONT face="Times New Roman, Times, Serif" size=2>Michael A.
Russell &#150; Offer of Employment<BR>
June 15, 2004 <BR>Page 2 of 3</FONT></P>
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0>

  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif"
      size=2>Health Benefits:</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif"
      size=2>The Company offers a comprehensive benefits plan that includes medical, dental, vision, short-term disability, long-term disability and life insurances. The Company will pay for all insurance premiums (including dependents). Benefits begin the first day of the month following your hire date. </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=bottom><FONT face="Times New Roman, Times, Serif"
      size=2>Paid Time Off </FONT></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>
      &amp; Holidays: </FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif"
      size=2>You
      will receive 15 days of accrued Paid Time Off (PTO) annually, in use for
      vacation or sick time. This provides for most of your paid time away from
      work. PTO hours are accrued per pay period. Any hours in excess of 200
      will be paid out in the first pay period of December.</FONT></TD></TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top width=144>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>The
      Company offers 9-paid holidays each calendar year. You must be on active
      status the day before and the day after the holiday to receive holiday
      pay.</FONT></TD></TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>Retirement:</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>A 401k
      package is available with multiple investment options and the company
      matches 25% of the employee&#146;s deferral up to 6% of your annual earnings.
      (Note:&nbsp;Some IRS limitations may apply.)</FONT></TD></TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD></TR>
  <TR>
    <TD vAlign=top width=144><FONT face="Times New Roman, Times, Serif"
      size=2>Arbitration:</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>As a
      contingency of this offer, you will be required to sign the attached
      Mutual Agreement to Arbitrate (&#147;Arbitration Agreement&#148;).
  </FONT></TD></TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Due to the enactment of the
Immigration Reform and Control Act of 1986, this offer is contingent on your
ability to produce acceptable documentation verifying your eligibility to work
in the United States. You will be required to present the necessary documents on
the day you begin work at American Technology Corp.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Additionally, as a
condition of this offer and of your employment with American Technology Corp.,
you will be required to preserve the Company&#146;s proprietary and confidential
information and you must comply with the Company&#146;s policies and procedures.
Accordingly, you will be required to execute the Company&#146;s Non-Disclosure
Agreement on your first date of employment. </FONT></P>
<FONT face="Times New Roman, Times, Serif" size=2>If this offer is accepted,
your employment will be at-will with no specified period or term of employment.
This means that either you or the Company may terminate employment at anytime,
with or without reason. The Company may also transfer, promote, demote or
otherwise alter your position and/or status at any time and for any reason. An
employment agreement for a specified period of time, which contradicts this
at-will agreement, may only be entered into in writing, signed by the President
of the Corporation. </FONT><FONT face="Times New Roman, Times, Serif" size=2><br>
Mike, we sincerely hope
that you decide to join American Technology Corp. Please acknowledge your
acceptance of our offer by signing below and returning a copy of this letter to
us not later than Thursday, June 17, 2004. If we do not receive your response by
close of business on June 17, 2004 this offer will be void.</FONT>
<BR><BR>
<HR noShade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">
<P align=left><FONT face="Times New Roman, Times, Serif" size=2>Michael A.
Russell &#150; Offer of Employment<BR>June 15, 2004 <BR>Page 3 of 3
</FONT></P>

<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td><FONT face="Times New Roman, Times, Serif" size=2>Mike, if you have any questions please do not hesitate to call me.</FONT></td>
  </tr>
</table>

<P><FONT face="Times New Roman, Times, Serif" size=2>Sincerely,</FONT></P>
<p><FONT face="Times New Roman, Times, Serif" size=2>/s/ KALANI JONES<br>
  </FONT><FONT face="Times New Roman, Times, Serif" size=2>Kalani
  Jones</FONT><FONT face="Times New Roman, Times, Serif" size=2><br>
  President &amp; Chief Operating Officer</FONT>
</p>
<p><br>
  <FONT face="Times New Roman, Times, Serif" size=2><I>I understand
and agree to the terms and conditions set forth in this letter. I further
understand that any misrepresentations that I have made on my employment
application or resume can result in termination. I acknowledge that no statement
contradicting this letter, oral or written, has been made to me, and that no
agreements exist which are contrary to the terms and conditions set forth in
this letter.</I></FONT></p>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td width="40%"><font face="Times New Roman, Times, Serif" size=2><i>Accepted by: /s/ MICHAEL A. RUSSELL</i></font></td>
    <td width="7%">&nbsp;</td>
    <td width="5%" nowrap><font face="Times New Roman, Times, Serif" size=2><i>&nbsp;Date: </i></font></td>
    <td><font face="Times New Roman, Times, Serif" size=2><i>&nbsp;&nbsp;June 17, 2004</i></font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size="2" face="Times New Roman, Times, serif">&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;</font></td>
  </tr>
</table>
<br>
<HR noShade SIZE=5>
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`
end

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<FILENAME>exh_10-2.htm
<TEXT>
<HTML>
<HEAD>
<TITLE></TITLE>
</HEAD>
<BODY>
<P align=right><FONT face="Times New Roman, Times, Serif" size=2><B><U>EXHIBIT 10.2</U></B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>June 14, 2004</FONT></P>
<FONT face="Times New Roman, Times, Serif" size=2>Joe Zerucha<br>
</FONT><FONT face="Times New Roman, Times, Serif" size=2>6550 Ambrosia Lane </FONT><FONT face="Times New Roman, Times, Serif" size=2><br>
Carlsbad&nbsp; CA&nbsp; 92009</FONT>
<P><FONT face="Times New Roman, Times, Serif" size=2>Dear Joe,</FONT></P>
<P align=left><FONT face="Times New Roman, Times, Serif" size=2>American Technology Corporation (the &#147;Company&#148;) has acknowledged that you are resigning from
your position as of <U>June 14, 2004.</U> &nbsp;You are reminded that you signed a Non-Disclosure Agreement at the commencement of your employment,
and should understand that the agreement is still, and shall remain, in effect and you shall abide
by the terms of the agreement. </FONT></P>
<P align=left><FONT face="Times New Roman, Times, Serif" size=2>Your healthcare benefits will be in effect until midnight, June 30, 2004. You will be receiving
notification by mail from Conexis regarding your rights under COBRA and the continuation of these
benefits. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>To ensure a smooth transition for both you and the Company, you will be offered a lump sum of $12,500.00,
which is equivalent to one (1) month as severance remuneration and an additional $15,000.00 for relocation
expenses. In consideration of the severance, you will be asked to execute a General Release
of Claims. The payout will be disbursed per the guidelines of the Agreement.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>As part of your employment with American Technology Corporation you participated in the 2002 Stock
Option Plan. As of June 14, 2004 you have not vested in any of your stock options. However,
you were compensated $8,000.00 as payment for The Aji Network continuing education and $20,000.00
for relocation costs. Even though the reason for your termination is voluntarily, and you will
not have been employed for 12 months since receiving these benefits, the Company does not expect
repayment.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>By signing below, you acknowledge receipt of the following:</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>All monies due are subject to applicable state and federal taxes.</FONT></P>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr valign="bottom">
    <td width="30%"><font face="Times New Roman, Times, Serif" size=2>Final pay</font></td>
    <td width="25%"><font face="Times New Roman, Times, Serif" size=2>6/07/04-6/14/04</font></td>
    <td width="1%" align="right"><font face="Times New Roman, Times, Serif" size=2>$</font></td>
    <td><font face="Times New Roman, Times, Serif" size=2>3,461.54</font></td>
  </tr>
  <tr valign="bottom">
    <td><font face="Times New Roman, Times, Serif" size=2>Accrued PTO</font></td>
    <td><font face="Times New Roman, Times, Serif" size=2>62.37&nbsp;hours</font></td>
    <td align="right"><font face="Times New Roman, Times, Serif" size=2>$</font></td>
    <td><font face="Times New Roman, Times, Serif" size=2>4,497.84</font></td>
  </tr>
  <tr valign="bottom">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
</table>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr valign="bottom">
    <td width="30%"><font face="Times New Roman, Times, Serif" size=2>/s/ JOE ZERUCHA</font></td>
    <td width="10%">&nbsp;</td>
    <td width="20%" align="left"><font face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6/14/04</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="bottom">
    <td><font size="2" face="Times New Roman, Times, serif">&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;</font></td>
    <td>&nbsp;</td>
    <td><font size="2" face="Times New Roman, Times, serif">&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="bottom">
    <td valign="top"><font face="Times New Roman, Times, Serif" size=2><b>Joe Zerucha<i></i></b></font></td>
    <td valign="top">&nbsp;</td>
    <td valign="top"><font face="Times New Roman, Times, Serif" size=2><b>Date</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="bottom">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="bottom">
    <td><font face="Times New Roman, Times, Serif" size=2>/s/ KALANI JONES</font></td>
    <td>&nbsp;</td>
    <td align="left"><font face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6/14/04</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="bottom">
    <td><font size="2" face="Times New Roman, Times, serif">&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;</font></td>
    <td>&nbsp;</td>
    <td><font size="2" face="Times New Roman, Times, serif">&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;&#151;</font></td>
    <td>&nbsp;</td>
  </tr>
  <tr valign="bottom">
    <td valign="top"><font face="Times New Roman, Times, Serif" size=2><b>Kalani Jones&nbsp;</b></font></td>
    <td valign="top">&nbsp;</td>
    <td valign="top"><font face="Times New Roman, Times, Serif" size=2><b>Date</b></font></td>
    <td>&nbsp;</td>
  </tr>
</table>
<br>
<HR noShade SIZE=5>

<P style="PAGE-BREAK-BEFORE: always">

</BODY></HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>5
<FILENAME>exh_31-1.htm
<TEXT>

<html>
<head>
<title></title>
</head>

<body>
<P align=right><FONT face="Times New Roman, Times, Serif" size=2><B>Exhibit 31.1</B></FONT></P>
<P align=center><FONT face="Times New Roman, Times, Serif" size=2><B>CERTIFICATION</B></FONT></P>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>I, Elwood G. Norris, certify that: </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>1.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>I have reviewed this quarterly report on Form 10-Q of American Technology Corporation; </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>2.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" 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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;3.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" 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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;4.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>The registrant&#146;s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>a)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>b)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>[paragraph omitted pursuant to SEC Release Nos. 33-2838 and 34-47986]</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>c)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>evaluated the effectiveness of the registrant&#146;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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>d)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>disclosed in this annual report any change in the registrant&#146;s internal control over financial reporting that occurred during the registrant&#146;s most recent fiscal quarter, which is the registrant&#146;s forth fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant&#146;s internal control over financial reporting.</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;5.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>The registrant&#146;s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the audit committee of registrant&#146;s board of directors (or persons performing the equivalent functions): </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>a)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>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&#146;s ability to record, process, summarize and report financial information; and </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>b)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant&#146;s internal controls over financial reporting. </FONT></TD>
  </TR>
</TABLE>
<br>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Dated: August
    4, 2004</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>/s/ ELWOOD G. NORRIS</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Elwood G. Norris, </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Chairman of the Board</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top width=48>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>(Co-Principal Executive Officer)</FONT></TD>
  </TR>
</TABLE>
<br>
<hr noshade size=5>
<P style="PAGE-BREAK-BEFORE: always">
</body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>6
<FILENAME>exh_31-2.htm
<TEXT>

<html>
<head>
<title></title>
</head>

<body>
<P align="right"><FONT face="Times New Roman, Times, Serif" size=2><B>Exhibit 31.2</B></FONT></P>
<P align=center><FONT face="Times New Roman, Times, Serif" size=2><B>CERTIFICATION</B></FONT></P>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>I, Kalani Jones, certify that:</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>1.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>I have reviewed this quarterly report on Form 10-Q of American Technology Corporation; </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>2.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" 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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;3.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" 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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;4.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>The registrant&#146;s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>e)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>f)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>[paragraph omitted pursuant to SEC Release Nos. 33-2838 and 34-47986]</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>g)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>evaluated the effectiveness of the registrant&#146;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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>h)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>disclosed in this annual report any change in the registrant&#146;s internal control over financial reporting that occurred during the registrant&#146;s most recent fiscal quarter, which is the registrant&#146;s forth fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the registrant&#146;s internal control over financial reporting.</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;5.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>The registrant&#146;s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the audit committee of registrant&#146;s board of directors (or persons performing the equivalent functions): </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>c)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>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&#146;s ability to record, process, summarize and report financial information; and </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>d)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant&#146;s internal controls over financial reporting. </FONT></TD>
  </TR>
</TABLE>
<br>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Dated: August
    4, 2004 </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>/s/ KALANI JONES</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Kalani Jones, </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>President and Chief Operating Officer</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top width=48>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>(Co-Principal Executive Officer)</FONT></TD>
  </TR>
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<DOCUMENT>
<TYPE>EX-31.3
<SEQUENCE>7
<FILENAME>exh_31-3.htm
<TEXT>

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<P align="right"><FONT face="Times New Roman, Times, Serif" size=2><B>Exhibit 31.3</B></FONT></P>
<P align=center><FONT face="Times New Roman, Times, Serif" size=2><B>CERTIFICATION</B></FONT></P>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>I, Michael A. Russell, certify that: </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>1.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>I have reviewed this quarterly report on Form 10-Q of American Technology Corporation; </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>2.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" 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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;3.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" 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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;4.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>The registrant&#146;s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>a)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>b)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>[paragraph omitted pursuant to SEC Release Nos. 33-2838 and 34-47986]</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>c)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>evaluated the effectiveness of the registrant&#146;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></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>d)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>disclosed in this annual report any change in the registrant&#146;s internal control over financial reporting that occurred during the registrant&#146;s most recent fiscal quarter, which is the registrant&#146;s forth fiscal quarter,&nbsp;that has materially affected, or is reasonably likely to materially affect, the registrant&#146;s internal control over financial reporting.</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;5.</FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>The registrant&#146;s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the audit committee of registrant&#146;s board of directors (or persons performing the equivalent functions): </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
</TABLE>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>a)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>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&#146;s ability to record, process, summarize and report financial information; and </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top></TD>
    <TD vAlign=top></TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top width=48></TD>
    <TD vAlign=top width=24><FONT face="Times New Roman, Times, Serif" size=2>b)<FONT face="Times New Roman, Times, Serif" size=2></FONT></FONT></TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2><FONT face="Times New Roman, Times, Serif" size=2></FONT>any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant&#146;s internal controls over financial reporting.</FONT></TD>
  </TR>
</TABLE>
<br>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Dated: August
    4, 2004 </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>/s/ MICHAEL A. RUSSELL</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Michael A. Russell</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Chief Financial Officer</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top width=48>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>(Principal Financial Officer)</FONT></TD>
  </TR>
</TABLE>
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<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>8
<FILENAME>exh_32-1.htm
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<P align="right"><FONT face="Times New Roman, Times, Serif" size=2><B>Exhibit 32.1</B></FONT></P>
<P align=center><FONT face="Times New Roman, Times, Serif" size=2><B>CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERS AND PRINCIPAL FINANCIAL OFFICER<br>
  </B></FONT><FONT face="Times New Roman, Times, Serif" size=2><B>PURSUANT TO<br>
  </B></FONT><FONT face="Times New Roman, Times, Serif" size=2><B>18 U.S.C. SECTION 1350,<br>
  </B></FONT><FONT face="Times New Roman, Times, Serif" size=2><B>AS ADOPTED PURSUANT TO<br>
</B></FONT><FONT face="Times New Roman, Times, Serif" size=2><B>SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" 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 &#147;Company&#148;), that, to his knowledge, the Quarterly Report of the Company on Form 10-Q, for the fiscal quarter ended June 30, 2004 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>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Dated: August
    4, 2004</FONT></TD>
  </TR>
  <TR>
    <TD colspan="2" vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>/s/ ELWOOD G. NORRIS</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Elwood G. Norris, </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Chairman of the Board</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top width=48>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>(Co-Principal Executive Officer)</FONT></TD>
  </TR>
</TABLE>
<br>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Dated: August
    4, 2004</FONT></TD>
  </TR>
  <TR>
    <TD colspan="2" vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>/s/ KALANI JONES</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Kalani Jones, </FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>President and Chief Operating Officer</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top width=48>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>(Co-Principal Executive Officer)</FONT></TD>
  </TR>
</TABLE>
<br>
<TABLE cellSpacing="0" cellPadding="0" width="100%" border="0">
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Dated: August
    4, 2004</FONT></TD>
  </TR>
  <TR>
    <TD colspan="2" vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD colspan="2" vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>/s/ MICHAEL A. RUSSELL</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top>&nbsp;</TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Michael A. Russell</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>Chief Financial Officer</FONT></TD>
  </TR>
  <TR>
    <TD vAlign=top width=48>&nbsp;</TD>
    <TD vAlign=top><FONT face="Times New Roman, Times, Serif" size=2>(Principal Financial Officer)</FONT></TD>
  </TR>
</TABLE>
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