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<SEC-DOCUMENT>0001019687-05-001302.txt : 20050510
<SEC-HEADER>0001019687-05-001302.hdr.sgml : 20050510
<ACCEPTANCE-DATETIME>20050510164119
ACCESSION NUMBER:		0001019687-05-001302
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		10
CONFORMED PERIOD OF REPORT:	20050331
FILED AS OF DATE:		20050510
DATE AS OF CHANGE:		20050510

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:		05817323

	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-033105.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>
  SECURITIES AND EXCHANGE COMMISSION</font></B> <BR>
Washington, D.C. 20549&nbsp;</FONT></P>
<P align=center><FONT face="Times New Roman, Times, Serif" size=4><B>FORM 10-Q </B></FONT></P>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td height="22" colspan="2"><font size="2" face="Times New Roman, Times, serif">(Mark one)</font></td>
  </tr>
  <tr>
    <td width="5%"><font size="3" face="wingdings">x</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>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td colspan="2"><FONT face="Times New Roman, Times, Serif" size=2>For the quarterly period ended March 31, 2005 </FONT></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td colspan="2"><FONT face="Times New Roman, Times, Serif" size=2>or </FONT></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font face="Wingdings">&#168;</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>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td colspan="2"><FONT face="Times New Roman, Times, Serif" size=2>For the transition period from ____________ to ____________. </FONT></td>
  </tr>
</table>
<P align=center><FONT face="Times New Roman, Times, Serif" size=2>Commission File Number: <U>000-24248</U> &nbsp;</FONT></P>
<P align=center><FONT face="Times New Roman, Times, Serif" size=2><B><font size="5">AMERICAN TECHNOLOGY CORPORATION</font></B> <BR>
(Exact name of registrant as specified in its charter)&nbsp;</FONT></P>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr align="center">
    <td width="50%"><font size="2" face="Times New Roman, Times, serif">Delaware</font></td>
    <td><font size="2" face="Times New Roman, Times, serif">87-0361799</font></td>
  </tr>
  <tr align="center">
    <td><hr width="60" size="1" noshade></td>
    <td><hr width="70" size="1" noshade></td>
  </tr>
  <tr align="center">
    <td><font size="2" face="Times New Roman, Times, serif">(State or other jurisdiction of incorporation or organization)</font></td>
    <td><font size="2" face="Times New Roman, Times, serif">(I.R.S. Employer Identification Number)</font></td>
  </tr>
  <tr align="center">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td><font size="2" face="Times New Roman, Times, serif">13114 Evening Creek Drive South, San Diego, California</font></td>
    <td><font size="2" face="Times New Roman, Times, serif">92128</font></td>
  </tr>
  <tr align="center">
    <td><hr width="305" size="1" noshade></td>
    <td><hr width="50" size="1" noshade></td>
  </tr>
  <tr align="center">
    <td><font size="2" face="Times New Roman, Times, serif">(Address of principal executive offices)</font></td>
    <td><font size="2" face="Times New Roman, Times, serif">(Zip Code)</font></td>
  </tr>
</table>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="center"><FONT face="Times New Roman, Times, Serif" size=2>(858) 679-2114 </FONT></td>
  </tr>
  <tr>
    <td><hr width="85" size="1" noshade></td>
  </tr>
  <tr>
    <td align="center"><FONT face="Times New Roman, Times, Serif" size=2>(Registrant&#146;s telephone number, including area code)&nbsp;</FONT></td>
  </tr>
</table>
<P align=left><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>&nbsp;<font size="3" face="wingdings">x</font><FONT face="Times New Roman, Times, Serif" size=2> YES &nbsp; <font size="3" face="wingdings">o</font> 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).&nbsp;</FONT>&nbsp;<FONT face="Times New Roman, Times, Serif" size=2> YES </FONT><font size="3" face="wingdings">x</font><FONT face="Times New Roman, Times, Serif" size=2></FONT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;  NO <font size="3" face="wingdings">o</font></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 April 28, 2005.</FONT></P>
<table width="100%"  border="0" cellspacing="0" cellpadding="0">
  <tr align="center">
    <td width="50%"><font size="2">Common Stock, $0.00001 par value</font></td>
    <td><font size="2">21,317,239 </font></td>
  </tr>
  <tr align="center">
    <td><hr width="200" size="1" noshade></td>
    <td><hr width="200" size="1" noshade></td>
  </tr>
  <tr align="center">
    <td><font size="2">(Class)</font></td>
    <td><font size="2">(Number of Shares)</font></td>
  </tr>
</table>
<P align=center><FONT face="Times New Roman, Times, serif" size=2></FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P align=center><FONT face="Times New Roman, Times, Serif" size=2>AMERICAN TECHNOLOGY CORPORATION<BR>
INDEX</FONT></P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
  <TR>
    <TD colspan="3" valign=bottom>&nbsp;</TD>
    <TD align="center" valign=bottom><b><font size="1">Page</font></b></TD>
  </TR>
  <TR>
    <TD colspan="3" valign=bottom><a href="#a1"><font size="2" face="Times New Roman, Times, serif">PART I. FINANCIAL INFORMATION</font></a></TD>
    <TD width="4%" align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD width="5%" valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><a href="#a2"><font size="2" face="Times New Roman, Times, serif">Item 1. Financial Statements:</font></a></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD width="6%" valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD valign=bottom><a href="#a3"><font size="2" face="Times New Roman, Times, serif">Balance Sheets as of March 31, 2005 and September 30, 2004 (unaudited)</font></a></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">3</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD valign=bottom><a href="#a4"><font size="2" face="Times New Roman, Times, serif">Statements of Operations for the three and six months ended March 31, 2005 and 2004 (unaudited)</font></a></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">4</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a5">Statements of Cash Flows for the six months ended March 31, 2005 and 2004 (unaudited)</a></font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">5</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">Notes to Interim Financial Statements (unaudited)</font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">6</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif">Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">14</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif">Item 3. Quantitative and Qualitative Disclosures about Market Risk</font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">38</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a9">Item 4. Controls and Procedures</a></font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">39</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD colspan="3" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a10">PART II. OTHER INFORMATION</a></font></TD>
    <TD align="right" valign=bottom>
    <font face="Times New Roman, Times, serif" size="2">40</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a11">Item 1. Legal Proceedings</a></font></TD>
    <TD align="right" valign=bottom>
    <font face="Times New Roman, Times, serif" size="2">40</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a12">Item 2. Unregistered Sales of Equity Securities and Use of Proceeds</a></font></TD>
    <TD align="right" valign=bottom>
    <font face="Times New Roman, Times, serif" size="2">40</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a13">Item 3. Defaults upon Senior Securities</a></font></TD>
    <TD align="right" valign=bottom>
    <font face="Times New Roman, Times, serif" size="2">40</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a14">Item 4. Submission of Matters to a Vote of Security Holders</a></font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">40</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a15">Item 5. Other Information</a></font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">40</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD valign=bottom><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
    <TD colspan="2" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a16">Item 6. Exhibits</a></font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">40</font></TD>
  </TR>
  <TR>
    <TD valign=bottom colspan=4><font size="2" face="Times New Roman, Times, serif">&nbsp;</font></TD>
  </TR>
  <TR>
    <TD colspan="3" valign=bottom><font size="2" face="Times New Roman, Times, serif"><a href="#a17">SIGNATURES</a></font></TD>
    <TD align="right" valign=bottom><font size="2" face="Times New Roman, Times, serif">41</font></TD>
  </TR>
</TABLE>
<P align=center><font size="2">2</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="a1"></a>PART I. FINANCIAL INFORMATION<BR>
      <a name="a2"></a>Item 1. Financial Statements. </B></FONT></P>
<P align="center"><b><font size="2" face="Times New Roman, Times, Serif">American Technology Corporation<br>
  </font></b><font size="2" face="Times New Roman, Times, Serif"><a name="a3"></a>BALANCE SHEETS<br>
  Unaudited</font></P>
<TABLE width=100% border=0 align="center" cellpadding=0 cellspacing=0>
  <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=1>March 31,<br>
      2005 </FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>September 30,<br>
      2004 (a) </FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><font size="2" face="Times New Roman, Times, serif">ASSETS</font></b></TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Current Assets:</FONT></b></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=11% 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=11% 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 bgcolor="#eaf9e8">
    <TD align=LEFT bgcolor="#eaf9e8"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Cash</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 6,162,409</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 4,178,968</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>&nbsp;&nbsp;Trade accounts receivable, less allowance
    for doubtful accounts of<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$25,000 in each 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>494,503</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>926,747</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Inventories, net</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>904,710</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>651,095</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Prepaid expenses and other</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>186,192</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>156,419</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Prepaid transaction costs</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>1,036,184</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Total current assets</FONT></b></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>8,783,998</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>5,913,229</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><b>Equipment</b>, net</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>683,912</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>453,355</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><b>Patents</b>, net</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>1,336,515</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>1,278,707</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2><b>Total assets</b></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> 10,804,425</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 7,645,291</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT colspan="7"><FONT face="Times New Roman, Times, Serif" size=2><b>LIABILITIES AND STOCKHOLDERS&#146; EQUITY</b></FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2><b>Current Liabilities:</b></FONT></TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;Accounts payable</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 1,617,191</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> 1,300,075</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;Accrued liabilities:</FONT></TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD 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>&nbsp;&nbsp;&nbsp;Payroll and related</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>480,115</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>302,706</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;Deferred revenue</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>300,000</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>322,344</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;Warranty reserve</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>238,837</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>331,917</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;Legal settlements</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>291,466</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>150,000</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;Other</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>42,959</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>22,236</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>11,631</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>10,967</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>Derivative instrument</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>1,111,036</FONT></TD>
    <TD align=LEFT colspan="4"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Total current liabilities</FONT></b></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>4,093,235</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>2,440,245</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT colspan="7"><b><FONT face="Times New Roman, Times, Serif" size=2>Long-Term Liabilities:</FONT></b></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>8% Unsecured Subordinated Promissory Notes, net of $645,184<br>
&nbsp;&nbsp;and $-0- debt discount</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>1,354,816</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>Capital lease long-term portion</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>5,203</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>12,131</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Total liabilities</FONT></b></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>5,453,254</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>2,452,376</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT colspan="7"><b><FONT face="Times New Roman, Times, Serif" size=2>Commitments and contingencies</FONT></b></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD width=71% align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Stockholders<b>&#146;</b> equity</FONT></b></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=11% 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=11% 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>Preferred stock, $0.00001 par value; 5,000,000 shares authorized:</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Series D Preferred stock 250,000 shares designated: 0 and 50,000<br>
&nbsp;&nbsp;&nbsp;&nbsp;issued and outstanding, respectively. Liquidation<br>
&nbsp;&nbsp;&nbsp;&nbsp;preference of $0 and $572,500, respectively.</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>&nbsp;&nbsp;Series E Preferred stock 350,000 shares designated: 0 and 233,250<br>
&nbsp;&nbsp;&nbsp;&nbsp;issued and outstanding, respectively. Liquidation preference<br>
&nbsp;&nbsp;&nbsp;&nbsp;of $0 and $2,556,000, respectively.</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</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>Common stock, $0.00001 par value; 50,000,000 shares authorized;<br>
&nbsp;&nbsp;21,317,239 and 19,808,819 shares issued and outstanding respectively.</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>213</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>198</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>Additional paid-in capital</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>50,818,317</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>47,520,207</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>Accumulated deficit</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>(45,467,359</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>(42,327,493</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Total stockholders<b>&#146;</b> equity</FONT></b></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>5,351,171</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>5,192,915</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Total liabilities and stockholders<b>&#146;</b> equity</FONT></b></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> 10,804,425</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>7,645,291 </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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>See accompanying notes to interim financial statements.<BR>(a) Derived from the audited financial statements as of September 30, 2004.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>3</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P align="center"><font size="2" face="Times New Roman, Times, serif"> <b>American Technology Corporation</b><br>
    <a name="a4"></a>STATEMENTS OF OPERATIONS<br>
  (Unaudited) </font></p>
<TABLE width=100% border=0 cellpadding=0 cellspacing=0>
  <TR valign=Bottom>
    <TH><font size="1" face="Times New Roman, Times, serif"></font></TH>
    <TH colspan=5><font size="1" face="Times New Roman, Times, serif">For the three months ended <br>
      March 31, </font>
        <HR size="1" color=BLACK></TH>
    <TH><font size="1" face="Times New Roman, Times, serif"></font></TH>
    <TH colspan=5><font size="1" face="Times New Roman, Times, serif">For the six months ended<br>
      March 31, </font>
        <HR size="1" color=BLACK></TH>
    <TH><font size="1" face="Times New Roman, Times, serif"></font></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=1>2005</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2005</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH>&nbsp;</TH>
    <TH colspan=2>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH colspan=2>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH colspan=2>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH colspan=2>&nbsp;</TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Revenues:</FONT></b></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=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=9% 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=9% 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=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;Product sales</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 2,814,293</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 1,493,250</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 7,161,206</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 2,111,834</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;Contract and license</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>3,100</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>65,100</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>156,194</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>2,817,393</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>1,493,250</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>7,226,306</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>2,268,028</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>Cost of revenues</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>1,453,966</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>945,224</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>2,981,669</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>1,353,702</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Gross profit</FONT></b></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>1,363,427</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>548,026</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>4,244,637</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>914,326</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT bgcolor="#eaf9e8" colspan="13"><b><FONT face="Times New Roman, Times, Serif" size=2>Operating expenses:</FONT></b></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Selling, general and administrative</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>2,094,036</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>1,079,472</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>4,089,951</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>2,151,786</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;Research and development</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>1,452,393</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>644,248</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>2,913,008</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>1,093,219</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>3,546,429</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>1,723,720</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>7,002,959</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>3,245,005</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(2,183,002</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>(1,175,694</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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(2,758,322</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>(2,330,679</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Other income (expense):</FONT></b></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Interest income</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>18,407</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>11,491</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>29,348</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>30,865</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>&nbsp;&nbsp;Interest expense</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>(130,631</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>(993</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>(142,961</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>(1,809</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;Unrealized gain (loss) on derivative revaluation</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>682,210</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>(267,931</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>569,986</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>10,498</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>(381,544</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>29,056</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Net loss</FONT></b></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>(1,613,016</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>(1,165,196</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>(3,139,866</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>(2,301,623</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>Dividend requirements on convertible 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>1,518,651</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>406,846</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>1,796,426</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>700,551</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Net loss available to common stockholders</FONT></b></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,131,667</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (1,572,042</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (4,936,292</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,002,174</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Net loss per share of common stock - basic and diluted</FONT></b></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.15</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.08</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.24</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.15</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><b><FONT face="Times New Roman, Times, Serif" size=2>Average weighted number of common shares outstanding</FONT></b></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>20,665,004</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>19,508,387</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>20,234,075</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>19,442,192</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>See accompanying notes to interim financial statements.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>4</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P align="center"><font size="2" face="Times New Roman, Times, serif"> <b>American Technology Corporation </b><br>
    <a name="a5"></a>STATEMENTS OF CASH FLOWS<br>
  (Unaudited) </font></p>
<TABLE width=100% border=0 cellpadding=0 cellspacing=0>
  <TR valign=Bottom>
    <TH><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=5><FONT face="Times New Roman, Times, Serif" size=1>For the six months ended March 31,</FONT>
        <HR size="1" color=BLACK></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=1>2005</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT bgcolor="#eaf9e8"><b><FONT face="Times New Roman, Times, Serif" size=2>Increase (Decrease) in Cash</FONT></b></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><b><FONT face="Times New Roman, Times, Serif" size=2>Operating Activities:</FONT></b></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT bgcolor="#eaf9e8"><FONT face="Times New Roman, Times, Serif" size=2>Net loss</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,139,866</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (2,301,623</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>Adjustments to reconcile net loss to net cash<br>
&nbsp;&nbsp;&nbsp;used in operations:</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;Depreciation and 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>212,050</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>106,024</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>&nbsp;&nbsp;&nbsp;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>(76,723</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>25,933</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;Options granted for compensation</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>270,043</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>&nbsp;&nbsp;&nbsp;Unrealized loss on derivative revaluation</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>267,931</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>&nbsp;&nbsp;&nbsp;Amortization of debt discount</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>98,793</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>&nbsp;&nbsp;&nbsp;Provision for obsolete inventory</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>239,986</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 bgcolor="#eaf9e8" colspan="7"><FONT face="Times New Roman, Times, Serif" size=2>Changes in assets and liabilities:</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Trade accounts receivable</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>432,244</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>(1,221,810</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;&nbsp;&nbsp;&nbsp;Inventories</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>(493,601</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>(215,086</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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prepaid expenses and other</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>(29,773</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>(48,835</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;&nbsp;&nbsp;&nbsp;Accounts payable</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>205,935</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>118,846</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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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>(16,357</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>(20,433</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;&nbsp;&nbsp;&nbsp;Accrued liabilities</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>317,254</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>(101,768</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(1,712,084</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>(3,658,752</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT bgcolor="#eaf9e8" colspan="7"><b><FONT face="Times New Roman, Times, Serif" size=2>Investing Activities:</FONT></b></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(355,995</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>(104,765</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>Patent costs paid</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>(144,420</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>(204,819</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(500,415</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>(309,584</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT bgcolor="#eaf9e8" colspan="7"><b><FONT face="Times New Roman, Times, Serif" size=2>Financing Activities:</FONT></b></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT bgcolor="#FFFFFF"><font size="2">Offering Costs Paid</font></TD>
    <TD align=RIGHT bgcolor="#FFFFFF">&nbsp;</TD>
    <TD align=RIGHT bgcolor="#FFFFFF"><font size="2">(102,875</font></TD>
    <TD align=LEFT bgcolor="#FFFFFF"><font size="2">)</font></TD>
    <TD align=RIGHT bgcolor="#FFFFFF">&nbsp;</TD>
    <TD align=RIGHT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=LEFT bgcolor="#FFFFFF">&nbsp;</TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(6,264</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>(5,662</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>Proceeds from issuance of unsecured promissory notes</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>2,000,000</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 bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Proceeds from exercise of common stock 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>1,661,277</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>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Proceeds from exercise of 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>643,802</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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>653,202</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>4,195,940</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>697,540</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>1,983,441</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>(3,270,796</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>Cash, beginning of 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>4,178,968</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>9,850,358</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Cash, end of period</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 6,162,409</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 6,579,562</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT bgcolor="#eaf9e8" colspan="7"><b><FONT face="Times New Roman, Times, Serif" size=2>Supplemental Disclosure of Cash Flow Information</FONT></b></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Cash paid for interest</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 1,058</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 1,809</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>Cash paid for taxes</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> &#151;</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</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>Non-cash financing activities:</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;Warrants issued for offering costs</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 843,105</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> &#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>&nbsp;&nbsp;&nbsp;Warrants issued for debt financing</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 723,000</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> &#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>&nbsp;&nbsp;&nbsp;Common stock issued for legal settlement accrual</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> &#151;</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><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>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>See accompanying notes to interim financial statements.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>5</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>1. &nbsp;OPERATIONS </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>American Technology Corporation (the Company) is engaged in design, development and commercialization
of sound, acoustic and other technologies. The Company produces products based on its HyperSonic&#174;
Sound (HSS&#174;), Long Range Acoustic Device (LRAD&#153;), NeoPlanar&#174; and other sound technologies.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company&#146;s operations are organized into two segments by the end-user markets they serve. The
Commercial Products Group, (Commercial Group), formerly known as the Business Products and Licensing
Group, markets and licenses HSS and NeoPlanar products to companies that employ audio in consumer,
commercial and professional applications. The Government and Force Protection Systems Group (Government
Group) markets LRAD, NeoPlanar, SoundCluster&#153; and HSS products to government and military customers
and to the expanding force protection and commercial security markets.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company&#146;s principal markets for its proprietary sound reproduction technologies and products
are in North America, Europe and Asia.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company continues to be subject to certain risks, including history of net losses and expectation
to continue to incur net losses; need for additional capital; potential dilutive impact on its stockholders
of the Committed Equity Financing Facility (CEFF) described in Note 11 below; 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 substantial uncertainty of ability to achieve profitability
and positive cash flow.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>2. &nbsp;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 six months&nbsp;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, 2004 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 $6,162,409 at March 31, 2005, accounts receivable collections and possible proceeds
from the CEFF described in Note 11 below, the Company has no other material unused sources of liquidity
at this time. The Company has financed its operations primarily through cash generated from product
sales and from financing activities. Management expects to incur additional operating losses during
the balance of fiscal 2005 as a result of expenditures for research and development and marketing
costs for proprietary 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. Based on the Company&#146;s cash position
and possible proceeds from the CEFF, and
assuming currently planned expenditures and level of operations, management believes the Company
will have sufficient capital resources for the next twelve months. Management believes increased
product sales will provide additional operating funds. If required, management has significant flexibility
to adjust the level of research and development and selling and administrative expenses based on
the availability of resources.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>6</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>3. &nbsp;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 accreted 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 and warrants exercisable into 4,437,545 shares of common stock
were outstanding at March 31, 2005 and stock options, warrants and convertible preferred stock exercisable
or convertible into 4,900,870 shares of common stock were outstanding at March 31, 2004. 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 issuances 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 were recorded as a
deemed dividend and were 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 were
not included in the Company&#146;s stockholders&#146; equity as the Company has an accumulated deficit.
Amounts were included in net loss available to common stockholders. The imputed deemed dividends
were not contractual obligations of the Company to pay such imputed dividends. All of the Company&#146;s
outstanding shares of Series D and E Preferred Stock were converted to common stock during the quarter
ending March 31, 2005.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The provisions of each of the Company&#146;s series of preferred stock also provided for a 6% per annum
accretion in the conversion value (similar to a dividend). These amounts also increased the net loss
available to common stockholders. 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>
    <TH><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=5><FONT face="Times New Roman, Times, Serif" size=1>Three Months Ended<br>
      March 31, </FONT>
    </TH>
    <TH>&nbsp;</TH>
    <TH colspan=5><FONT face="Times New Roman, Times, Serif" size=1>Six Months Ended <br>
      March 31, </FONT>
    </TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=2 valign="middle"><FONT face="Times New Roman, Times, Serif" size=1>2005</FONT>        </TH>
    <TH valign="middle">&nbsp;</TH>
    <TH colspan=2 valign="middle"><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT>        </TH>
    <TH valign="middle">&nbsp;</TH>
    <TH colspan=2 valign="middle"><FONT face="Times New Roman, Times, Serif" size=1>2005</FONT>        </TH>
    <TH valign="middle">&nbsp;</TH>
    <TH colspan=2 valign="middle"><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT>        </TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT bgcolor="#eaf9e8"><FONT face="Times New Roman, Times, Serif" size=2>Net loss</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (1,613,016</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (1,165,196</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,139,866</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (2,301,623</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<br>
&nbsp;&nbsp;warrants issued with preferrd 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>(490,857</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>(146,274</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>(592,137</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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(247,113</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>Imputed deemed dividends on Series D and E<br>
&nbsp;&nbsp;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>(1,013,854</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>(214,112</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>(1,146,917</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>(359,990</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>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;Series D 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>(1,500</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>(7,500</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>(9,167</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>(15,000</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>&nbsp;&nbsp;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>(12,440</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>(38,960</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>(48,205</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>(78,448</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></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=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,131,667</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (1,572,042</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (4,936,292</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,002,174</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>On January 18, 2005, the Company&nbsp;gave notice to all holders of Series D and Series E Preferred
Stock that it had elected to convert all of the outstanding shares of Series D and Series E Preferred
Stock to common stock. The designations, rights and preferences of the Series D and Series E Preferred
Stock permitted the Company to exercise this conversion option if the market price of its common
stock exceeded $9.50 for ten consecutive trading days and certain other conditions were satisfied.
The price condition was satisfied on January 6, 2005. The conversion of the Series D Preferred Stock
was effective on January 18, 2005 and resulted in all 50,000 issued and outstanding shares of Series
D Preferred Stock converting into an aggregate of 129,259 shares of common stock. The conversion
of the Series E Preferred Stock was effective on February 1, 2005, and resulted in all 233,250 issued
and outstanding shares of Series E Preferred Stock converting into an aggregate of 801,306 shares
of common stock.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>As all the Series D and Series E Preferred Stock was called for conversion as described above, $1,504,711
was accreted in the quarter ending March 31, 2005, in addition to the accretion of $13,940 at the
stated rate of 6%, increasing the net loss available to common stockholders for that period.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>7</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>4. &nbsp;STOCK-BASED COMPENSATION </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company accounts for employee stock-based compensation using the intrinsic value method. In most
cases, the Company does not recognize compensation expense for its employee stock option grants,
as they have been granted at the fair market value of the underlying Common Stock at the grant date.
Had compensation expense for the Company&#146;s employee stock option grants been determined based
on the fair value at the grant date for awards through March 31, 2005 consistent with the provisions
of Statement of Financial Accounting Standards No. 123, its after-tax net income and after-tax net
income per share would have been reduced to the pro forma amounts indicated below:</FONT></P>
<TABLE width=100% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR valign=Bottom>
    <TH><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=5><FONT face="Times New Roman, Times, Serif" size=1>Three Months Ended<br>
      March 31, </FONT>
    </TH>
    <TH>&nbsp;</TH>
    <TH colspan=5><FONT face="Times New Roman, Times, Serif" size=1>Six Months Ended <br>
      March 31, </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=1>2005</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2005</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT>
        <HR size="1" color=BLACK></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT bgcolor="#eaf9e8"><FONT face="Times New Roman, Times, Serif" size=2>Net loss available to common shareholders</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,131,667</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (1,572,042</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (4,936,292</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=9% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,002,174</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<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;expense included in reported net loss</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>266,963</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>Less: Total stock-based employee compensation expense<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;determined using fair value based method</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>(326,524</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>(262,566</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>(884,226</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>(507,855</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 size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="1" color=BLACK></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=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,458,191</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (1,834,608</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (5,553,555</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (3,510,029</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</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<br>
&nbsp;&nbsp;and diluted - as reported</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.15</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.08</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.24</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.15</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Net loss per common share - basic<br>
&nbsp;&nbsp;and diluted - pro forma</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.17</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.09</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.27</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (0.18</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 size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR size="2" color=BLACK></TD>
    <TD></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
</TABLE>
<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 2005 and
2004, respectively: dividend yield of zero percent for each period; expected volatility of 53 to
56 percent in 2005 and 75 percent in 2004; risk-free interest rates of 3.82 to 1.84 percent; and
expected lives of 2.5 years for each period. The estimated fair value of the options so determined is then amortized
to expense over the options&#146; vesting periods.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>5. &nbsp;RECENT ACCOUNTING PRONOUNCEMENTS </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In December 2004, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard
(FAS) 123(R), &#147;Share Based Payment.&#148;&nbsp;Although Statement 123(R) states that it is effective
for public companies at the beginning of the first interim or annual period after June 15, 2005,
the Securities and Exchange Commission has adopted a rule delaying the required compliance date to
the first interim or annual reporting period of the registrant&#146;s first fiscal year beginning
on or after June 15, 2005. Therefore, the Company will first be required to comply with Statement 123(R)
in the quarter ending December 31, 2005. This statement eliminates the ability to account for share-based
compensation using the intrinsic value-based method under APB Opinion No. 25, &#147;Accounting for
Stock Issued to Employees.&#148; Statement 123(R) would require the Company to calculate equity-based
compensation expense for stock options and employee stock purchase plan rights granted to employees
based on the fair value of the equity instrument at the time of grant. Currently, the Company discloses
the pro forma net income (loss) and the related pro forma income (loss) per share information in
accordance with FAS 123 and FAS 148, &#147;Accounting for Stock-Based Compensation Costs-Transition
and Disclosure.&#148; The Company has not evaluated the impact that Statement 123(R) will have on
its financial position and results of operations.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In November 2004, the FASB issued SFAS No. 151, &#147;Inventory Costs an amendment of ARB 43, Chapter
4.&#148; SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period charges and requires
the allocation of fixed production overheads to inventory based on the normal capacity of the production
facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company
is currently evaluating the financial statement impact of the implementation of SFAS No. 151.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>6. &nbsp;INVENTORIES AND CONTRACT MANUFACTURER</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Inventory is stated at the lower of cost, which approximates actual costs on a first-in first-out (FIFO)
basis, or market. At March 31, 2005 $597,560 of inventory value was located at the Company&#146;s
contract manufacturer in San Jose, California.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>8</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>Inventories consisted of the following:</FONT></P>
<TABLE width=80% 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 colspan=2><FONT face="Times New Roman, Times, Serif" size=1>March 31,<BR>
      2005</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>September 30,<BR>
      2004</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR>
    <TD colspan=2></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=4% 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>$</FONT></TD>
    <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 719,057</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 342,647</FONT></TD>
    <TD width=2% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>Raw materials</FONT></TD>
    <TD align=LEFT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>535,639</FONT></TD>
    <TD align=LEFT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>418,448</FONT></TD>
    <TD align=LEFT bgcolor="#FFFFFF"><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></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>&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>1,254,696</FONT></TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD></TD>
    <TD align="right"><font face="Times New Roman, Times, Serif" size=2>761,095</font></TD>
    <TD></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=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>(349,986</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>(110,000</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 904,710</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 651,095</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></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>During the six months ended
March 31, 2005, the Company shipped materials to it's contract manufacturer,
booked an amount due from the contract manufacturer and reduced inventory by $387,889. The Company did
not recognize any revenue on these transactions. At March 31, 2005, the remaining balance due from
the contract manufacturer, for shipments made to it, was $160,050. The contract manufacturer used
these materials to build products for the Company. The above due from the contract manufacturer of $160,050
has been netted against the payable due to the contract manufacturer.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>7. &nbsp;CUSTOMER CONCENTRATION </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>For the six months ended March 31, 2005, sales to one customer in the Government Group accounted for
82% of total revenues and sales to a second customer in the Government Group, including affiliates
of the customer, accounted for 10% of total revenues. For the three months ended March 31, 2005,
sales to one customer in the Government Group accounted for 93% of total revenues. At March 31, 2005,this
customer accounted for 56% of accounts receivable, and two other customers accounted for 21% and
14% of accounts receivable. No other customer accounted for more than 10% of accounts receivable
at March 31, 2005. For the six months ended March 31, 2004, sales to three customers in the Government
Group accounted for 41%, 32% and 11% of total revenues respectively. For the three months ended March
31, 2004, sales to two customers in the Government Group accounted for 62% and 17% of total revenues.
At March 31, 2004, the accounts receivable from these two customers accounted for 66% and 12% of accounts
receivable respectively and no other customer accounted for more than 10% of accounts receivable.
Management believes that the loss of any one of these significant customers would have a material adverse effect
on the Company&#146;s results of operations and financial condition.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>8. &nbsp;INTANGIBLES </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Patents are carried at cost and, when granted, are amortized over their estimated useful lives. The
carrying value of patents is periodically reviewed and impairments, if any, are recognized when the
expected future benefit to be derived from an individual intangible asset is less than its carrying
value. Patents consisted of the following:</FONT></P>
<TABLE width=80% 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 colspan=2><FONT face="Times New Roman, Times, Serif" size=1>March 31, <br>
      2005</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>September 30, <br>
      2004</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR>
    <TD colspan=2></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>Cost</FONT></TD>
    <TD width=4% 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=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>1,722,997</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>$</FONT></TD>
    <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 1,578,578</FONT></TD>
    <TD width=2% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Accumulated amortization</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(386,482</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(299,871</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Net patent</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 1,336,515</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> 1,278,707</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></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>9</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>9. &nbsp;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 reserve during the three and six months ended March 31, 2005 and 2004 were
as follows:</FONT></P>
<TABLE width=90% 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 colspan=5><FONT face="Times New Roman, Times, Serif" size=1>Three Months Ended<BR>
      March 31,</FONT><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=5><FONT face="Times New Roman, Times, Serif" size=1>Six Months Ended<BR>
      March 31,</FONT><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2005</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2005</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>2004</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Beginning balance</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>$</FONT></TD>
    <TD width=11% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 408,834</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=11% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 315,000</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>$</FONT></TD>
    <TD width=11% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 331,917</FONT></TD>
    <TD width=3% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=11% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 319,500</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, net</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>(158,886</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>30,433</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>(76,723</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>25,933</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>Warranty deductions</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>(11,111</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>(20,433</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>(16,357</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>(20,433</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 238,837</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 325,000</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 238,837</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 325,000</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD colspan=2></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. &nbsp;UNSECURED SUBORDINATED PROMISSORY NOTES </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In December 2004, the Company sold an aggregate of $2,000,000 of 8% unsecured subordinated promissory
notes due December 31, 2006. Interest on these notes accrues at the rate of 8% per year and is due
and payable quarterly in arrears. For the three and six months ended March 31, 2005, we recorded
interest on these notes of $39,452 and $42,959, respectively. The Company is required to use 40%
of the net proceeds of any future equity financing to prepay these notes, including any amounts the
Company raises pursuant to the CEFF described in Note 11 below. The Company may prepay the notes
at its discretion at any time without penalty after June 30, 2005.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In connection with the issuance of these notes, the purchasers were granted warrants to purchase an
aggregate of 150,000 shares of its common stock. The exercise price of the warrants was $9.28 per
share for purchasers who were directors, officers, employees or consultants of the Company, or affiliates
of such persons, and $8.60 per share for other purchasers. Warrants exercisable for 75,000 shares
were issued at each such exercise price. The fair value of such warrants, which amounted to $723,000,
and closing costs of $20,977&nbsp;have been recorded as debt discount to be amortized over the term
of the notes. The following variables were used to determine the fair value of the warrants under
the Black-Scholes option pricing model: volatility of 56%, term of five years, risk free interest
of 2.97% and underlying stock price equal to fair market value at the time of grant. For the three
and six months ended March 31, 2005, $90,734 and $98,793,respectively, of debt discount was amortized.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>A trust affiliated with an officer, director and significant stockholder of the Company purchased one
of the aforementioned promissory notes in the principal amount of $500,000 and received a warrant
exercisable for 37,500 shares with an exercise price of $9.28 per share.</FONT></P>
<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><FONT face="Times New Roman, Times, Serif" size=2><B>11. &nbsp;STOCKHOLDERS&#146; EQUITY </B></FONT></p>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Summary </U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>  The following table summarizes changes in equity components from transactions during the six months ended March 31, 2005:</FONT></P>
<TABLE cellpadding=0 cellspacing=0 border=0 width=100%>
  <TR valign=Bottom>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=5>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH colspan=5>&nbsp;</TH>
    <TH>&nbsp;</TH>
    <TH colspan=2 rowspan="3" nowrap><FONT face="Times New Roman, Times, Serif" size=1></FONT><FONT face="Times New Roman, Times, Serif" size=1>Additional<BR>
      Paid-in<BR>
      Capital</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2 rowspan="3" nowrap><FONT face="Times New Roman, Times, Serif" size=1></FONT><FONT face="Times New Roman, Times, Serif" size=1>Accumulated<BR>
      Deficit</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2 rowspan="3" nowrap><FONT face="Times New Roman, Times, Serif" size=1></FONT><FONT face="Times New Roman, Times, Serif" size=1>Total <br>
      Stockholders&#146;<BR>
      Equity<BR>
      (Deficit)</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2 rowspan="2"><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=5 align="center"><FONT face="Times New Roman, Times, Serif" size=1>&nbsp;&nbsp;&nbsp;Preferred Stock</FONT><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH rowspan="2">&nbsp;</TH>
    <TH colspan=5 align="center"><FONT face="Times New Roman, Times, Serif" size=1></FONT><FONT face="Times New Roman, Times, Serif" size=1>&nbsp;&nbsp;&nbsp;Common Stock</FONT></TH>
    <TH rowspan="2">&nbsp;</TH>
    <TH rowspan="2">&nbsp;</TH>
    <TH rowspan="2">&nbsp;</TH>
    <TH rowspan="2">&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>Shares</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>Amount</FONT></TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>Shares</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>Amount</FONT></TH>
  </TR>
  <TR>
    <TD align=RIGHT>&nbsp;</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>
    <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 nowrap><b><FONT face="Times New Roman, Times, Serif" size=2>Balance, October 1, 2004</FONT></b></TD>
    <TD width=1% 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=5% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>283,250</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>$</FONT></TD>
    <TD width=5% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 3</FONT></TD>
    <TD width=2% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=7% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>19,808,819</FONT></TD>
    <TD width=2% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=5% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 198</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>$</FONT></TD>
    <TD width=7% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 47,520,207</FONT></TD>
    <TD width=2% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=7% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (42,327,493</FONT></TD>
    <TD width=2% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD width=1% align=RIGHT><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> 5,192,915</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 nowrap><FONT face="Times New Roman, Times, Serif" size=2>Stock issued upon exercise of 369,568<br>
    warrants</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>369,568</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>4</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>1,661,273</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>1,661,277</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 nowrap><FONT face="Times New Roman, Times, Serif" size=2>Conversion of Series D Preferred Stock</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>)</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>129,259</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>&#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 nowrap><FONT face="Times New Roman, Times, Serif" size=2>Conversion of Series E Preferred Stock</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>(233,250</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>(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>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>801,306</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>8</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>(6</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>&#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 nowrap><FONT face="Times New Roman, Times, Serif" size=2>Cashless exercise of 25,000 Warrants</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>20,425</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 nowrap><FONT face="Times New Roman, Times, Serif" size=2>Stock issued upon exercise of stock options</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>187,862</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</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>643,800</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>643,802</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 nowrap><FONT face="Times New Roman, Times, Serif" size=2>Value assigned to extension of time to<br>
    exercise 92,675 options</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>266,963</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>266,963</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT nowrap><FONT face="Times New Roman, Times, Serif" size=2>Debt discount for 150,000 warrants granted<br>
    on 8% unsecured subordinated promissory notes</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>723,000</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>723,000</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 nowrap><FONT face="Times New Roman, Times, Serif" size=2>Issuance of stock options and warrants for<br>
    services</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>3,080</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>3,080</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT nowrap><FONT face="Times New Roman, Times, Serif" size=2>Deemed dividends and accretion on<br>
    convertible preferred stock of $1,796,426</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>
    <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 bgcolor="#EAF9E8">
    <TD align=LEFT nowrap><FONT face="Times New Roman, Times, Serif" size=2>Net loss for the period</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>
    <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>(3,139,866</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>(3,139,866</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR>
    <TD align=RIGHT nowrap>&nbsp;</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>
    <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 nowrap><b><FONT face="Times New Roman, Times, Serif" size=2>Balance, March 31, 2005</FONT></b></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>$</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>21,317,239</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 213</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 50,818,317</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> (45,467,359</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 5,351,171</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD align=RIGHT>&nbsp;</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>
    <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>As of March 31, 2005, all previously outstanding shares of Series D and Series E Preferred Stock were
converted into an aggregate of 930,565 shares of common stock. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Committed Equity Financing Facility </U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>  In December 2004, the Company entered into a $25 million Committed Equity Financing Facility (CEFF)
  with Kingsbridge Capital Limited, a firm specializing in financing small to medium sized technology-based
  companies. The CEFF allows the Company to sell to Kingsbridge, subject to certain significant limiting
  conditions, a maximum of 3,684,782 shares of its common stock at a price between 88% and 92% of the
  volume weighted average price during 15 day purchase periods. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>As part of the arrangement, the Company issued a warrant to Kingsbridge to purchase 275,000 shares
of its common stock at a price of $8.60 per share. The warrant is exercisable beginning six months
after the date of issuance and for a period of five years thereafter. The Company also agreed to
file a registration statement for the resale of shares acquired under the CEFF, or upon exercise
of the warrant, within 45 days after entering into the agreement for the CEFF. In January 2005 the
Company filed the required resale registration statement. The registration statement has not yet
been declared effective. The 3,684,782 share maximum also includes any shares that the
Company may
issue in lieu of paying Kingsbridge liquidated damages in the event that registration statement is
unavailable for the resale of the securities purchased by Kingsbridge under the CEFF once the registration
statement has been declared effective. The Company has no obligation to draw down all or any portion
of the commitment during its 24-month term.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company is obligated to use 40% of the proceeds it may receive from the CEFF or other equity financings
to prepay any outstanding interest and principal on the notes described in Note 10 above. The Company
may also be required to pay liquidated damages of up to $2,500,000 in the event that a registration
statement is not available for the resale of securities purchased by Kingsbridge under the CEFF.
The Company has also agreed to pay to a consultant, who is not an affiliate of the Company or Kingsbridge,
a finder fee equal to 4% of the first $5 million raised under the CEFF, 3% for the second $5 million
raised under the CEFF, 2% for the third $5 million raised under the CEFF, and 1.5% for any additional
amounts raised.</FONT></P>
<P align=center><font size="2">11</font></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>The fair value of the warrant at the date of issuance, which amounted to $843,105, and legal, audit
and associated fees of $193,079 were recorded as prepaid transaction costs. These costs will be reclassified
to equity once the registration statement is declared effective or upon exercise of the warrant.
The following variables were used to determine the fair value of the warrant under the Black-Scholes
option pricing model: volatility of 56%, term of 5.5 years, risk free interest of 2.97% and underlying
stock price equal to fair market value at the time of issuance. The warrant has been accounted for
as a derivative instrument in accordance with Emerging Issues Task Force (EITF) 00-19 &#147;Accounting
for Derivative Financial Instruments, Indexed to, and Potentially Settled in a Company&#146;s Own
Stock.&#148;&nbsp;As a derivative, the fair value of the warrant is recorded as a liability at its
estimated fair value at each balance sheet date until the effective date of the related registration
statement, or upon warrant exercise, when the warrant liability, as may be further revalued, will
be reclassified to equity. Changes in the fair value of the warrant are recorded as other income
or expense in the accompanying income statement. For the three months ended March 31, 2005, $682,210
was recorded as unrealized gain for the change in valuation of the fair value of the warrant. For
the period measured from the issuance date of December 14, 2004 until March 31, 2005, $267,931 was
recorded as an unrealized expense for the change in valuation of the fair value of the warrant.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Stock Options </U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>  During the six months ended March 31, 2005, the Company recorded non-cash compensation expense of $266,963
  for the extension of time to exercise stock options for former employees relating to an aggregate
  of 92,675 shares of common stock. For the three and six months ended March 31, 2005, the Company
  also recognized $1,540 and $3,080 of non-cash compensation expense, respectively, for the value of
  options granted to non-employees. These options were valued in the same manner as described in Note
  4 for employee options. There were no non-cash compensation expenses for the quarter ended March
  31, 2004 or for the six months ended March 31, 2004. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following table summarizes information about stock option activity during the six months ended
March 31, 2005:</FONT></P>
<TABLE width=80% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR valign=Bottom>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=2 nowrap><FONT face="Times New Roman, Times, Serif" size=1>Number of<BR>
      Options</FONT></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><FONT face="Times New Roman, Times, Serif" size=1>Weighted Average<BR>
      exercise price</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Outstanding October 1, 2004</FONT></TD>
    <TD width=1% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>1,839,498</FONT></TD>
    <TD width=4% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 4.68</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;Granted</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>597,500</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 8.28</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Exercised</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(187,862</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(3.43</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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canceled/expired</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>(119,825</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(4.62</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Outstanding March 31, 2005</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>2,129,311</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 5.80</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Exercisable March 31, 2005</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>886,902</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> 3.98</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=2></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=2></TH>
    <TH>&nbsp;</TH>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Options outstanding are exercisable at prices ranging from $2.50 to $10.06 and expire over the period
from 2005 to 2010 with an average life of 3.1 years. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><U>Stock Purchase Warrants </U></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>  The following table summarizes information about warrant activity during the six months ended March
  31, 2005:</FONT></P>
<TABLE width=80% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR valign=Bottom>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1></FONT></TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>Number of<BR>
      Warrants</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>Weighted Average<BR>
      Exercise Price</FONT></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Outstanding October 1, 2004</FONT></TD>
    <TD width=4% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>2,352,802</FONT></TD>
    <TD width=4% align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 3.74</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;Issued</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>425,000</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 8.72</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Exercised</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(394,568</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>( 4.34</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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canceled/expired</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>(75,000</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>(11.00</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>)</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>Outstanding March 31, 2005</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>2,308,234</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 4.31</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TH colspan=2>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=2></TH>
    <TH nowrap>&nbsp;</TH>
    <TH colspan=2 nowrap><HR color=BLACK size=2></TH>
    <TD align=LEFT>&nbsp;</TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>At March 31, 2005, the following stock purchase warrants were outstanding arising from offerings and
other transactions, each exercisable into one common share:</FONT></P>
<P align=center><font size="2">12</font></P>
<HR noshade size=5>

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


<TABLE width=40% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR valign=Bottom>
    <TH><FONT face="Times New Roman, Times, Serif" size=1>Number</FONT></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><FONT face="Times New Roman, Times, Serif" size=1>Exercise<BR>
      Price</FONT></TH>
    <TH>&nbsp;</TH>
    <TH><FONT face="Times New Roman, Times, Serif" size=1>Expiration<BR>
      Date</FONT></TH>
  </TR>
  <TR valign=Bottom>
    <TH><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
    <TH colspan=2><HR color=BLACK size=1></TH>
    <TH>&nbsp;</TH>
    <TH><HR color=BLACK size=1></TH>
  </TR>
  <TR valign=Bottom>
<TD align=RIGHT><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD align=LEFT><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD align=RIGHT><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD align=RIGHT><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD align=LEFT><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD align=right><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR valign=Bottom bgcolor="#EAF9E8">
  <TD width=20% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>655,000</FONT></TD>
  <TD width=15% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
  <TD width=15% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 2.00</FONT></TD>
  <TD width=10% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD align=right><FONT face="Times New Roman, Times, serif" size=2>September 30, 2006</FONT></TD>
</TR>
  <TR valign=Bottom>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>451,880</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 3.01</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>March 31, 2007</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>272,729</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 6.75</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>July 10, 2007</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>100,000</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 4.25</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>September 30, 2007</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>353,625</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 3.25</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>December 31, 2007</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>50,000</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 3.63</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>April 8, 2008</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>75,000</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 8.60</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>December 31, 2009</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>75,000</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 9.28</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>December 31, 2009</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#EAF9E8">
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>275,000</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 8.60</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, serif" size=2>June 14, 2010</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=RIGHT><HR color=BLACK size=1></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=RIGHT><font face="Times New Roman, Times, serif" size=2>2,308,234</font></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=RIGHT><HR color=BLACK size=1></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>12. &nbsp;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.
The Company&#146;s operations are organized 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 Commercial Products Group (Commercial Group) markets
and licenses HSS and NeoPlanar sound products to companies that employ audio in consumer, commercial
and professional applications. The Government and Force Protection Systems Group (Government Group)
markets LRAD, NeoPlanar, Sound Cluster and HSS sound products to government and military customers
and to the expanding force protection and commercial security markets. 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 accounting policies of the segments are the same as those described in the summary of significant
accounting policies. The Company does not allocate operating expenses or assets between its two reportable
segments. Accordingly the measure of profit for each reportable segment is gross profit.</FONT></P>
<TABLE width=80% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR align="center" valign=Bottom>
    <TD><B><FONT face="Times New Roman, Times, serif" size=1>&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=5><B><FONT face="Times New Roman, Times, serif" size=1>Three Months Ended<BR>
      March 31,</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=5><B><FONT face="Times New Roman, Times, serif" size=1>Six Months Ended<BR>
      March 31,</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
  </TR>
  <TR align="center" valign=Bottom>
    <TD><B><FONT face="Times New Roman, Times, serif" size=1>&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2005</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2004</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2005</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2004</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></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 size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT bgcolor="#EAF9E8"><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=2% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, serif" size=2>&nbsp;&nbsp;Commercial Products Group</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> 109,523</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 455,156</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 296,872</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 537,095</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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 size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>2,707,870</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>1,038,094</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>6,929,434</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>1,730,933</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 2,817,393</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 1,493,250</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 7,226,306</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 2,268,028</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
</TABLE>
<br>
<TABLE width=80% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR align="center" valign=Bottom>
    <TD><B><FONT size=1 face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=5><B><FONT size=1 face="Times New Roman, Times, serif">Three Months Ended<BR>
  March 31,</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=5><B><FONT size=1 face="Times New Roman, Times, serif">Six Months Ended<BR>
  March 31,</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
</TR>
  <TR align="center" valign=Bottom>
    <TD><B><FONT size=1 face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT size=1 face="Times New Roman, Times, serif">2005</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT size=1 face="Times New Roman, Times, serif">2004</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT size=1 face="Times New Roman, Times, serif">2005</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT size=1 face="Times New Roman, Times, serif">2004</FONT></B></TD>
    <TD><B><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></B></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>Gross Profit (Loss):</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=2% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, serif" size=2>&nbsp;&nbsp;Commercial Products Group</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> (408,137</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> (73,180</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> (612,433</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> (76,792</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 size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>1,771,564</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>621,206</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>4,857,070</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>991,118</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 1,363,427</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 548,026</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 4,244,637</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 914,326</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=BLACK size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
    <TD colspan=3></TD>
  </TR>
</TABLE>
<B></B>
<P align=center><font size="2">13</font></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>13. &nbsp;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; 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 three cases were consolidated upon motion by the defendants and order of the court. The defendants
filed a cross-action in the consolidated action 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
Company filed its answer to the second amended cross-complaint in August 2004. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In April 2005, the Company, ESI and its two principals entered into a Settlement Agreement and Mutual
Release. As part of the settlement, the Company agreed to pay $150,000, which was previously recorded
as a general and administrative expense, and to issue 17,500 shares of common stock to ESI, for which
the fair market value as of April 27, 2005 was $140,175, which was recorded in the quarter ended
March 31, 2005 as a general and administrative expense. In addition, Mr. Endsley and Mr. Paschall
will be entitled to receive an aggregate commission equal to 1% of net sales from April 1, 2005 to
September 28, 2007, of the Company&#146;s HSS products specifically targeted for use in North America
in the point of sale/purchase, kiosk, display, event, trade show and exhibit markets, subject to
a maximum aggregate commission of $500,000. The Company also granted the recipients of the shares
&#147;piggyback&#148; rights to have their shares included on future registration statements that
the Company might file.</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>14. &nbsp;INCOME TAXES </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>At March 31, 2005, 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, 2004 the Company had for federal income tax purposes net operating loss
carryforwards of approximately $37,400,000, which expire through 2025 of which certain amounts are
subject to significant limitations under the Internal Revenue Code of 1986, as amended.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following discussion should be read in conjunction with the accompanying unaudited interim financial
statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together
with Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations included
in the Company&#146;s Annual Report on Form 10-K for the year ended September 30, 2004.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following discussion provides an overview of our results of operations for the three and six months
ended March 31, 2005 and 2004. Significant period-to-period variances in the statements of operations
are discussed under the caption &#147;Results of Operations.&#148; Our financial condition and cash
flows are discussed under the caption &#147;Liquidity and Capital Resources.&#148;</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><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 future
  performance. Words such as</I> &#147;<I>expects,</I>&#148; <I>&#147;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. We believe our innovative
proprietary sound technologies provide us a significant competitive advantage in our principal markets.
We believe we are the leader in developing and commercializing parametric loudspeakers, branded as
HyperSonic&#174; sound or HSS&#174;. We believe we are also the leader in developing and commercializing
high intensity directed acoustical devices, branded as our Long Range Acoustic Device or LRAD&#153;.
We have filed over 70 patent applications in the United States, and over 90 patent applications internationally
covering our various sound technologies and products. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We make significant investments in research and development to expand our technology and product portfolio.
We are expanding our LRAD product family, introducing a new NeoPlanar product line for emergency
notification and general announcement markets which require high intelligibility, and utilizing
our products to provide solutions for difficult acoustic challenges. We offer our products for sale
worldwide, but expect our largest markets to be the United States, Europe and Asia. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our four major products from our technology portfolio are listed below. </FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD valign=top width=30>
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Our HyperSonic sound, or HSS, technology is a new parametric speaker technology that creates sound &#147;in the air.&#148; Sound is generated along an air column using ultrasonic frequencies, which
are 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 our substantial intellectual
property portfolio and pioneering HSS products support our leadership position in the field of parametric
non-linear acoustics for sound reproduction, as we continue to improve and release higher reliability,
lower distortion and higher output level models of our HSS products.</FONT></P></TD>
</TR>
<TR>
<TD valign=top width=30><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=30>
<P><FONT size="2" face="Times New Roman, Times, serif">&#149;</FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Our Long Range Acoustic Device, or LRAD, technology produces variable intensity acoustical sound intended
for use in long-range delivery of directional sound information, which is effectively a supercharged
megaphone. LRAD products are designed and used as directed long-range hailing and warning systems
by both government and commercial customers. We believe our LRAD product innovation, our growing
engineering capabilities, and our manufacturing and marketing competencies have established us as
the leader in this new marketplace. We are marketing LRAD throughout the U.S. Department of Defense
as &#147;The Sound of Force Protection&#153;&#148;, and our markets are expanding to include law
enforcement and commercial customers with significant security concerns. In fiscal 2004, we developed
a remote controlled pan/tilt version of LRAD for critical infrastructure force protection applications,
and we demonstrated our competency to engineer additional new sound solutions for the U.S. Department
of Defense. We plan to introduce in the summer of 2005 a new Medium Range Acoustic Device (MRAD<SUP>TM</SUP>). MRAD will be about half the size and weight of LRAD, and provide effective hailing and warning at
approximately half the range of LRAD. MRAD is expected to be particularly effective on armored vehicles
for urban warfare, shorter-range checkpoints and access denial, plus multiple applications for local,
national and international law enforcement.</FONT></P></TD>
</TR>
<TR>
<TD valign=top width=30><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=30>
<P><FONT size="2" face="Times New Roman, Times, serif">&#149;</FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Our NeoPlanar&#174; technology is a thin film magnetic speaker that produces sound of high quality,
low distortion and high volume. NeoPlanar applications include high-end sound, emergency notification
and public address systems. In fiscal 2004, we began marketing NeoPlanar for use in large indoor
spaces and in outdoor environments for emergency notification. NeoPlanar offers customers a new capability
by delivering remarkably intelligible communications in difficult spaces such as aircraft hangar
bays and at distances up to one-half mile. </FONT></P></TD>
</TR></TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>15</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=30></TD>
<TD valign=top></TD></TR>
<TR>
<TD valign=top width=30>
<P><FONT size="2" face="Times New Roman, Times, serif">&#149;</FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Our SoundCluster&#153; technology is a new multi-element speaker cluster optimized for even sound coverage
over large areas. Our SoundCluster product offers an improved level of intelligibility and clarity
in high ambient noise environments. The SoundCluster satisfies flight deck safety and large area
emergency notification requirements. The flexible and ruggedized SoundCluster design lends itself
to installation in harsh environments, where conventional speakers may fail. During fiscal 2004,
we deployed the first SoundCluster for use on a U.S. naval warship. </FONT></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>We believe we are uniquely equipped to provide our technologies and products in rapidly growing markets
for new sound applications not currently served by conventional sound devices and as an alternative
to conventional loudspeakers. We believe market factors such as the rapid growth of plasma and flat
panel screens offer significant growth opportunities for our HSS focused sound solutions. We also
believe that the growth in defense and homeland security and related protection spending by commercial
customers provides a growing market for our sound products to be used for intelligible communication
over long distances. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our primary products sold to date have been LRAD and HSS products. These products are currently manufactured
for us by Pemstar, Inc., an established contract manufacturer with multiple locations worldwide.
Our sales have been highly dependent on large orders from a few customers. We target our products
for sale worldwide, but expect the largest markets to be the U.S., Europe and Asia. To date, our
sales have been made in U.S. Dollars and we do not expect currency fluctuations to have a material
impact on our operations.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Overall Performance</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our second fiscal quarter, ended March 31, 2005, showed
a substantial increase in revenues over the same
period in the prior fiscal year. However, due to significant increases in
operating expenses for the quarter, net loss for the fiscal quarter ended March 31, 2005 was higher than for the same period
in the prior fiscal year. Our revenues for the three months ended March 31, 2005 were $2,817,393,
compared to $1,493,250 for the three months ended March 31, 2004, an increase of 89%. Our gross profit
for the three months ended March 31, 2005 was 48% of revenues, compared to 37% of revenues for the
comparable period in the prior fiscal year. We recorded a gross profit of $1,363,427 for the three months ended March 31, 2005, which was higher than the gross profit of $548,026 for the three months ended March 31, 2004. Operating
expenses increased from $1,723,720 for the three months ended March 31, 2004 to $3,546,429
for the three months ended March 31, 2005. In addition, for the three months
ended March 31, 2005, there was a non-cash gain on derivative
revaluation of $682,210 associated with the decrease in
value of the warrant we issued to Kingsbridge Capital, and for the six months
ended March 31, 2005 there was a non-cash expense of $267,931 associated with
the increase in value of the same warrant. There were no corresponding entries for the same
periods in the prior fiscal year. Our net loss increased from $1,165,196 for the three months ended
March 31, 2004 to $1,613,016 for the three months ended March 31, 2005.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We are continuing to focus our efforts on near-term revenue and gross margin improvement from our existing,
marketable products. We have filled key management and operations positions and increased personnel
in our sales and marketing and engineering departments. While new hires have necessarily resulted
in increased expenses, we believe these new hires are important to near-term
revenue and gross margin improvements. We are currently focusing our resources primarily on sales,
marketing, engineering and production of existing products. We are closely monitoring expenses for
our Advanced Development department, charged with development of new products. Our policy is to establish
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.&nbsp; See &#147;Business Risks&#148; below.</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><B>Recent Developments </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In April 2005, we entered into a Settlement Agreement and Mutual Release with eSoundIdeas, Inc., its
two principals and a related partnership, which we refer to collectively as the ESI Parties. Pursuant
to the Settlement Agreement, we and the ESI Parties settled litigation arising out of a dispute regarding
a license and marketing agreement that we terminated in May 2003, and regarding stock options issued
to each of the principals in April 2001 which expired unexercised following termination of consulting
services provided to us by these principals. As part of the settlement, the Company agreed to pay
$150,000, which was previously recorded as a general and administrative expense, and to issue 17,500
shares of common stock to the ESI Parties, for which the fair market value as of April 27, 2005 was
$140,175, which was recorded in the quarter ended March 31, 2005 as a general and administrative expense.
We granted the recipients of these shares &#147;piggyback&#148; rights to have their shares included
on future registration statements that we might file. In addition, the ESI
Parties will be entitled to receive an aggregate commission equal to 1% of net
sales from April 1, 2005 to September 28, 2007, of our HSS products specifically targeted for use in North America in the point of
sale/purchase, kiosk, display, event, trade show and exhibit markets, subject to a maximum aggregate
commission of $500,000. We and the ESI Parties have executed a mutual release of claims, and have
agreed to dismiss with prejudice the pending litigation among us.</FONT></P>
<P><font face="Times New Roman, Times, Serif" size="2">In May 2005, Carl
Gruenler, Vice President, Government and Force Protection Systems Group, left
our company. Kalani Jones, President and Chief Operating Officer, will assume
Mr. Gruenler's duties in the interim until we locate a replacement for Mr.
Gruenler.</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. Our accounting policies are more fully described in our financial statements
located in Item 1 of Part I, &#147;Financial Statements.&#148;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The methods, estimates and judgments we use in applying our accounting policies, in conformity with
generally accepted accounting principles in the United States, have a significant impact on the results
we report in our financial statements. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. The estimates affect
the carrying values of assets and liabilities. Actual results may differ from these estimates under
different assumptions or conditions. We believe that the following discussion addresses our most
critical accounting policies, which are those that are most important to the portrayal of our financial
condition and results of operations and require our most difficult, subjective, and complex judgments,
often as a result of the need to make estimates about the effect of matters that are inherently uncertain.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Revenue Recognition.</I> &nbsp;We currently derive our revenue primarily from two sources: (i) component and product sale revenues
and associated engineering and installation, which we refer to collectively as Product Sales and
(ii) contract and license fee revenue. Product Sales revenues are recognized in the periods that
products are shipped to customers, FOB shipping point or destination, when 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 generally 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>Valuation of Intangible Assets.</I> &nbsp;Intangible assets include purchased technology and patents, which are amortized over their estimated
useful lives. We must make judgments and estimates regarding the future utility and carrying value
of intangible assets. The carrying values 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. In fiscal 2004, we reviewed the carrying value of our intangible
assets and reduced the carrying value of these assets by $37,798. Our judgments and estimates regarding
carrying value and impairment of intangible assets have an impact on our financial statements.</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><I>Warranty Reserve.</I> &nbsp;We establish a warranty reserve based on anticipated warranty claims at the time product revenue
is recognized. These warranties require us to make estimates regarding the amount and costs of warranty
repairs we expect to make over a period of time. 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. See Note
9 to our financial statements for additional information regarding warranties. The estimates we use
have an impact on our financial statements. In the three and six months ended March 31, 2005, we
recorded a net warranty reduction of $158,886 and $76,723, respectively, as a result
of the following: 1) we reduced the warranty reserve that we had previously established in fiscal
2003 for HSS Generation 1 products, primarily as a result of the expiration of
time to return failed HSS Generation 1 product to the company for replacement, and 2) we recorded a warranty provision for current sales
of all products.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><EM>Derivative Instruments. </EM>We account for the warrant issued in December 2004 in conjunction with the Committed Equity Financing
Facility with Kingsbridge Capital Limited as a derivative financial instrument. As a derivative,
the fair value of the warrant is recorded as a liability in the balance sheet and changes in the
fair value of the warrant are recognized as other income or expense during each period. The fair
value of the warrant is expected to change primarily in response to changes in our stock price. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Significant increases in the fair value of our stock could give rise to significant expense in the
period of the change. Likewise, a reduction in our stock price could give rise to significant income
in the period of the change. The warrant liability will be reclassified to equity as of the effective
date of the related registration statement, or upon the exercise of the warrant.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Guarantees and Indemnifications</I>. Under our bylaws, we have agreed to indemnify our officers and directors for certain events. We also
enter into certain indemnification agreements in the normal course of our business. We have no liabilities
recorded for such indemnities.</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 asset as management
has not determined that it is more likely than not that the deferred tax asset will not be realized.
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. Congress passed the American Jobs Creation
Act of 2004 in October 2004. The new law contains numerous changes to existing tax laws, including
both domestic and foreign tax incentives. We have not yet determined what impact, if any, this new
law may have on our deferred tax asset, or our future results of operations and financial condition.</FONT></P>
<P><font face="Times New Roman, Times, Serif" size="2"><i>Legal Proceedings.</i>
We are currently involved in certain legal proceedings. We estimate the range of
liability relating to pending litigation, where the amount and range of loss can
be estimated. We record our best estimate of a loss when the loss is considered
probable. Where a liability is probable and there is a range of estimated loss
with no best estimate in the range, we record the minimum estimated liability
related to the claim. As additional information becomes available, we assess the
potential liability related to our pending litigation and revise our estimates.</font></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Valuation of Inventory. </I>Our inventory is comprised of raw materials, assemblies and finished products that we intend to sell
to our customers<I>. </I>We must periodically make judgments and estimates regarding the future utility and carrying value of
our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any,
are recognized when the expected future benefit from our inventory is less than its carrying value.
In the quarter ended March 31, 2005, we reviewed the carrying value of our inventory and increased
the reserve for obsolescence to $349,986, primarily for raw materials and finished goods that were
used on our older HSS products for which there is anticipated to be reduced demand.</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 for the six months ended March 31, 2005 were $7,226,306, which was a 219% increase over the
$2,268,028 in revenues for the six months ended March 31, 2004. Revenues for the six months ended
March 31, 2005 and March 31, 2004 included $7,161,206 and $2,111,834 of product sales, and $65,100
and $156,194 of contract and license revenues, respectively. The increase in product sales was primarily due to
increased sales of LRAD products by our Government Group. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Revenues for the three months ended March 31, 2005 were $2,817,393, which was an 89% increase over
the $1,493,250 in revenues for the three months ended March 31, 2004. Revenues for the three months
ended March 31, 2005 included $2,814,293 of product sales and $3,100 of contract and license revenues.
Revenues for the three months ended March 31, 2004 consisted entirely of product sales. The increase
in revenues was primarily due to increased sales of LRAD products by our Government Group.</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>At March 31, 2005, we had $300,000 in deferred revenue or deposits for existing contracts, agreements
and licenses.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We have only a limited record of recurring sales, so we do not consider order backlog to be an important
index of future performance at this time. Our backlog is affected by the timing of large orders and
order deliveries, especially to government customers. Our order backlog was approximately $128,017
at March 31, 2005 and approximately $600,000 at March 31, 2004. 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>Our Commercial Products Group, or Commercial Group, markets and licenses HSS and NeoPlanar products
to companies, which employ audio in consumer, commercial and professional applications. Our Government
and Force Protection Systems Group, or Government Group, markets LRAD, NeoPlanar, SoundCluster and
HSS products to government and military customers and to the expanding force protection and commercial
security markets.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Presented below is a summary of revenues by business segment:</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>
</FONT>
<TABLE width=80% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR align="center" valign=Bottom>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=5><B><font size="1" face="Times New Roman, Times, serif">Three Months Ended<br>
  March 31, </font></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=5><B><font size="1" face="Times New Roman, Times, serif">Six Months Ended <br>
  March 31, </font></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
</TR>
  <TR align="center" valign=Bottom>
    <TD><B><FONT face="Times New Roman, Times, serif" size=1>&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2005</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2004</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2005</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2004</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></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>
    <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>Revenues:</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=2% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, serif" size=2>&nbsp;&nbsp;Commercial Products Group</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> 109,523</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 455,156</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 296,872</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 537,095</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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 size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>2,707,870</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>1,038,094</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>6,929,434</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>1,730,933</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 2,817,393</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 1,493,250</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 7,226,306</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 2,268,028</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Commercial Group revenues for all reported periods consisted primarily of HSS and Neoplanar product
sales. The decrease in Commercial Group revenues for the three and six months ended March 31, 2005
compared to the comparable prior fiscal periods was due to a shift in marketing focus from
multiple small volume sales to pursuit of high volume contracts which require
much longer sales cycles.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Government Group revenues for all reported periods&nbsp;consisted primarily of sales of LRAD and, NeoPlanar
products and engineering services such as installation design and support. These
revenues are 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 three and six months ended March 31, 2005 were $2,707,870 and
$6,929,434 respectively, and consisted primarily of LRAD product sales and
engineering services. Government Group sales for the three and six month periods
ended March 31, 2004 were $1,038,094 and $1,730,933, respectively, and consisted
primarily of LRAD and NeoPlanar product sales and engineering services.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>For the six months ended March 31, 2005, sales to one customer in the Government Group accounted for
82% of total revenues and sales to a second customer in the Government Group, including affiliates
of the customer, accounted for 10% of total revenues. For the three months ended March 31, 2005,
sales to one customer in the Government Group accounted for 93% of total revenues. For the six months
ended March 31, 2004 sales to two customers in the Government Group accounted for 41% and 32% of
total revenues, respectively, and sales to one customer in the Commercial Group accounted for 11%
of total revenues. For the three months ended March 31, 2004, sales to one customer in the Government
Group accounted for 62% of total revenues, and sales to one customer in the Commercial Group accounted
for 17% of total revenues. The loss of any one of these significant customers would
have a material adverse effect on our results of operations and financial condition.</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><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=80% border=0 align="center" cellpadding=0 cellspacing=0>
  <TR align="center" valign=Bottom>
    <TD><B><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></B></TD>
    <TD colspan=5><B><font size="1" face="Times New Roman, Times, serif">Three Months Ended<br>
  March 31, </font></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=5><B><font size="1" face="Times New Roman, Times, serif">Six Months Ended <br>
  March 31, </font></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
</TR>
  <TR align="center" valign=Bottom>
    <TD><B><FONT face="Times New Roman, Times, serif" size=1>&nbsp;&nbsp;</FONT></B></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2005</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2004</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2005</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2><B><FONT face="Times New Roman, Times, serif" size=1>2004</FONT></B></TD>
    <TD><FONT size="1" face="Times New Roman, Times, serif"><B>&nbsp;&nbsp;</B></FONT></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>
    <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>Gross Profit (Loss):</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT bgcolor="#eaf9e8"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT bgcolor="#eaf9e8"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=3% align=LEFT bgcolor="#eaf9e8"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, serif" size=2></FONT></TD>
    <TD width=2% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT face="Times New Roman, Times, serif" size=2>&nbsp;&nbsp;Commercial Products Group</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> (408,137</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> (73,180</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>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> (612,433</FONT></TD>
    <TD align=LEFT><FONT face="Times New Roman, Times, serif" size=2>)</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> (76,792</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 size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>1,771,564</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>621,206</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>4,857,070</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>991,118</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=1></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 1,363,427</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 548,026</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 4,244,637</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, serif" size=2> 914,326</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD colspan=2 align=RIGHT><HR color=black size=2></TD>
    <TD><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
</TABLE>
<P align="left"><FONT face="Times New Roman, Times, Serif" size=2>The overall gross profit for the six months ended March 31, 2005 was $4,244,637, or 59% of revenues,
compared to gross profit of $914,326 or 40% of revenues for the comparable period of the prior fiscal
year. The significant improvement in gross profit as a percentage of revenues reflected improved
gross profit in our Government Group, offset in part by increased gross losses in our Commercial
Group.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The overall gross profit for the three months ended March 31, 2005 was $1,363,427 or 48% of revenues,
compared to gross profit of $548,026 or 37% of revenues for the comparable period of the prior fiscal
year. Gross profit as a percentage of revenues improved over the comparable period of the prior fiscal
year as a result of improved gross profit in our Government Group, offset in part by increased gross
losses in our Commercial Group.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We experienced gross losses
in our Commercial Group for the three and six months ended March 31, 2005 of
$408,137 and $612,433 respectively, as limited sales were not sufficient to absorb fixed manufacturing
overhead costs and substantial reserves were taken for obsolete and slow moving inventory
particularly for our older HSS products. For the
three and six months ended March 31, 2004, we had gross losses in our Commercial Group of $73,180
and $76,292 respectively, primarily as a result of limited sales compared to fixed overhead and warranty
costs. During fiscal year 2003 and fiscal 2004 we changed our HSS Generation 1 emitter design to
eliminate the requirement for a vacuum in the emitter, and we improved film quality. During fiscal
2004, we made further raw material improvements in the electronics and the manner in which the film
and emitters are produced. We believe that future generations of our products will be more reliable.
We expect that warranty costs will decrease in fiscal 2005, and that as the volume of HSS product
sales grow, we will achieve positive gross margins in future periods.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Gross profit for our Government Group for the three and six months
ended March 31, 2005,
was $1,771,564 and $4,857,070 respectively compared to $621,206 and $991,118 for the three and six months ended March 31, 2004. Gross profit percentage continues to be highly dependent
on sales prices, volumes, purchasing costs and overhead allocations. Our various sound products have
different margins, so product sales mix will materially affect gross profits. In addition, we continue
to make model updates and changes including raw material and component changes, which change product
costs. We therefore do not believe that historical gross profit margins should be relied upon as
an indicator of future gross profit margins.</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 revenues were 57% for the six months
  ended March 31, 2005 compared to 95% for the six months ended March 31, 2004. These costs for the six
  months ended March 31, 2005 totaled $4,089,951, which represents an increase from selling general and administrative expenses of $2,151,786 for the six months ended March 31, 2004. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The overall increase for the six months ended March 31, 2005 included the following:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$581,029 increase in personnel and related expenses due to increases in headcount and salaries.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$213,180 increase in commission expenses resulting from increased sales in our Government Group.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$539,399 increase in legal expense related to the litigation which settled in April 2005, and increased
legal costs of public company compliance.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$210,116 increase in travel and entertainment and marketing expenses as a result of increased sales
efforts.</FONT></TD>
</TR></TABLE>
<P align=center><font size="2">20</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><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$95,537 increase in insurance expenses.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$69,724 increase in depreciation expenses due to an increase in depreciable capital assets.</FONT></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Selling, general and administrative expenses as a percentage of sales were 74% for the three months
ended March&nbsp;31, 2005 compared to 72% for the three months ended March&nbsp;31, 2004. These costs
for the three months ended March&nbsp;31, 2005 totaled $2,094,036, which represents an increase from selling, general and administrative expenses of $1,079,472 for the three months ended
March&nbsp;31, 2004. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The overall increase for the three months ended March 31, 2005 included the following: </FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$192,213 increase in personnel and related expenses due to increases in headcount and salaries. </FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$474,586 increase in legal expense related to the litigation which settled in April 2005, and increased
costs of public company compliance. </FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$106,841 increase in travel and entertainment and other marketing related expenses as a result of increased
sales.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$87,343 increase in insurance expenses.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$44,225 of increased consulting expenses.</FONT></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>We expect selling, general and administrative expenses to increase in future periods as we increase
our marketing efforts for our proprietary sound technologies. We will also incur substantial additional
expense over the remainder of fiscal 2005 to improve and document our internal control over financial
reporting in anticipation of management&#146;s required assessment of the effectiveness of our internal
control over financial reporting and the attestation of such assessment by our independent registered
public accounting firm, required by Section 404 of the Sarbanes-Oxley Act of 2002 in connection with
our report on Form 10-K for the fiscal year ending September 30, 2005.</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 increased by $1,819,789 from $1,093,219 for the six months ended
  March 31, 2004 to $2,913,008 for the six months ended March 31, 2005. Research and development expenses
  as a percentage of sales were 40% for the six months ended March 31, 2005 compared to 48% for the
  six months ended March 31, 2004. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The overall increase for the six months ended March 31, 2005 included the following:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$997,520 increase in personnel and related costs as we significantly increased our engineering design
and development capability.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$245,183 non-cash expense associated with the modification of stock options
for departing employees.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$538,239 increase for prototypes and other parts relating to our continuing effort to design and develop
new and more reliable products.</FONT></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Research and development expenses increased by $808,145 from $644,248
for the three months ended March 31, 2004 to $1,452,393 for the three
months ended March&nbsp;31, 2005. Research and development expenses as a percentage of sales were
52% for the three months ended March&nbsp;31, 2005 compared to 43% for the three months ended March&nbsp;31,
2004. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The overall increase for the three months ended March 31, 2005 included the following:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$479,382 increase in personnel and related costs, as we significantly increased our engineering design
and development capability.</FONT></TD>
</TR>
<TR>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD valign=top width=24><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$59,712 decrease for consulting expenses.</FONT></TD>
</TR></TABLE>
<P align=center><font size="2">21</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><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width=24><FONT face="Times New Roman, Times, serif" size=2>&#149;</FONT></TD>
<TD valign=top><FONT face="Times New Roman, Times, serif" size=2>$320,555 increase for prototypes and other parts relating to our continuing effort to design and develop
new and more reliable products.</FONT></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Research and development expenses 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 research and development expenses for the remainder of fiscal 2005
to be higher than the corresponding periods of fiscal 2004. </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>  Loss from operations was $2,758,322 for the six months ended March&nbsp;31, 2005 compared to $2,330,679
  for the six months ended March&nbsp;31, 2004. The increase in loss from operations
was due to a $3,757,954
  increase in total operating expenses, offset in part by an increase of $3,330,311 in gross profit.
Losses from operations are expected to continue in the
current fiscal year.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Loss from operations was $2,183,002 for the three months ended March&nbsp;31, 2005 compared to $1,175,694
for the three months ended March&nbsp;31, 2004. The increase in loss from operations reflected a
$1,822,709 increase in total operating expenses, offset in part by an increase of $815,401 in gross
profit. </FONT></P>
<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>  We recorded $569,986 of other income and $381,544 of other expense for the three and six months ended March&nbsp;31,
  2005, compared with $10,498 and $29,056 of other income for the three and six months ended March&nbsp;31,
  2004. Other income for the three months ended March 31, 2005 included $682,210 of non-cash derivative
  revaluation income related to the decrease in the fair value during the three months ended March
  31, 2005 of the warrant issued to Kingsbridge Capital Limited. Other expense for the six months ended
  March 31, 2005 included $267,931 of non-cash derivative revaluation expense related to the increase
  in the fair value of such warrant measured from the issuance date of December 14, 2004 to March 31,
  2005. We also incurred interest expense of $130,631 and $142,961 and recognized $18,407 and $29,348
  of interest income from invested cash balances during the three and six months ended March&nbsp;31,
  2005. During the three and six months ended March&nbsp;31, 2004, we recorded interest expense of
  $993 and $1,809, respectively, and $11,491 and $30,865, respectively, of interest income 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>  Net loss for six months ended March&nbsp;31, 2005 was $3,139,866 compared to net loss of $2,301,623
  for the six months ended March&nbsp;31, 2004. Net loss for the three months ended March&nbsp;31, 2005
  was $1,613,016 compared to net loss of $1,165,196 for the three months ended March&nbsp;31, 2004.
  The increase in net loss during the 2005 periods resulted primarily from higher operating expenses,
  offset in part by increases in gross margins. The non-cash derivative revaluation expense recorded
  for the three and six months ended March 31, 2005 contributed to increased net loss for the six month
  period and reduced the net loss for the three month period.</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 outstanding during
each period. The imputed deemed dividends were 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 $1,518,651 and $1,796,426 for the three
and six months ended March&nbsp;31, 2005, and $406,846 and $700,551 for the three and six months
  ended March&nbsp;31, 2004. Accordingly, the net loss available to common stockholders was $3,131,667
  and $4,936,292 for the three and six months ended March&nbsp;31, 2005, and $1,572,042 and $3,002,174
  for the three and six months ended March&nbsp;31, 2004.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>On January 18, 2005, we gave notice to all holders of Series D and Series E Preferred Stock that we
had elected to convert the shares of Series D and Series E Preferred Stock to common stock. All 50,000
issued and outstanding shares of Series D Preferred Stock converted into an aggregate of 129,259
shares of common stock on the date of notice, and all 233,250 issued and outstanding shares of Series
E Preferred Stock converted into an aggregate of 801,306 shares of common stock on February 1, 2005.
As all the Series D and Series E Preferred Stock was called for conversion as described above, $1,504,711
was accreted in the second fiscal quarter, in addition to the accretion of
$13,940 at the stated rate of 6%, and increased the net loss available to common stockholders.</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>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 proprietary sound technologies. Our net cash used in operating activities was $1,712,084
for the six months ended March 31, 2005 compared to $3,658,752 for the six months ended March 31,
2004. For the six months ended March 31, 2005, the net loss of $3,139,866 included certain expenses
not requiring the use of cash totaling $1,012,080. For the six months ended March 31, 2005, cash
was used in operating activities through an increase of $493,601 in inventory, an increase of $29,773
in prepaid expenses and an increase of $16,357 in warranty payments. Cash was provided in operating
activities through a decrease of $432,244 in accounts receivable, an increase of $523,189 in accounts
payable and accrued liabilities.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>At March 31, 2005, we had accounts receivable of $494,503 as compared to $926,747 at September 30,
2004. The balance at March 31, 2005 represented approximately 35 days of revenues. One customer accounted
for 56% of accounts receivable and two other customers accounted for 21% and 14% of accounts receivable
at March 31, 2005, No other customer accounted for more than 10% of accounts receivable at March
31, 2005. Terms with individual customers vary greatly. We typically require pre-payment or a maximum
of thirty-day terms for our proprietary sound technology 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 six months ended March 31, 2005 and March 31, 2004 we used cash of $355,995 and $104,765, respectively
for the purchase of equipment and software and made investments of $144,420 and $204,819, respectively
in patents and new patent applications. We anticipate a continued investment in patents for the balance
of fiscal 2005. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Cash from financing
activities provided $4,195,940 and $697,540 for the six months ended March 31,
2005 and March 31, 2004. During the six months ended March 31, 2005, we received $2,000,000 from
the sale of unsecured promissory notes, $1,661,277 from the exercise of common stock warrants and
$643,802 from the exercise of stock options. During the six months ended March 31, 2004, we received
$50,000 from the exercise of common stock warrants and $653,202 from the exercise of common stock
options.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>At March 31, 2005, we had working capital of $4,690,763 compared to working capital of $3,472,984 at
September 30, 2004.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In December 2004, we sold for cash in a private offering an aggregate of $2,000,000 of unsecured subordinated
promissory notes due December 31, 2006. In connection with the financing, we also issued five-year
warrants to purchase an aggregate of 150,000 shares, 75,000 of which have an exercise price of $9.28
per share, and 75,000 of which have an exercise price of $8.60 per share. A trust affiliated with
Elwood G. Norris, our Chairman and the beneficial owner of 19.5% of our common stock before the financing,
purchased a note in the principal amount of $500,000 and received a warrant exercisable for 37,500
shares with an exercise price of $9.28 per share.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In December 2004, we entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital
Limited, pursuant to which Kingsbridge committed, subject to certain significant limiting conditions,
to purchase up to $25 million of our common stock to support future growth. As part of the arrangement,
we issued a warrant to Kingsbridge to purchase 275,000 shares of our common stock at a price of $8.60
per share. The warrant is exercisable beginning six months after the date of grant and for a period
of five years thereafter. Subject to certain conditions and limitations, from time to time under
the CEFF, we may require Kingsbridge to purchase newly-issued shares of our common stock at a price
that is between 88% and 92% of the volume weighted average price during a 15 day purchase period,
and thereby raise capital as required, at the time, price and in the amounts deemed suitable to us.
For each election to sell shares to Kingsbridge, we select the lowest threshold price at which our
stock may be sold, but the threshold price cannot be lower than $3.00 per share. Our agreement with
Kingsbridge permits Kingsbridge to terminate the CEFF if Kingsbridge determines that a material and
adverse event has occurred affecting the business, operations, properties or financial condition
of our company, or if any situation occurs that would interfere with our ability to perform any of
our obligations under the agreement.</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>The CEFF requires us to have a resale registration statement filed within 45 days of entering into
the CEFF, and to use commercially reasonable efforts to have such registration statement declared
effective by the Securities and Exchange Commission (SEC) within 45 days or 120 days of filing, depending
on whether the SEC elects to review the registration statement. The required registration statement
was filed in January 2005. The resale statement has not yet been declared effective. We cannot elect
to sell shares to Kingsbridge until the registration statement is effective.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In certain instances, we may be required to pay liquidated damages or other amounts resulting from
the unavailability of a registration statement. For further details, see &#147;Business Risks&#148;
below.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Based on such factors as market conditions, financing needs and the time required for the SEC to declare
the resale registration statement effective, we currently expect that we may begin to utilize the
CEFF during fiscal 2005 in order to fund working capital requirements. However, the timing and extent
of our ability to utilize the CEFF is uncertain. We are obligated to use 40% of the proceeds we may
receive from the CEFF to prepay any outstanding interest and principal on the notes sold in December
2004. Under the rules of the Nasdaq Stock Market, the maximum number of shares we may sell to Kingsbridge
without approval of our stockholders is 3,684,782, which includes any shares we may issue in lieu
of paying liquidated damages, but excludes the warrant shares. This limitation may further reduce
the amount of proceeds we are able to obtain from the CEFF. We agreed to pay to a consultant a finder
fee equal to 4% of the first $5 million raised under the CEFF, 3% for the second $5 million raised
under the CEFF, 2% for the third $5 million raised under the CEFF, and 1.5% for any additional amounts
raised under the CEFF. See &#147;Business Risks&#148; below for a discussion of other risks associated with the CEFF.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Other than cash, cash equivalents and the CEFF, we have no other unused sources of liquidity at this
time. We expect to incur additional operating losses as a result of expenditures for research and
development and marketing costs for our sound products and technologies. The timing and amounts of
these expenditures and the extent of our operating losses will depend on many factors, some of which
are beyond our control. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Principal factors that could affect the availability of our internally generated funds include:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">government spending levels; </FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width="92%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">introduction of competing technologies; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">failure of sales from our Government Group and Commercial Group to meet planned projections; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">product mix and effect on margins; and </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">product acceptance in new markets. </FONT></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Principal factors that could affect the availability to obtain cash from external sources include:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">inability to have the registration statement required by the CEFF declared effective by the SEC; </FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width="92%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">decrease in the market price of our common stock, which may render the CEFF unavailable (if the purchase
price under the CEFF would be less than $3.00 per share), or which may make the CEFF a less attractive
funding source.; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">our failure to satisfy other required conditions for use of the CEFF; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the trading volume of public trading of our common stock; and </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">overall market conditions. </FONT></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Based on our cash position, and assuming currently planned expenditures and level of operations, we
believe we will have sufficient cash for operations for the next twelve months. We believe increased
sales of LRAD, HSS and, to a lesser extent, NeoPlanar products will continue to contribute cash in
fiscal 2005. We believe that any investment capital we may require will be available to us, but there
can be no guarantee that we will be able to raise funds on terms acceptable to us, or at all. We
have 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 align=center><font size="2">24</font></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Contractual Commitments and Commercial Commitments </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The following table summarizes our contractual obligations at March 31, 2005, 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>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH colspan=8><font size="1" face="Times New Roman, Times, serif">Less than 1</font></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH colspan=2><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH><FONT face="Times New Roman, Times, serif" size=1>After 5 </FONT></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
  </TR>
  <TR valign=Bottom>
    <TH><FONT face="Times New Roman, Times, serif" size=1>Contractual Obilgations</FONT></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH colspan=2><FONT face="Times New Roman, Times, serif" size=1>Total</FONT></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH colspan=2><FONT face="Times New Roman, Times, serif" size=1>Year</FONT></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH colspan=2><FONT face="Times New Roman, Times, serif" size=1>1-3 Years</FONT></TH>
    <TH> <font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH><FONT face="Times New Roman, Times, serif" size=1>4-5 Years</FONT></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
    <TH><FONT face="Times New Roman, Times, serif" size=1> Years</FONT></TH>
    <TH><font size="1" face="Times New Roman, Times, serif">&nbsp;&nbsp;</font></TH>
  </TR>
  <TR>
    <TD><HR size=1 noshade color=#000000></TD>
    <TD>&nbsp;</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 align=RIGHT><HR color=black size=1></TD>
    <TD></TD>
    <TD 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="2%" align=LEFT>&nbsp;</TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 21,344</FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=1% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD width=12% align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 12,806</FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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> 8,538</FONT></TD>
    <TD width=3% align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD width=3% align=right><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD width=12% align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD width=2% align=LEFT bgcolor="#eaf9e8"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&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=LEFT>&nbsp;</TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>355,827</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>245,033</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>110,794</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=right><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR valign=Bottom bgcolor="#eaf9e8">
    <TD align=LEFT><font face="Times New Roman, Times, Serif" size="2">Long Term
    Debt</font></TD>
    <TD align=LEFT>&nbsp;</TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>2,000,000</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT>&nbsp;</TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><font face="Times New Roman, Times, Serif" size=2>2,000,000</font></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=right><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></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 align=RIGHT><HR color=black size=1></TD>
    <TD></TD>
    <TD align=RIGHT><HR color=black size=1></TD>
    <TD></TD>
  </TR>
  <TR valign=Bottom>
    <TD align=LEFT nowrap><FONT face="Times New Roman, Times, Serif" size=2>Total contractual cash obligations</FONT></TD>
    <TD align=LEFT>&nbsp;</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> 2,377,171</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 257,839</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2>$</FONT></TD>
    <TD align=RIGHT><FONT face="Times New Roman, Times, Serif" size=2> 2,119,332</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=right><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
    <TD align=right><FONT face="Times New Roman, Times, Serif" size=2>&#151;</FONT></TD>
    <TD align=LEFT><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  </TR>
  <TR>
    <TD></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 align=RIGHT><HR color=black size=2></TD>
    <TD></TD>
    <TD align=RIGHT><HR color=black size=2></TD>
    <TD></TD>
  </TR>
</TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>The Company had no material purchase obligations at March 31, 2005.</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 Note 5).</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><I>An investment in our company involves a high degree of risk. In addition to the other information included
in this report, you should carefully consider the following risk factors in evaluating an investment
in our company. You should consider these matters in conjunction with the other information included
or incorporated by reference in this report. Our results of operations or financial condition could
be seriously harmed, and the trading price of our common stock may decline due to any of these or
other risks.</I></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 the remainder of fiscal
2005. At March 31, 2005, we had an accumulated deficit of $45,467,359. We need to generate additional revenue
to be profitable in future periods. Failure to achieve profitability, or maintain profitability if
achieved, may cause our stock price to decline.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We may need additional capital for growth. </B>&nbsp;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our current plans indicate that depending on sales, we may need additional capital to support our growth.
We may generate a portion of these funds from operations. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The actual amount of funds that we will need will be determined by many factors, some of which are
beyond our control, and we may need funds sooner than currently anticipated. Principal factors that
could affect the availability of our internally generated funds include:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">government spending levels; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">introduction of new competing technologies; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">failure of sales from our Government Group and Commercial Group to meet planned projections; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
</TABLE>

<p align="center"><font size="2">25</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="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">product mix and effect on margins; and </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">acceptance of our products in new markets. &nbsp; </FONT></P></TD>

</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>When we require additional funds, general market conditions or the then-current market price of our
common stock may not support capital raising transactions. If we require additional funds and we
are unable to obtain them on a timely basis or on terms favorable to us, we may be required to scale
back our research and development efforts, sell or license some or all of our technology or assets
or curtail or cease operations. If we raise additional funds by selling additional shares of our
capital stock or securities convertible into common stock, the ownership interest of our stockholders
will be diluted.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>If our stock price falls below $3.41 per share we will be unable to draw down on the CEFF unless the
stock price increases. The potential unavailability of this facility would negatively affect our
financing activities.</B> &nbsp;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We have entered into a Committed Equity Financing Facility, or CEFF, with Kingsbridge Capital Limited.
Under the terms of our agreement with Kingsbridge, we may, at our sole discretion, sell to Kingsbridge,
and Kingsbridge would be obligated to purchase, shares of our common stock for up to $25 million
in proceeds to us. The price at which we may sell shares of common stock under the agreement is based
on a discount to the volume weighted average market price of the common stock for fifteen trading
days following each of our elections to sell shares. For each election to sell shares, we select
the lowest threshold price at which our stock may be sold, but the threshold price cannot be lower
than $3.00 per share. In the event the market price of our common stock falls below $3.41 per share,
which after giving effect to the discount would result in a price per share lower that the $3.00
minimum threshold price, the CEFF will not be an available source of financing. Our stock has traded
below $3.41 per share during many in the past, including most recently during May 2003. In addition,
we are obligated to use 40% of the proceeds we may raise from the CEFF to prepay any outstanding
interest and principal on promissory notes we sold in December 2004 with an aggregate principal amount
of $2,000,000. Our agreement with Kingsbridge permits Kingsbridge to terminate the CEFF if Kingsbridge
determines that a material and adverse event has occurred affecting the business, operations, properties
or financial condition of our company, or if any situation occurs that would interfere with our ability
to perform any of our obligations under the agreement.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>If we are unable to draw down on the CEFF, and are otherwise unable to obtain capital from other sources
on a timely basis or on terms favorable to us, we may be required to scale back our marketing and
research and development efforts, sell or license some or all of our technology or assets or curtail
or cease operations.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>If Kingsbridge determines that a material and adverse event has occurred that affects our company,
we will be unable to draw down on the CEFF. The potential unavailability of this facility would negatively
affect our financing activities.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our agreement with Kingsbridge permits Kingsbridge to terminate the CEFF if Kingsbridge determines
that a material and adverse event has occurred affecting the business, operations, properties or
financial condition of our company, or if any situation occurs that would interfere with our ability
to perform any of our obligations under the agreement. If we are unable to draw down on the CEFF,
and are otherwise unable to obtain capital from other sources on a timely basis or on terms favorable
to us, we may be required to scale back our marketing and research and development efforts, sell
or license some or all of our technology or assets or curtail or cease operations.</FONT></P>
<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><B>Each advance under the CEFF is limited. We may not draw down on the CEFF when Kingsbridge beneficially
owns in excess of 9.9% of our outstanding shares. The potential unavailability of this facility would
negatively affect our financing activities.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Each draw down election we make is limited to a maximum of 3% of our market capitalization at the time
of the election, and cannot in any case exceed $10 million. We must also wait at least five trading
days after the end of a fifteen trading day draw down period before we can commence the next draw
down. In addition, the CEFF limits the beneficial ownership of Kingsbridge to 9.9% of our outstanding
common stock, which percentage includes any shares of common stock purchased pursuant to the CEFF,
that we may issue as liquidated damages, and issued upon exercise of the warrant. Depending on the
market price of our common stock and Kingsbridge&#146;s other holdings of our common stock, this
restriction may limit the maximum amount we can draw down under the CEFF. If Kingsbridge&#146;s beneficial
ownership were to exceed 9.9% of our outstanding common stock, together with the total amount of
our common stock that would be outstanding upon completion of a draw down, we would not be able to
draw down on the Committee Equity Facility until such time as Kingsbridge sells enough shares of
our common stock or our number of shares of common stock outstanding increases, which may not occur.
Therefore, we may not be able to draw down on the full $25 million commitment.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our sales of stock to Kingsbridge will be discounted to market price, so our stockholders will experience
immediate dilution in the value of their shares if we sell shares to Kingsbridge under the CEFF.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The issuance of shares under the CEFF will have a dilutive impact on other stockholders, and the issuance
or even potential issuance of such shares could have a negative effect on the market price of our
common stock. In addition, if we draw down the CEFF, we will issue shares to Kingsbridge at a discount
ranging from 8% to 12% of the daily volume weighted average prices of our common stock during the
fifteen day trading period after initiation of each draw down. Issuing shares at such a discount
will further dilute the interests of other stockholders. The 9.9% limitation on Kingsbridge&#146;s
beneficial ownership will not prevent Kingsbridge from selling some of its holdings and then receiving
additional shares, such that the total number of shares that we may sell to Kingsbridge under the
CEFF and it resells is greater than 9.9% of our outstanding stock.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>There are a large number of shares underlying the CEFF that we are in the process of registering in
a registration statement, and the sale of these shares may depress the price of our common stock.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>To the extent that Kingsbridge sells shares of our common stock issued under the CEFF under an effective
registration statement, our stock price may decrease due to the additional selling pressure in the
market. The perceived risk of dilution from sales of stock to or by Kingsbridge may cause holders
of our common stock to sell their shares, which could contribute to a decline in our stock price.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>The sale of shares underlying the CEFF could encourage short sales by third parties, which could contribute
to the future decline of our stock price. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>A significant downward pressure on the price of our common stock caused by the sale of material amounts
of common stock under the CEFF could encourage short sales by third parties. In a short sale, a prospective
seller borrows stock from a stockholder or broker and sells the borrowed stock. The prospective seller
hopes that the stock price will decline, at which time the seller can purchase shares at a lower
price to repay the lender. The seller profits when the stock price declines because it is purchasing
shares at a price lower than the sale price of the borrowed stock. Such sales could place downward
pressure on the price of our common stock by increasing the number of shares being sold, which could
contribute to the future decline of our stock price.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We cannot predict the actual number of shares that we will issue under the CEFF, in any particular
draw down, or in total. The number of shares we will issue will fluctuate based on the market price
of our stock over the fifteen trading days after we give a draw down notice for each draw down period.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The actual number of shares that we will issue under the CEFF in any particular draw down, and in total,
is uncertain. Subject to the limitations in our agreement with Kingsbridge, we have the discretion
to draw down funds at any time throughout the term of the CEFF, and we have not determined the amount
of proceeds, if any, we will seek to raise through the CEFF. Also, the number of shares we must issue
after giving a draw down notice will fluctuate based on the market price of our stock over the fifteen
trading days after we give a draw down notice, and Kingsbridge will receive more shares if our stock
price declines. Assuming the volume weighted average price of our common stock is $8.36 per share,
which was the closing sale price reported on the NASDAQ SmallCap Market on April 15, 2005, and we
elected to draw down a total of $10 million under the CEFF, we would issue 1,329,080 shares of common
stock to Kingsbridge, representing 5.9% of our common stock outstanding as of April&nbsp;15, 2005,
after giving effect to the sale of such shares. Using the same assumptions and conditions but with
elections by us to draw down the full $25 million under the CEFF, we would issue 3,322,700 shares
of common stock to Kingsbridge, representing 13.5% of our common stock outstanding on April 15, 2005,
after giving effect to the sale of such shares. During the one year period ended April&nbsp;15, 2005,
our stock price as reported on the NASDAQ SmallCap Market ranged from a high of $11.55 to a low of $4.38. </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>The above estimates of the number of shares to be sold assume that our stock price would remain constant
during each fifteen trading day draw down period, and across all draw down periods. This assumption
is not realistic, particularly since during each fifteen trading day draw down period, Kingsbridge
is permitted to sell the shares to be issued with respect to each trading day once the discount purchase
price for such day (and therefore the number of shares to be purchased for such day) is determined.
These permitted sales during a draw down period may cause the volume weighted average price of our
common stock to decline on immediately subsequent days, resulting in the sale of additional shares
to Kingsbridge on immediately subsequent days for the same monetary proceeds to us. The further sale
of shares priced on those immediately subsequent days could then cause further price declines on
later days, resulting in the sale of increasing numbers of shares for the same monetary proceeds
as the draw down period progresses. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Furthermore, Kingsbridge&#146;s 9.9% beneficial ownership limitation is determined on, and based on
the amount of our common stock outstanding on, each settlement date. As the number of shares outstanding
on each settlement date increases, Kingsbridge may be required to purchase more shares of our common
stock during a draw down period than would have been apparent on the date that we sent the draw down
notice to Kingsbridge. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We may issue additional common stock in the future, including shares under our CEFF, and this stock
may reduce the value of your common stock.</B> &nbsp;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>As a result of the CEFF or other financings, we may issue additional shares of common stock without
further action by our stockholders. Moreover, the economic and voting interests of each stockholder
will be diluted as a result of such issuances. Although the number of shares of common stock that
stockholders presently own will not decrease, such shares will represent a smaller percentage of
our total shares that will be outstanding after such events. If we satisfy the conditions that allow
us to draw down the entire $25 million available under the CEFF, and we choose to do so, then generally,
as the market price of our common stock decreases, the number of shares we will have to issue upon
each draw down on the CEFF increases, to a maximum of 3,684,782 shares we may issue without stockholder
approval. Drawing down on the CEFF when the price of our common stock is decreasing will have an
additional dilutive effect to your ownership percentage and may result in additional downward pressure
on the price of our common stock. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Sales of common stock issuable on the exercise of outstanding options and warrants, including the warrant
held by Kingsbridge, may depress the price of our common stock. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>As of April 15, 2005, there were options granted to our employees, directors and consultants to purchase
2,129,311 shares of our common stock. As of April 15, 2005, there were warrants granted to investors
to purchase 2,308,234 shares of our common stock, including the warrant issued to Kingsbridge exercisable
for 275,000 shares. The exercise prices for the options and warrants range from $2.00 to $11.00 per
share. In the future we may issue additional convertible securities, options and warrants. The issuance
of shares of common stock issuable upon the exercise of convertible securities, options or warrants
could cause substantial dilution to holders of common stock, and the sale of those shares in the
market could cause the market price of our common stock to decline. The potential dilution from these
shares could negatively affect the terms on which we could obtain equity financing.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our CEFF imposes certain liquidated damages which may impair our liquidity and ability to raise capital.</B> &nbsp;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The terms of the CEFF require us to pay liquidated damages in the event that a registration statement
is not available for the resale of securities purchased by Kingsbridge under the CEFF. These liquidated
damages provisions generally require us to pay an amount based on the decline in value, if any, of
shares held by Kingsbridge during the time a registration statement is unavailable. The liquidated
damages could severely affect our liquidity, or to the extent we are permitted to and decide to pay
such damages through the issuance of common stock, cause significant dilution to our common stockholders.</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>We may not issue convertible securities with a floating or adjustable discount to the price of our
common stock during the two year term of the Common Equity Financing Facility without the prior written
consent of Kingsbridge, which consent we may not be able to obtain. These restrictions may affect
our ability to raise capital.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>During the two-year term of the proposed CEFF, without the prior written consent of Kingsbridge, we
are prohibited from issuing securities that are, or may become, convertible or exchangeable into
shares of common stock where the purchase, conversion or exchange price for such common stock is
determined using a floating or otherwise adjustable discount to the market price of the common stock
(including pursuant to an equity line or other financing that is substantially similar to an equity
line with an investor other than Kingsbridge). In the past, we met our capital needs through the
sale of preferred stock and convertible notes which had floating price features. We may have difficulty
raising capital if Kingsbridge does not consent to our use of such securities in the future. If we
are unable to raise capital from Kingsbridge or from sources that do not demand a floating price
feature, we may have to severely curtail our operations, which could cause a significant decrease
in the price of our common stock. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our ability to draw down on the CEFF may be limited under the rules of the NASDAQ Stock Market.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Under the rules of the NASDAQ Stock Market, the approval of our stockholders is required for the sale
of shares to Kingsbridge totaling more than 20% of our issued and outstanding shares at the time
we entered into the agreement with Kingsbridge. If our average sale price to Kingsbridge is below
$6.78 per share (equivalent to a volume weighted average price of $7.54 per share, assuming a 10%
discount for all sales) and we elect to draw the full $25 million commitment, it would require that
we issue more than 20% of our issued and outstanding shares at the time we entered into the agreement
with Kingsbridge and we would need to seek stockholder approval to do so. The $6.78 average sale
price mentioned above assumes that we have not issued Kingsbridge any shares in lieu of paying liquidated
damages that may be owed to Kingsbridge in the event that the availability of its registration statement
is suspended. If we issue shares to Kingsbridge in lieu of payment of liquidated damages, the average
sale price (and the volume weighted average price) would need to be higher in order to elect to draw
the full $25 million commitment without stockholder approval. If we are unable to obtain such stockholder
approval, our ability to raise capital under the CEFF will be impaired. If we are unable to obtain
capital from other sources on a timely basis or on terms favorable to us, we may be required to scale
back our marketing and research and development efforts, sell or license some or all of our technology
or assets or curtail or cease operations.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>One customer accounted for approximately 93% of our revenues for the three months ended March&nbsp;31,
2005, two customers accounted for <U>92% </U>of our revenues for the six months ended March&nbsp;31, 2005, and we continue to be dependent on a
few large customers.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>ADS, Inc., a prime vendor to the U. S. military, accounted for 93% of net revenues for the three months
ended March&nbsp;31, 2005. For the six months ended March&nbsp;31, 2005, ADS accounted for 82% of
our revenues and a second customer and its affiliates accounted for 10% of our revenues. These customers
have the right to cease doing business with us at any time. If this were to occur and we could not
replace them, our net revenues could decline substantially. Any such decline could result in us incurring
net losses, increasing our accumulated deficit and causing us to need to raise additional capital
to fund our operations.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We must expand our customer base in order to grow our business.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>To grow our business, we must fulfill orders from our existing customers, obtain additional orders
from our existing customers, develop relationships with new customers and obtain and fulfill orders
from new customers. We cannot guarantee that we will be able to increase our customer base. Further,
even if we do obtain new customers, we cannot guarantee that those customers will purchase from us
enough quantities of our product or at product prices that will enable us to recover our costs in
acquiring those customers and fulfilling those orders. Whether we will be able to sell more of our
products will depend on a number of factors, including:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">our ability to manufacture reliable products that have the features that are required by our customers;&nbsp;</FONT></P></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">
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">our ability to expand relationships with existing customers and to develop relationships with new customers
that will lead to additional orders for our products;&nbsp;</FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">our ability to develop and expand new markets for directed sound products; and&nbsp;</FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">our ability to develop international product distribution directly or through strategic partners. </FONT></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>The growth of our Government Group revenues is materially dependent 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>Although our LRAD products are designed for use by both government and commercial customers, our LRAD
products have, to date, been predominantly sold for government use. Within the Government Group,
our largest customer is a reseller of our products to end users in various branches of the military
such as the U.S. Navy, U.S. Marine Corps, U.S. Army and the Department of Homeland Security. We have
only recently achieved significant sales of LRAD products, and the product has not yet been widely
accepted in the government market. Furthermore, the force protection and emergency response market
is itself an emerging market, which is changing rapidly. 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, and we may fail to achieve our sales projections.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Perceptions that long range hailing devices are unsafe or may be used in an abusive manner may hurt
sales of our LRAD products which could cause our revenues to decline.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Potential customers for our LRAD products, including government, military and 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. These claims or perceptions could cause our product
sales to decline. In addition, if these agencies have these perceptions, it will be difficult for
us to grow our customer base beyond these markets. These factors could reduce future revenues, adversely
affecting our financial condition and results of operations.</FONT></P>
<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 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 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 products have been limited to date and we cannot guarantee
significant revenues in the future. The development and introduction of our products took longer
than anticipated by management and the introduction of new products could also be subject to delays.
Customers may not wait for newer versions of existing products or new products and may elect to purchase
products from competitors. We experienced quality control problems with some of our initial commercial
HSS units, and we may not be able to resolve future similar problems in a timely and cost effective
manner. Products employing our sound technology may not achieve market acceptance. Our various sound
projects are high risk in nature, and unanticipated technical obstacles can arise at any time and
result in lengthy and costly delays or result in a determination that further exploitation is unfeasible.
If we do not successfully exploit our technology, our financial condition and results of operations
and business prospects would be adversely affected.</FONT></P>
<P><FONT 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></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>None of our products has been produced in sufficient quantities to be considered mass produced. Our
technologies 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 align=center><FONT face="Times New Roman, Times, serif" size=2>30</FONT></P>
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<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>At March 31, 2005, we had a
warranty reserve of $238,837. We recorded substantial warranty reserves for
early versions of our HSS products and have little history to predict future warranty costs. 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 could incur charges for excess and obsolete inventory.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Due to rapidly changing technology and uneven customer demand, product cycles tend to be short and
the value of our inventory may be adversely affected by changes in technology that affect our ability
to sell the products in our inventory. Therefore, periodically, it may be necessary to write off
inventory as excess or obsolete. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>While we will make every attempt to successfully manage product transition, including inventory control
of older generation products when introducing new products, we have previously experienced and may,
in the future, experience reductions in sales of older generation products as customers delay or
defer purchases in anticipation of new product introductions. We currently have established reserves
for slow moving or obsolete inventory. The reserves we have established for potential losses due
to obsolete inventory may, however, prove to be inadequate and may give rise to additional charges
for obsolete or excess inventory. </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>We expect our sound proprietary reproduction technologies will be the source of substantially all of
our future revenues. Revenues from our sound proprietary reproduction technologies are expected to
vary significantly due to a number of factors. Many of these factors are beyond our control. Any
one or more of the factors listed below or other factors could cause us to fail to achieve our revenue
expectations. These factors include:</FONT></P>
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<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">our ability to develop and supply sound reproduction components to customers, distributors or OEMs
or to license our technologies; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">market acceptance of and changes in demand for our products or products of our customers; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">gains or losses of significant customers, distributors or strategic relationships; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">unpredictable volume and timing of customer orders; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the availability, pricing and timeliness of delivery of components for our products and OEM products;
</FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing
costs; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the timing of new technological advances, product announcements or introductions by us, by OEMs or
licensees and by our competitors; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">product obsolescence and the management of product transitions and inventory; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">unpredictable warranty costs associated with new product models; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">production delays by customers, distributors, OEMs or by us or our suppliers; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">seasonal fluctuations in sales; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the conditions of other industries, such as military and commercial industries, into which our technologies
may be licensed; </FONT></P></TD>
</TR></TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>31</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="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">general consumer electronics industry conditions, including changes in demand and associated effects
on inventory and inventory practices; </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">general economic conditions that could affect the timing of customer orders and capital spending and
result in order cancellations or rescheduling; and </FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">general political conditions in this country and in various other parts of the world that could affect
spending for the products that we offer. </FONT></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>Some or all of these factors could adversely affect demand for our products or technologies, and therefore
adversely affect our future operating results.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Most of our operating expenses are relatively fixed in the short term. We may be unable to rapidly
adjust spending to compensate for any unexpected sales or license revenue shortfalls, which could
harm our quarterly operating results. We do not have the ability to predict future operating results
with any certainty.</FONT></P>
<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:&nbsp;</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the value of our stock price, which impacts the income or expense we record each quarter for the warrant
issued to Kingsbridge;&nbsp;</FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the timing and extent of our research and development efforts;</FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">investments and costs of maintaining or protecting our intellectual property; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the extent of marketing and sales efforts to promote our products and technologies;
and</FONT></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">the timing of personnel and consultant hiring.</FONT></P></TD>
</TR>
</TABLE>
<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><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 well-established
markets. As a result, our technologies, even if successful, may become obsolete before we recoup
our investment.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>32</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our competitive position will be seriously damaged if we cannot obtain patent protection for important&nbsp;differentiating
aspects of our products or otherwise protect intellectual property rights in our technology.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We rely on a combination of contracts and trademark, patent and trade secret laws to establish and
protect our proprietary rights in our technology. However, we may not be able to prevent misappropriation
of our intellectual property, our competitors may be able to independently develop and the agreements
we enter into may not be enforceable.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our success, in part, depends on our ability to obtain and enforce intellectual property protection
for our technology, particularly our patents. There is no guarantee any patent will issue on any
patent application that we have filed or may file. Claims allowed from existing or pending patents
may not be of sufficient scope or strength to protect the economic value of our technologies. Further,
any patent that we may obtain will expire, and it is possible that it may be challenged, invalidated
or circumvented. If we do not secure and maintain patent protection for our technology and products,
our competitive position will be significantly harmed because it will be much easier for competitors
to sell products similar to ours. Alternatively, a competitor may independently develop or patent
technologies that are substantially equivalent to or superior to our technology. For example, patent
protection on our LRAD product is limited, and we may not be able to prevent others from introducing
products with similar functionality. If this happens, any patent that we may obtain may not provide
protection and our competitive position could be significantly harmed.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>As we expand our product line or develop new uses for our products, these products or uses may be outside
the protection provided by our current patent applications and other intellectual property rights.
In addition, if we develop new products or enhancements to existing products we cannot assure you
that we will be able to obtain patents to protect them. Even if we do receive patents for our existing
or new products, these patents may not provide meaningful protection. In some countries outside of
the United States where our products can be sold or licensed, patent protection is not available.
Moreover, some countries that do allow registration of patents do not provide meaningful redress
for violations of patents. As a result, protecting intellectual property in these countries is difficult
and our competitors may successfully sell products in those countries that have functions and features
that infringe on our intellectual property.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We may initiate claims or litigation against third parties in the future for infringement of our proprietary
rights or to determine the scope and validity of our proprietary rights or the proprietary rights
of our competitors. These claims could result in costly litigation and divert the efforts of our
technical and management personnel. As a result, our operating results could suffer and our financial
condition could be harmed.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Our competitive position will be seriously damaged if our products are found to infringe on the intellectual
property rights of others.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Other companies and our competitors may currently own or obtain patents or other proprietary rights
that might prevent, limit or interfere with our ability to make, use or sell our products. As a result,
we may be found to infringe the intellectual property rights of others. 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. In the event of
a successful claim of infringement against us and our failure or inability to license the infringed
technology, our business and operating results could be adversely affected. Any litigation or claims,
whether or not valid, could result in substantial costs and diversion of our resources. An adverse
result from intellectual property litigation could force us to do one or more of the following:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">cease selling, incorporating or using products or services that incorporate the challenged intellectual
property; </FONT></P></TD>
</TR></TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>33</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="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">obtain a license from the holder of the infringed intellectual property right, which license may not
be available on reasonable terms, if at all; and </FONT></P></TD>
</TR>
<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">redesign products or services that incorporate the disputed technology. </FONT></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>If we are forced to take any of the foregoing actions, we could face substantial costs and shipment
delays and our business could be seriously harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or be adequate to indemnify us for all
liability that may be imposed.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In addition, it is possible that our customers or end users may seek indemnity from us in the event
that our products are found or alleged to infringe the intellectual property rights of others. Any
such claim for indemnity could result in substantial expenses to us that could harm our operating
results.</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><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, for example, the Trading with the Enemy Act of 1917,
the Arms Export Control Act of 1976, the Export Administration Act of 1979, or the International
Emergency Economic Powers Act, as well as their implementing regulations and executive orders.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In the case of certain agreements involving equipment or services controlled under the International
Traffic in Arms Regulations (ITAR) and sold at specified dollar volumes, the U.S. Department of State
must notify Congress at least 15 to 30 days, depending on the intended overseas destination, prior
to authorizing these sales. During that time, Congress may take action to block the proposed sale.
Based on our current product lines, we do not anticipate the congressional notification requirement
to have an immediate impact; however, as our product lines expand, this notification requirement
could impact our ability to sell certain controlled products or services in the international market.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>The need for export licenses and, when required, Congressional notification, can introduce a period
of delay in our ability to consummate international transactions. Because issuance of an export license
is wholly within the discretion of the controlling U.S. government agency, it is possible that, in
some circumstances, we may not be able to obtain the necessary licenses for some potential transactions.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>34</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<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 expect to 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  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">changes in tariff regulations; </FONT></P></TD>
</TR>
<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">political instability, war, terrorism and other political risks; </FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">foreign currency exchange rate fluctuations; </FONT></P></TD>
</TR>
<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">establishing and maintaining relationships with local distributors and dealers; </FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">lengthy shipping times and accounts receivable payment cycles; </FONT></P></TD>
</TR>
<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">import and export licensing requirements; </FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">compliance with a variety of foreign laws and regulations, including unexpected changes in taxation
and regulatory requirements; </FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">greater difficulty in safeguarding intellectual property than in the U.S.; and </FONT></P></TD>
</TR>
<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">difficulty in staffing and managing geographically diverse operations. </FONT></P></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>Commercialization of our proprietary 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 proprietary sound technologies and products.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>An important part of our strategy is to establish business relationships with leading participants
in various segments of the electronics, government and sound reproduction markets to assist us in
producing, distributing, marketing and selling products that include our proprietary sound technologies.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Our success will therefore depend on our ability to maintain or enter into new strategic arrangements
with partners on commercially reasonable terms. If we fail to enter into such strategic arrangements
with third parties, our financial condition, results of operations, cash flows and business prospects
will be adversely affected. Any future relationships may require us to share control over our development,
manufacturing and marketing programs or to relinquish rights to certain versions of our sound and
other technologies.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We are dependent on third party manufacturers. </B>&nbsp;</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We do not have the capacity to manufacture all of our products internally and we are therefore dependent
on third party manufacturers. At present, we manufacture NeoPlanar and SoundCluster internally only
in small quantities and would need to outsource our manufacturing if sales of these products were
to increase significantly. In addition, we established a manufacturing relationship with Pemstar,
Inc. in fiscal 2004 to manufacture our LRAD and HSS products. We do not have a formal written agreement
with Pemstar. Pemstar, or any other contract manufacturing partner, may not be able or willing to
manufacture products for us in the quantities and at the level of quality that we require. If we
need to seek additional third party manufacturers for our products, we may not be able to obtain
acceptable replacement manufacturing sources on a timely basis. An extended interruption in the supply
of our products could result in a substantial loss of sales. In addition, any actual or perceived
degradation of product quality as a result of our reliance on third party manufacturers may have
an adverse effect on sales or result in increased product returns and buybacks. Failure to maintain
quality contract manufacturing could reduce future revenues, adversely affecting financial condition
and results of operations.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>35</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>&nbsp;<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><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 Group 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="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">include provisions that allow the government agency to terminate the contract without penalty under
some circumstances;&nbsp;</FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">be subject to purchasing decisions of agencies that are subject to political influence;&nbsp;</FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">contain onerous procurement procedures; and&nbsp;&nbsp; </FONT></P></TD>
</TR>

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%"></TD>
<TD valign=top width="92%"></TD></TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">be subject to cancellation if government funding becomes unavailable. </FONT></P></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><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 depends 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>We may not address successfully the problems encountered in connection with any potential future acquisitions.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>36</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2>We expect to continue to consider opportunities to acquire or make investments in other technologies,
products and businesses that could enhance our capabilities, complement our current products or expand
the breadth of our markets or customer base. We have limited experience in acquiring other businesses
and technologies. Potential and completed acquisitions and strategic investments involve numerous
risks, including:</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">problems assimilating the purchased technologies, products or business operations; </FONT></P></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD valign=top width="92%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">problems maintaining uniform standards, procedures, controls and policies;&nbsp;</FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">unanticipated costs associated with the acquisition; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">diversion of management&#146;s attention from our core business; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">adverse effects on existing business relationships with suppliers and customers; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">risks associated with entering new markets in which we have no or limited prior experience; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">potential loss of key employees of acquired businesses; and </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">increased legal and accounting costs as a result of the newly adopted rules and regulations related
to the Sarbanes-Oxley Act of 2002. </FONT></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2>If we fail to properly evaluate and execute acquisitions and strategic investments, our management
team may be distracted from our day-to-day operations, our business may be disrupted and our operating
results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt
securities, our stockholders would be diluted.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>We are subject to increased costs as a result of newly adopted accounting and SEC regulations.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management will be required by the end
of fiscal 2005 to perform an evaluation of our internal control over financial reporting and have
our independent auditor attest to that evaluation. Compliance with these requirements is expected
to be expensive and time consuming. If we fail to timely complete this evaluation, or if our independent
registered public accounting firm cannot timely attest to our evaluation, we could be subject to
regulatory scrutiny and a loss of public confidence in our internal control over financial reporting.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>In designing and evaluating our internal control over financial reporting, we recognize that any internal
control or procedure, no matter how well designed and operated, can provide only reasonable assurance
of achieving desired control objectives, and management is required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. No system of internal control
can be designed to provide absolute assurance of effectiveness and any material failure of internal
control over financial reporting could materially impact our reported financial results and the market
price of our stock could significantly decline. In addition, adverse publicity related to a material
failure of internal control over financial reporting would have a negative impact on our reputation
and business.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B>Changes in stock option accounting rules may adversely impact our reported operating results prepared
in accordance with generally accepted accounting principles, our stock price and our competitiveness
in the employee marketplace.</B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Technology companies in general and our company in particular have a history of depending upon and
using broad based employee stock option programs to hire, incentivize and retain employees in a competitive
marketplace. Currently, we do not recognize compensation expense for stock options issued to employees
or directors, except in limited cases involving modifications of stock options, and we instead disclose
in the notes to our financial statements information about what such charges would be if they were
expensed. An accounting standard setting body has recently adopted a new accounting standard that
will require us to record equity-based compensation expense for stock options and employee stock
purchase plan rights granted to employees based on the fair value of the equity instrument at the
time of grant. We will be required to record these expenses beginning with our first quarter of fiscal 2006, which ends December 31, 2005. The change in accounting rules will lead to increased
reported net loss or, should we become profitable, a decrease in reported earnings. This may negatively
impact our future stock price. In addition, this change in accounting rules could impact our ability
to utilize broad based employee stock plans to reward employees and could result in a competitive
disadvantage to us in the employee marketplace.</FONT></P>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>37</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 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 offerings 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 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="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">our anticipated or actual operating results; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">developments concerning our sound reproduction technologies; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">technological innovations or setbacks by us or our competitors; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">conditions in the consumer electronics market; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">announcements of merger or acquisition transactions; </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">changes in personnel within our company; and </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">&#149; </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">other events or factors and general economic and market conditions. </FONT></P></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><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a8"></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 market risk associated with our issuance of a warrant to Kingsbridge Capital Limited
for 275,000 shares. Because this warrant is classified as a liability on our balance sheet, we must
calculate the fair value of the warrant at the end of each quarter and record the change in fair
value over the quarter to other income or expense until the related registration statement is effective,
until the warrant is fully exercised, or until the expiration of the warrant in June 2010. Accordingly,
we are incurring risk associated with increases or decreases in the market price of our stock, which
will directly impact the fair value calculation and the non-cash charge or credit recorded to our
statement of operations for future quarters. For example, if our stock price increases by 20% during
the quarter ending June 30, 2005 from its March 31, 2005 value, the registration statement is not
effective and all other inputs into the Black-Scholes valuation model remain unchanged from March
31, 2005, we would record approximately $353,516 of other expense for the period ended June 30, 2005.
If our stock price decreased by 20% during the quarter ending June 30, 2005 from its March 31, 2005
value, and all other inputs into the Black-Scholes valuation model remain unchanged from March 31,
2005, we would record approximately $330,763 as other income. </FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We are also exposed to some market risk through interest rates, related to our investment of current
cash and cash equivalents of approximately $6.2 million. Based on this balance, a change of one percent
in interest rate would cause a change in interest income of $62,000. 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 align=center><FONT face="Times New Roman, Times, serif" size=2>38</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="a9"></a>Item 4. Controls and Procedures. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>We maintain disclosure controls and procedures designed to ensure that material information related
to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms.</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">(a) </FONT></P></TD>
<TD valign=top width="92%">
<P><FONT size="2" face="Times New Roman, Times, serif">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 13a-15(e) or 15d-15(e) 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, as of March 31, 2005.</FONT></P>
</TD>
</TR>

<TR>
  <TD  valign=top></TD>
  <TD  valign=top>&nbsp;</TD>
  <TD valign=top>&nbsp;</TD>
</TR>
<TR>
<TD  valign=top width="4%"></TD>
<TD  valign=top width="4%">
<P><FONT size="2" face="Times New Roman, Times, serif">(b) </FONT></P></TD>
<TD valign=top width="92%">
<P><font face="Times New Roman, Times, serif" size="2">Except as set forth
below, no significant changes were made in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As a result of a notification from our independent registered accounting firm to
our Audit Committee that we had not followed all appropriate period close down
procedures for our quarter ended December 31, 2004, referencing deficient
procedures for evaluation of the accrual for bonuses for which executives were
eligible, we have rectified this significant deficiency by accelerating the
timing of the Compensation Committee's assessment for executive bonuses earned
in the period.</font></P></TD>
</TR></TABLE>
<P><FONT face="Times New Roman, Times, Serif" size=2><I>Limitations</I>. Our management, including our co-principal executive officers and principal financial officer, does
not expect that our disclosure control 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 control 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 align="center"><font face="Times New Roman, Times, Serif" size="2">39</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="a10"></a>PART II. OTHER INFORMATION </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a11"></a>Item 1. &nbsp;Legal Proceedings. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>Reference is made to Note 13 of our Notes to Interim Financial Statements included in Part I, Item 1 of this report for information regarding Legal Proceedings.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a12"></a>Item 2. &nbsp;Unregistered Sales of Equity Securities and Use of Proceeds. </B></FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2>None.</FONT></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a13"></a>Item 3. &nbsp;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="a14"></a>Item 4. &nbsp;Submission of Matters to a Vote of Security Holders. </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="a15"></a>Item 5. &nbsp;Other Information. </B></FONT></P>
<P><font face="Times New Roman, Times, Serif" size="2">On May 9, 2005, Carl
Gruenler, Vice President, Government and Force Protection Systems Group, left
our company. Mr. Gruenler had been employed under the terms of a letter
agreement amended on July 30, 2003. The letter agreement provided for an annual
base salary of $110,000, and an annual performance bonus of up to 10% of base
salary to be determined by the Compensation Committee and the Board of
Directors. Mr. Gruenler's annual base salary at the time of separation was
$250,000, and he participated in our broad-based commission plan in lieu of the
annual performance bonus contemplated by his letter agreement. Mr. Gruenler's
employment was terminable at-will by us or by Mr. Gruenler for any reason, with
or without notice. Our employment arrangement with Mr. Gruenler was terminated
in conjunction with his departure.</font></P>
<P><font face="Times New Roman, Times, Serif" size="2">The foregoing disclosure
is made in lieu of disclosure under Item 1.02 on Form 8-K.</font></P>
<P><FONT face="Times New Roman, Times, Serif" size=2><B><a name="a16"></a>Item 6. Exhibits</B></FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD width="8%"  valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">10.1 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Table of Inducement Grants. </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">10.2 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Offer Letter for Bruce Gray. +</FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%">&nbsp;</TD>
<TD  valign=top>
<font size="2">10.3</font></TD>
<TD valign=top>
<font size="2">Inducement Stock Option Grant Notice and Inducement Stock Option
Agreement for Bruce Gray dated March 22, 2005. +</font></TD>
</TR>
<TR>
<TD  valign=top width="4%">&nbsp;</TD>
<TD  valign=top>
&nbsp;</TD>
<TD valign=top>
&nbsp;</TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">10.4 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Summary Sheet of Director and Executive Officer Compensation. +</FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">31.1 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">31.2 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">31.3 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">32.1 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD colspan="2" valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD colspan="2" valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif"><B>+ Management contract or compensatory plan or arrangement.</B> &nbsp;</FONT></P></TD>
</TR></TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>40</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="a17"></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="60%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></td>
    <td colspan="2"><font size="2" face="Times New Roman, Times, serif">AMERICAN TECHNOLOGY CORPORATION </font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td colspan="2">&nbsp;</td>
  </tr>
  <tr>
    <td><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></td>
    <td colspan="2"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></td>
  </tr>
  <tr>
    <td><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></td>
    <td width="3%"><font size="2" face="Times New Roman, Times, serif">By: </font></td>
    <td><font size="2" face="Times New Roman, Times, serif">/S/ MICHAEL A. RUSSELL</font></td>
  </tr>
  <tr>
    <td><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></td>
    <td><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></td>
    <td><hr align="left" width="300" size="1" color=black>
  </td>
  </tr>
  <tr valign="top">
    <td><font size="2" face="Times New Roman, Times, serif">Date: May 10, 2005</font></td>
    <td><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></td>
    <td><font size="2" face="Times New Roman, Times, serif">Michael A. Russell, Chief Financial Officer<br>
      (Principal Financial and Accounting Officer<br>
      and duly authorized to sign on behalf of<br>
    the Registrant) </font></td>
  </tr>
</table>
<B><U></U></B>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>41</FONT></P>
<HR noshade size=5>

<P style="PAGE-BREAK-BEFORE: always">
<P><FONT face="Times New Roman, Times, Serif" size=2><B><U>Exhibit Index</U></B> &nbsp;</FONT></P>
<TABLE cellspacing="0" cellpadding="0" width="100%" border="0">

<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="8%">
<P><FONT size="2" face="Times New Roman, Times, serif">10.1 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Table of Inducement Grants. </FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="8%">
<P><FONT size="2" face="Times New Roman, Times, serif">10.2 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Offer Letter for Bruce Gray. +</FONT></P></TD>
</TR>
<TR>
  <TD  valign=top>&nbsp;</TD>
  <TD  valign=top>&nbsp;</TD>
  <TD valign=top>&nbsp;</TD>
</TR>
<TR>
  <TD  valign=top>&nbsp;</TD>
  <TD  valign=top><font size="2">10.3</font></TD>
  <TD valign=top><font size="2">Inducement Stock Option Grant Notice and Inducement Stock Option Agreement for
  Bruce Gray dated March 22, 2005. +</font></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="8%">
<P><FONT size="2" face="Times New Roman, Times, serif">10.4 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">Summary Sheet of Director and Executive Officer Compensation. +</FONT></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="8%">
<P><FONT size="2" face="Times New Roman, Times, serif">31.1 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="8%">
<P><FONT size="2" face="Times New Roman, Times, serif">31.2 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="8%">
<P><FONT size="2" face="Times New Roman, Times, serif">31.3 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>
<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD  valign=top width="8%">
<P><FONT size="2" face="Times New Roman, Times, serif">32.1 </FONT></P></TD>
<TD valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif">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></P></TD>
</TR>

<TR>
  <TD  valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
  <TD colspan="2" valign=top><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
</TR>
<TR>
<TD  valign=top width="4%"><FONT size="2" face="Times New Roman, Times, serif">&nbsp;&nbsp;</FONT></TD>
<TD width="96%" colspan="2" valign=top>
<P><FONT size="2" face="Times New Roman, Times, serif"><B>+ Management contract or compensatory plan or arrangement.</B> &nbsp;</FONT></P></TD>
</TR></TABLE>
<P align=center><FONT face="Times New Roman, Times, serif" size=2>42</FONT></P>
<HR noshade size=5>

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<P ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>EXHIBIT 10.1 </B></FONT></P>


<!-- MARKER FORMAT-SHEET="Center Bold" -->
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>Table of
Inducement Stock Option Grants </B></FONT></P>

<!-- MARKER FORMAT-SHEET="Para Indent" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From
time to time, as an inducement to employment, the registrant has granted to certain of its
employees that are not executive officers non-qualified stock options in accordance with
individual compensation arrangements that have not been approved by the registrant&#146;s
security holders (collectively, the &#147;<B>Inducement Options</B>&#148;). All Inducement
Options are documented pursuant to the form of Inducement Grant Notice and Inducement
Stock Option Agreement filed as Exhibit 4.1 to the registrant&#146;s Form 8-K filed on
September 28, 2004. </FONT></P>

<!-- MARKER FORMAT-SHEET="Para Indent" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
table set forth below lists the Inducement Options granted by the registrant to certain of
its employees that are not executive officers, and the principal terms thereof. Each of
the following options is a non-statutory option, has a five year term and vests 25% on the
first anniversary of the grant date and then quarterly thereafter for the next 12
quarters, subject to continued employment and other conditions. </FONT></P>


<TABLE CELLPADDING="3" CELLSPACING="0" BORDER="1" WIDTH="50%">
<TR VALIGN="top">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Date of Grant</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Shares<BR>Underlying<BR>Option</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Exercise<BR>Price</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD WIDTH="40%" ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">9/21/04</FONT></TD>
     <TD WIDTH="30%" ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">3,500</FONT></TD>
     <TD WIDTH="20%" ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.14</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">9/21/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">15,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.14</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">9/21/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">1,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.14</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">9/21/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">10,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.14</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">9/21/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">17,500</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.14</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">10/26/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">2,500</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.21</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">10/26/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12,500</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.21</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">10/26/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">5,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.21</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">11/16/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">1,500</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.70</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">11/16/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">2,500</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$6.70</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12/22/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">6,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$10.06</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12/22/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">18,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$10.06</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12/22/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">20,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$10.06</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12/22/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">5,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$10.06</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12/22/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">2,500</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$10.06</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12/22/04</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">25,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$10.06</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">1/25/05</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">20,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$9.48</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">1/25/05</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">2,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$9.48</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">1/25/05</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">8,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$9.48</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">1/25/05</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">15,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$9.48</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">1/25/05</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$9.48</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">3/16/05</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$8.40</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">3/16/05</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">12,000</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$8.40</FONT></TD></TR>
</TABLE>

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<TYPE>EX-10.2
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<P ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B><B>EXHIBIT 10.2 </B> </B></FONT></P>



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     <TD><IMG SRC="atco-logo.gif"></TD></TR>
</TABLE>
<BR>
<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">March 15, 2005</FONT></P>
<BR>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">Bruce Gray<BR>11477
Winding Ridge<BR>San Diego, CA 92131</FONT></P>
<BR>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">Dear Bruce,</FONT></P>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><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 and is based on the following terms and conditions:</FONT></P>

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<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Title:
</FONT></TD>
<TD WIDTH="80%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Vice President of the Business Group.
</FONT></TD>
</TR>
</TABLE>
<BR>

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<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Start Date:
</FONT></TD>
<TD WIDTH="80%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
We have an anticipated your start date as Monday, March 21, 2005
</FONT></TD>
</TR>
</TABLE>
<BR>

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<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Salary:
</FONT></TD>
<TD WIDTH="80%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Your  starting salary as an exempt employee will be $7,692.31 gross bi-weekly which is an annual  wage of
$200,000.00.
</FONT></TD>
</TR>
</TABLE>
<BR>

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<TR VALIGN=TOP>
<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Sales Bonus:
</FONT></TD>
<TD WIDTH="80%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
You will be eligible
for an annual  sales bonus up to  $100,000.00.  The bonus will be based on the Business
Group &nbsp;attaining  quarterly and annual goals. The detailed quarterly and annual
goals will be created  jointly by you and Kalani Jones by April 30, 2005. This bonus is
payable on a quarterly  basis and will be paid on the second pay period of the month
following the end of the  commission quarter
</FONT></TD>
</TR>
</TABLE>
<BR>


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<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Stock Options:
</FONT></TD>
<TD WIDTH="80%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Management will
recommend to the Board of Directors, that, as an inducement material to you entering into
employment with the  Company, you be
granted stock options to purchase 100,000 shares of common stock.&nbsp; The grant will
occur at the first meeting of the Board of Directors held after your start  date, or by
unanimous written consent. 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.&nbsp; The recommended options will be exercisable for five (5) years  after
grant, subject to earlier termination upon termination of your continuous  service.&nbsp; 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.&nbsp; 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>

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<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-1- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>

<!-- MARKER FORMAT-SHEET="Para Hang" -->
<TABLE WIDTH="100%" CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Health Benefits:
</FONT></TD>
<TD WIDTH="80%"><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 pays for 100% of all health benefit premiums,  including
dependents and you can elect HMO or PPO medical coverage. You may pay for any  qualified
out-of-pocket expense on a pre-tax basis through a Section 125 plan. Benefits  begin the
first day of the month following your hire date.
</FONT></TD>
</TR>
</TABLE>
<BR>

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<TABLE WIDTH="100%" CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Paid Time Off  &amp; Holidays:
</FONT></TD>
<TD WIDTH="80%"><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 for personal time
off. PTO  hours are
accrued per pay period. Any hours in excess of 200 will be paid out in the first  pay
period of December. In the event of short-term illness, you will be provided time to
convalesce at home and will be paid your regular salary for this time. Sick time is not
accrued but rather is taken as needed.
</FONT></TD>
</TR>
</TABLE>
<BR>

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<TABLE WIDTH="100%" CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
&nbsp;
</FONT></TD>
<TD WIDTH="80%"><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>
</TABLE>
<BR>

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<TABLE WIDTH="100%" CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Retirement:
</FONT></TD>
<TD WIDTH="80%"><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: Some IRS limitations  may apply.)
</FONT></TD>
</TR>
</TABLE>
<BR>

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<TABLE WIDTH="100%" CELLPADDING=0 CELLSPACING=0 BORDER=0>
<TR VALIGN=TOP>
<TD WIDTH="20%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">
Arbitration:
</FONT></TD>
<TD WIDTH="80%"><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>
<BR>


<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><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>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><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>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">If 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></P>

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<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-2- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>



<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">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 close of
business Friday, March 18, 2005. If we do not receive your response by close of business
March 18, 2005 this offer will be withdrawn.</FONT></P>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">If there are any
questions, please do not hesitate to call me.</FONT></P>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">Sincerely,</FONT></P>
<BR>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">/s/ Kalani Jones</FONT></P>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">Kalani Jones<BR>
President/COO</FONT></P>
<BR>
<BR>
<BR>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><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, that I am not relying on any statement or term not contained in
this letter, and that no agreements exist which are contrary to the terms and
conditions set forth in this letter.</I></FONT></P>


<!-- MARKER FORMAT-SHEET="Two columns - left" -->
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="100%">
<TR>
<TD WIDTH="50%"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2">Accepted by: <U>/s/ Bruce Gray</U></FONT></FONT></TD>
<TD WIDTH="50%"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2">Date: <U>March 18, 2005</U></FONT></FONT> </TD>
</TR>
</TABLE>
<BR>

<!-- MARKER FORMAT-SHEET="PublicEase Pg Break w/ Number" -->
<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-3- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>



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<FILENAME>atco_10qex10-3.htm
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<HTML>
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<BODY BGCOLOR="#FFFFFF" link="#0033FF" vlink="#0033FF" alink="#0033FF">


<!-- MARKER FORMAT-SHEET="Right Bold" -->
<P ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>EXHIBIT 10.3 </B></FONT></P>


<!-- MARKER FORMAT-SHEET="Center Bold" -->
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>AMERICAN
TECHNOLOGY CORPORATION<BR>
INDUCEMENT STOCK OPTION GRANT NOTICE </B></FONT></P>

<!-- MARKER FORMAT-SHEET="Para Indent" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;AMERICAN
TECHNOLOGY CORPORATION (the &#147;Company&#148;) hereby grants to the Optionee named
below, an employee of the Company, as an inducement material to the Optionee&#146;s
entering into employment with the Company, a stock option to purchase the number of shares
of the Company&#146;s common stock set forth below. This option is subject to all of the
terms and conditions as set forth herein and the Stock Option Agreement (attached hereto),
which is incorporated herein in its entirety. </FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="50%">
<TR VALIGN="BOTTOM">
     <TD WIDTH="81%" ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Optionee:</FONT></TD>
     <TD WIDTH="19%" ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Bruce Gray</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Grant No:</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">I-</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Date of Grant:</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">03/22/05</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Shares Subject to Option:</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">100,000</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Exercise Price Per Share:</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$8.90</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Expiration Date:</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">03/22/2010</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Intended to be Incentive Stock Option:</FONT></TD>
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">No</FONT></TD></TR>
</TABLE>
<BR>

<!-- MARKER FORMAT-SHEET="Two columns - left" -->
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="100%">
<TR VALIGN="TOP">
<TD WIDTH="25%"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B>VESTING SCHEDULE:</B><BR><U>Vesting Start Date</U><BR>03/22/05</FONT></FONT></TD>
<TD WIDTH="75%"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><BR><U>Vesting Schedule</U><BR>Subject to continuing Service (as
defined in the Stock Option Agreement) this option becomes exercisable with respect to 1/4<SUP>th</SUP> of the Shares
Subject to Option on the one-year anniversary of the Vesting Start Date, which is defined as the date on
which the option is granted. Thereafter, subject to continuing Service, this option becomes
exercisable with respect to an additional 1/16<SUP>th</SUP> of the Shares Subject to Option on each subsequent
three-month anniversary of the Vesting Start Date, for a total of 4 years when this option is fully vested.</FONT></FONT></TD>
</TR>
</TABLE>
<BR>


<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">ADDITIONAL
TERMS/ACKNOWLEDGMENTS: The undersigned Optionee acknowledges receipt of, and represents
that the Optionee has read, understands, accepts and agrees to the terms of this Grant
Notice and the Stock Option Agreement. Optionee hereby accepts the Option subject to all
of its terms and conditions and further acknowledges that as of the Date of Grant, this
Grant Notice and the Stock Option Agreement set forth the entire understanding between
Optionee and the Company regarding the acquisition of stock in the Company and supersede
all prior oral and written agreements pertaining to this particular option.</FONT></P>

<!-- MARKER FORMAT-SHEET="Para Flush" -->
<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>NOTE: THE OPTIONEE
IS SOLELY RESPONSIBLE FOR ANY ELECTION TO EXERCISE THE OPTION, AND THE COMPANY SHALL HAVE
NO OBLIGATION WHATSOEVER TO PROVIDE NOTICE TO THE OPTIONEE OF ANY MATTER, INCLUDING, BUT
NOT LIMITED TO, THE DATE THE OPTION TERMINATES.</B></FONT></P>


<!-- MARKER FORMAT-SHEET="Two columns - left" -->
<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="100%">
<TR>
<TD WIDTH="50%"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B>AMERICAN TECHNOLOGY CORPORATION:</B><BR><BR>
<BR>By: <U>&nbsp;&nbsp;/s/ Kalani Jones&nbsp;&nbsp;</U><BR>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Name: Kalani Jones,
President/COO<BR>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dated: April 1, 2005</FONT></FONT></TD>
<TD WIDTH="50%"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B>OPTIONEE:</B><BR><BR>
<BR>By: <U>&nbsp;&nbsp;/s/ Bruce Gray&nbsp;&nbsp;</U><BR><BR>Date: <U>&nbsp;&nbsp;April 1, 2005&nbsp;&nbsp;</U></FONT></FONT></TD>
</TR>
</TABLE>
<BR>



<!-- MARKER FORMAT-SHEET="PublicEase Pg Break w/ Number" -->
<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-1- </FONT></P>
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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>AMERICAN
TECHNOLOGY CORPORATION<BR>
INDUCEMENT STOCK OPTION AGREEMENT </B></FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">Pursuant to the Grant
Notice and this Stock Option Agreement (&#147;Agreement&#148;), American Technology
Corporation (the &#147;Company&#148;) has granted to the Optionee named in the Grant
Notice (&#147;<B><I>you</I></B><I></I>&#148; or the
&#147;<B><I>Optionee</I></B><I></I>&#148;) an Option to purchase the number of shares of
the Company&#146;s common stock (&#147;Stock&#148;) indicated in the Grant Notice at the
exercise price indicated in the Grant Notice.</FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
details of this Option are as follows: </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;&nbsp;&nbsp;
<B><U>Definitions  And Construction</U>.</B> </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.1&nbsp;&nbsp;&nbsp;<B>Definitions</B>.
Whenever used herein, the following terms shall have their respective  meanings set forth
below: </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Affiliate</I></B><I></I>&#148; means (i)&nbsp;an entity, other than a Parent
Corporation, that directly, or indirectly through one or more intermediary entities,
controls the Company or (ii)&nbsp;an entity, other than a Subsidiary Corporation, that is
controlled by the Company directly, or indirectly through one or more intermediary
entities, or (iii)&nbsp;an entity which the Board designates as an Affiliate. For this
purpose, the term &#147;control&#148; (including the term &#147;controlled by&#148;)
means  the possession, direct or indirect, of the power to direct or cause the direction
of the  management and policies of the relevant entity, whether through the ownership of
voting  securities, by contract or otherwise; or shall have such other meaning assigned
such term  for the purposes of registration on Form&nbsp;S-8 under the Securities Act. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Board</I></B><I></I>&#148; means the Board of Directors of the Company. If
one  or more Committees have been appointed by the Board to administer outstanding stock
options, &#147;<B><I>Board</I></B><I></I>&#148; also means such Committee(s). </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;
A  &#147;<B><I>Change In Control</I></B><I></I>&#148; shall mean an Ownership Change
Event or  a series of related Ownership Change Events (collectively, a  &#147;<B><I>Transaction</I></B><I></I>&#148;)
wherein the stockholders of the Company  immediately before the Transaction do not retain
immediately after the Transaction, in  substantially the same proportions as their
ownership of shares of the Company&#146;s  voting stock immediately before the
Transaction, direct or indirect beneficial ownership  of more than fifty percent (50%) of
the total combined voting power of the outstanding  voting securities of the Company or,
in the case of a Transaction described in  Section&nbsp;1.1(q)(iii), the corporation or
other business entity to which the assets of  the Company were transferred (the &#147;<B><I>Transferee</I></B><I></I>&#148;),
as the  case may be. The Board shall determine in its discretion whether multiple sales
or  exchanges of the voting securities of the Company or multiple Ownership Change Events
are  related. Notwithstanding the preceding sentence, a Change in Control shall not
include a  Spinoff Transaction. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Code</I></B><I></I>&#148; means the Internal Revenue Code of 1986, as
amended,  and any applicable regulations promulgated thereunder. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Committee</I></B><I></I>&#148; means the Compensation Committee or other
committee of the Board duly appointed to administer this Agreement and having such powers
as shall be specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board granted
herein. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Company</I></B><I></I>&#148; means American Technology Corporation, a
Delaware  corporation, or any Successor. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Consultant</I></B><I></I>&#148; means a person engaged to provide consulting
or advisory services (other than as an Employee or a Director) to a Participating Company. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Director</I></B><I></I>&#148; means a member of the Board or of the board of
directors of any other Participating Company. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Disability</I></B><I></I>&#148; means the Optionee has been determined by the
long-term disability insurer of the Participating Company Group as eligible for
disability  benefits under the long-term disability plan of the Participating Company
Group or the  Optionee has been determined eligible for Supplemental Security Income
benefits by the  Social Security Administration of the United States of America. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Employee</I></B><I></I>&#148; means any person treated as an employee
(including an Officer or a Director who is also treated as an employee) in the records of
a Participating Company. The Company shall determine in good faith and in the exercise of
its discretion whether the Optionee has become or has ceased to be an Employee and the
effective date of the Optionee&#146;s employment or termination of employment, as the
case  may be. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Exchange Act</I></B><I></I>&#148; means the Securities Exchange Act of 1934,
as amended. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Fair  Market Value</I></B><I></I>&#148; means, as of any date, the value of
the Stock determined  as follows: </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;
If the Stock is  listed on any established stock exchange or traded on the Nasdaq Stock
Market or the  Nasdaq SmallCap Market, the Fair Market Value of a share of Stock shall be
the closing  sales price for such stock (or the closing bid, if no sales were reported)
as quoted on  such exchange or market (or if the stock is traded on more than one
exchange or market,  the exchange or market with the greatest volume of trading in the
Stock) on the last  market trading day prior to the day of determination, as reported in
The Wall Street  Journal or such other source as the Board deems reliable. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;&nbsp;&nbsp;
If the common  stock is quoted by a recognized securities dealer but selling prices are
not reported, the  Fair Market Value of a share of common stock shall be the mean between
the bid and asked  prices for the common stock on the last market trading day prior to
the day of  determination, as reported in the Wall Street Journal or such other source as
the Board  deems reliable. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;&nbsp;&nbsp;
In the absence  of such markets for the Stock, the Fair Market Value shall be determined
in good faith by  the Board. </FONT></P>

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<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(m)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Incentive Stock Option</I></B><I></I>&#148; means an Option intended to be
(as  set forth in the Option Agreement) and which qualifies as an incentive stock option
within  the meaning of Section&nbsp;422(b) of the Code. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(n)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Insider</I></B><I></I>&#148; means an Officer, a Director of the Company or
other person whose transactions in Stock are subject to Section&nbsp;16 of the Exchange
Act. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(o)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Non-Control Affiliate</I></B><I></I>&#148; means any entity in which any
Participating Company has an ownership interest and which the Board shall designate as a
Non-Control Affiliate. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(p)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Officer</I></B><I></I>&#148; means any person designated by the Board as an
officer of the Company. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(q)&nbsp;&nbsp;&nbsp;
An  &#147;<B><I>Ownership Change Event</I></B><I></I>&#148; shall be deemed to have
occurred  if any of the following occurs with respect to the Company: (i) the direct or
indirect  sale or exchange in a single or series of related transactions by the
stockholders of the  Company of more than fifty percent (50%) of the voting stock of the
Company; (ii) a merger  or consolidation in which the Company is a party; (iii) the sale,
exchange, or transfer of  all or substantially all, as determined by the Board in its
discretion, of the assets of  the Company; or (iv) a liquidation or dissolution of the
Company. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(r)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Parent  Corporation</I></B><I></I>&#148; means any present or future &#147;parent
corporation&#148; of the Company, as defined in Section&nbsp;424(e) of the Code. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(s)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Participating Company</I></B><I></I>&#148; means the Company or any Parent
Corporation or Subsidiary Corporation or Affiliate. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(t)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Participating Company Group</I></B><I></I>&#148; means, at any point in time,
all entities collectively which are then Participating Companies. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(u)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Rule  16b-3</I></B><I></I>&#148; means Rule 16b-3 under the Exchange Act, as
amended from time  to time, or any successor rule or regulation. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Securities Act</I></B><I></I>&#148; means the Securities Act of 1933, as
amended. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(w)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Service</I></B><I></I>&#148; means </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;
the  Optionee&#146;s employment or service with the Participating Company Group, whether
in the  capacity of an Employee, a Director or a Consultant. The Optionee&#146;s Service
shall not  be deemed to have terminated merely because of a change in the capacity in
which the  Optionee renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that there is
no interruption or termination of the Optionee&#146;s Service. Furthermore, only to such
extent as may be provided by the Company&#146;s leave policy, the Optionee&#146;s Service
with the Participating Company Group shall not be deemed to have terminated if the
Optionee takes any military leave, sick leave, or other leave of absence approved by the
Company. Notwithstanding the foregoing, a leave of absence shall be treated as Service
for  purposes of vesting only to such extent as may be provided by the Company&#146;s
leave  policy. The Optionee&#146;s Service shall be deemed to have terminated either upon
an  actual termination of Service or upon the entity for which the Optionee performs
Service  ceasing to be a Participating Company; except that if the entity for which
Optionee  performs Service is a Subsidiary Corporation and ceases to be a Participating
Company as a  result of the distribution of the voting stock of such Subsidiary
Corporation to the  stockholders of the Company, Service shall not be deemed to have
terminated as a result of  such distribution. Subject to the foregoing, the Company, in
its discretion, shall  determine whether the Optionee&#146;s Service has terminated and
the effective date of  such termination. </FONT></P>

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<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;&nbsp;&nbsp;
Notwithstanding  any other provision of this Section, an Optionee&#146;s Service shall
not be deemed to  have terminated merely because the Participating Company for which the
Optionee renders  Service ceases to be a member of the Participating Company Group by
reason of a Spinoff  Transaction, nor shall Service be deemed to have terminated upon
resumption of Service  from the Spinoff Company to a Participating Company. For all
purposes under this  Agreement, the Optionee&#146;s Service shall include Service,
whether in the capacity of  an Employee, Director or a Consultant, for the Spinoff
Company provided the Optionee was  employed by the Participating Company Group
immediately prior to the Spinoff Transaction.  Notwithstanding the foregoing, if the
Company&#146;s auditors determine that the  provisions or operation of the preceding two
sentences would cause the Company to incur a  compensation expense and provided further
that in the absence of the preceding two  sentences no such compensation expense would be
incurred, then the two preceding sentences  shall be without force or effect, and the
vesting and exercisability of each outstanding  Option and any shares acquired upon the
exercise thereof shall be determined under any  other applicable provision of this
Agreement. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(x)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Spinoff Company</I></B></FONT><FONT SIZE="2">&#148; means a Participating Company which ceases to be such as a
result of a Spinoff Transaction.</FONT></FONT> </P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(y)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Spinoff Transaction</I></B><I></I>&#148; means a transaction in which the
voting stock of an entity in the Participating Company Group is distributed to the
shareholders of a parent corporation as defined by Section&nbsp;424(e) of the Code, of
such entity. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(z)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Stock</I></B><I></I>&#148; means the common stock of the Company, as adjusted
from time to time in accordance with Section&nbsp;4.2. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(aa)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Subsidiary Corporation</I></B><I></I>&#148; means any present or future
&#147;subsidiary corporation&#148; of the Company, as defined in Section&nbsp;424(f) of
the Code. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(bb)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Successor</I></B><I></I>&#148; means a corporation into or with which the
Company is merged or consolidated or which acquires all or substantially all of the
assets  of the Company and which is designated by the Board as a Successor for purposes
of this  Agreement. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.2&nbsp;&nbsp;&nbsp;
<B><U>Construction</U></B><U></U>. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any provision of
this Agreement. Except when otherwise indicated by the context, the singular shall
include  the plural and the plural shall include the singular. Use of the term &#147;or&#148; is
not intended to be exclusive, unless the context clearly requires otherwise. </FONT></P>

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<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-5- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;&nbsp;&nbsp;
<B>VESTING. </B> Except as otherwise provided in this Agreement, this option will vest as
provided in the  Grant Notice. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;&nbsp;&nbsp;
<B><U>Exercise Of  The Option</U>.</B> </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.1&nbsp;&nbsp;&nbsp;
<B><U>Method Of  Exercise</U>.</B> You may exercise the vested portion of this Option at
any time prior to  the expiration of the Option by delivering a notice of exercise in
such form as may be  designated by the Company from time to time together with the
exercise price to the  Secretary of the Company, or to such other person as the Company
may designate, during  regular business hours and prior to the expiration of the Option,
together with such  additional documents as the Company may then require. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.2&nbsp;&nbsp;&nbsp;
<B><U>Method Of  Payment</U>.</B> Payment of the exercise price may be by cash (or
check), or pursuant to a  program developed under Regulation T as promulgated by the
Federal Reserve Board which,  prior to the issuance of Stock, results in either the
receipt of cash (or check) by the  Company or the receipt of irrevocable instructions to
a broker which provides for the  payment of the aggregate exercise price to the Company,
or a combination of the above  methods, as the Company may designate from time to time.
The Company reserves, at any and  all times, the right, in the Company&#146;s sole and
absolute discretion, to establish,  decline to approve or terminate any program or
procedures for the exercise of Options by  means of a Cashless Exercise. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.3&nbsp;&nbsp;&nbsp;
<B><U>Tax  Withholding</U>.</B> By exercising this Option you agree that as a condition
to any  exercise of this Option, the Company may withhold from your pay and any other
amounts  payable to you, or require you to enter an arrangement providing for the payment
by you to  the Company of any tax withholding obligation of the Company arising by reason
of  (1)&nbsp;the exercise of this Option; or (2)&nbsp;the disposition of Stock acquired
upon  such exercise. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.4&nbsp;&nbsp;&nbsp;
<B><U>Responsibility For Exercise</U>.</B> You are responsible for taking any and all
actions as may be required to exercise this Option in a timely manner and for properly
executing any such documents as may be required for exercise in accordance with such
rules  and procedures as may be established from time to time. By signing this Agreement
you  acknowledge that information regarding the procedures and requirements for this
exercise  of the Option is available to you on request. The Company shall have no duty or
obligation  to notify you of the expiration date of this Option. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;&nbsp;&nbsp;
<B><U>Securities  Law Compliance</U>.</B> Notwithstanding anything to the contrary
contained herein, this  Option may not be exercised unless the Stock issuable upon
exercise of this Option is then  registered under the Securities Act or, if such Stock is
not then so registered, the  Company has determined that such exercise and issuance would
be exempt from the  registration requirements of the Securities Act. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;&nbsp;&nbsp;
<B><U>Termination  Of The Option</U>.</B> The term of this Option commences on the Date
of Grant (as  specified in the Grant Notice) and expires and shall no longer be
exercisable upon the  earliest of: </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.1&nbsp;&nbsp;&nbsp;
the Expiration  Date indicated in the Grant Notice; </FONT></P>

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<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-6- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.2&nbsp;&nbsp;&nbsp;
the last day for  exercising the Option following termination of your Service as
described in Section&nbsp;6  below; or </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.3&nbsp;&nbsp;&nbsp;
a Change of  Control, to the extent provided in Section 7 below. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.&nbsp;&nbsp;&nbsp;
<B><U>Effect Of  Termination Of Service</U></B><U></U>. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.1&nbsp;&nbsp;&nbsp;
<B><U>Option  Exercisability</U></B><U><I></I></U><I>.</I> Subject to earlier termination
of the Option  as otherwise provided herein, the Option shall be exercisable after the
Optionee&#146;s  termination of Service only during the applicable time period determined
in accordance  with this Section&nbsp;6 and thereafter shall terminate. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;
<I>Disability</I>.  If the Optionee&#146;s Service terminates because of the Disability
of the Optionee, the  Option shall continue for the period of such Disability and may be
exercised by the  Optionee at any time during the period of Disability but in any event
no later than the  Expiration Date. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;
<I>Death</I>. If  the Optionee&#146;s Service terminates because of the death or because
of the Disability  of the Optionee and such termination is subsequently followed by the
death of the  Optionee, (A)&nbsp;the exercisability and vesting of the Option shall be
accelerated  effective upon the Optionee&#146;s death, and (B)&nbsp;the Option, to the
extent  unexercised and exercisable on the date of the Optionee&#146;s death, may be
exercised by  the Optionee&#146;s legal representative or other person who acquired the
right to  exercise the Option by reason of the Optionee&#146;s death at any time prior to
the  expiration of twelve (12) months after the date of the Optionee&#146;s death, but in
any  event no later than the Expiration Date. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;
<I>Termination  Upon Transfer To Non-Control Affiliate</I>. If at the request of the
Company, the Optionee  transfers Service to a Non-Control Affiliate and the Optionee&#146;s
Service ceases as a  result, then, subject to the Optionee&#146;s execution of a general
release of claims form  reasonably satisfactory to the Company, the Option, to the extent
unexercised and  exercisable on the date on which the Optionee&#146;s Service terminated,
may be exercised  by the Optionee (or the Optionee&#146;s guardian or legal
representative) at any time  prior to the expiration of twelve (12) months after the date
on which the Optionee&#146;s  Service terminated, but in any event no later than the
Expiration Date. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;&nbsp;&nbsp;
<I>Termination  After Change In Control.</I> If the Optionee&#146;s Service ceases as a
result of  Termination After Change in Control (as defined below), then (A)&nbsp;the
exercisability  and vesting of the Option shall be accelerated effective as of the date
on which the  Optionee&#146;s Service terminated, and (B)&nbsp;the Option, to the extent
unexercised and  exercisable on the date on which the Optionee&#146;s Service terminated,
may be exercised  by the Optionee (or the Optionee&#146;s guardian or legal
representative) at any time  prior to the expiration of six (6) months after the date on
which the Optionee&#146;s  Service terminated, but in any event no later than the
Expiration Date. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;&nbsp;&nbsp;
<I>Other  Termination Of Service</I>. If the Optionee&#146;s Service with the
Participating Company  Group terminates for any reason except Disability, death, Transfer
to a Non-Control  Affiliate, or Termination after Change in Control, the Option, to the
extent unexercised  and exercisable by the Optionee on the date on which the Optionee&#146;s
Service  terminates, may be exercised by the Optionee at any time prior to the expiration
of thirty  (30) days after the date on which the Optionee&#146;s Service terminates, but
in any event  no later than the Expiration Date. </FONT></P>

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<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-7- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.2&nbsp;&nbsp;&nbsp;
<B><U>Extension If  Exercise Prevented By Law</U></B><U></U>. Notwithstanding the
foregoing, other than  termination for Cause, if the exercise of an Option within the
applicable time periods set  forth in Section&nbsp;6.1 is prevented by the provisions of
Section&nbsp;4 above, the  Option shall remain exercisable until three (3) months after
the date the Optionee is  notified by the Company that the Option is exercisable, but in
any event no later than the  Expiration Date. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.3&nbsp;&nbsp;&nbsp;
<B><U>Extension If  Optionee Subject To Section 16(b)</U></B><U></U>. Notwithstanding the
foregoing, other  than termination for Cause, if a sale within the applicable time
periods set forth in  Section&nbsp;6.1 of shares acquired upon the exercise of the Option
would subject the  Optionee to suit under Section&nbsp;16(b) of the Exchange Act, the
Option shall remain  exercisable until the earliest to occur of (i)&nbsp;the tenth (10th)
day following the  date on which a sale of such shares by the Optionee would no longer be
subject to such  suit, (ii)&nbsp;the one hundred and ninetieth (190th) day after the
Optionee&#146;s  termination of Service, or (iii)&nbsp;the Expiration Date. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.4&nbsp;&nbsp;&nbsp;
<B><U>Certain  Definitions</U></B><U></U>. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Cause</I></B><I></I>&#148; shall mean any of the following: (1)&nbsp;the
Optionee&#146;s theft, dishonesty, or falsification of any Participating Company
documents  or records; (2)&nbsp;the Optionee&#146;s improper use or disclosure of a
Participating  Company&#146;s confidential or proprietary information; (3)&nbsp;any
action by the  Optionee which has a detrimental effect on a Participating Company&#146;s
reputation or  business; (4)&nbsp;the Optionee&#146;s failure or inability to perform any
reasonable  assigned duties after written notice from a Participating Company of, and a
reasonable  opportunity to cure, such failure or inability; (5)&nbsp;any material breach
by the  Optionee of any employment or service agreement between the Optionee and a
Participating  Company, which breach is not cured pursuant to the terms of such
agreement; (6)&nbsp;the  Optionee&#146;s conviction (including any plea of guilty or nolo
contendere) of any  criminal act which impairs the Optionee&#146;s ability to perform his
duties with a  Participating Company; or (7)&nbsp;violation of a material Company policy. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Good  Reason</I></B><I></I>&#148; shall mean any one or more of the following: </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;
without the  Optionee&#146;s express written consent, the assignment to the Optionee of
any duties, or  any limitation of the Optionee&#146;s responsibilities, substantially
inconsistent with  the Optionee&#146;s positions, duties, responsibilities and status
with the Participating  Company Group immediately prior to the date of the Change in
Control; </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;&nbsp;&nbsp;
without the  Optionee&#146;s express written consent, the relocation of the principal
place of the  Optionee&#146;s employment or service to a location that is more than fifty
(50) miles  from the Optionee&#146;s principal place of employment or service immediately
prior to the  date of the Change in Control, or the imposition of travel requirements
substantially more  demanding of the Optionee than such travel requirements existing
immediately prior to the  date of the Change in Control; </FONT></P>

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<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-8- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;&nbsp;&nbsp;
any failure by  the Participating Company Group to pay, or any material reduction by the
Participating  Company Group of, (A)&nbsp;the Optionee&#146;s base salary in effect
immediately prior to  the date of the Change in Control (unless reductions comparable in
amount and duration are  concurrently made for all other employees of the Participating
Company Group with  responsibilities, organizational level and title comparable to the
Optionee&#146;s), or  (B)&nbsp;the Optionee&#146;s bonus compensation, if any, in effect
immediately prior to  the date of the Change in Control (subject to applicable
performance requirements with  respect to the actual amount of bonus compensation earned
by the Optionee); </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv)&nbsp;&nbsp;&nbsp;
any failure by  the Participating Company Group to (A)&nbsp;continue to provide the
Optionee with the  opportunity to participate, on terms no less favorable than those in
effect for the  benefit of any employee or service provider group which customarily
includes a person  holding the employment or service provider position or a comparable
position with the  Participating Company Group then held by the Optionee, in any benefit
or compensation  plans and programs, including, but not limited to, the Participating
Company Group&#146;s  life, disability, health, dental, medical, savings, profit sharing,
stock purchase and  retirement plans, if any, in which the Optionee was participating
immediately prior to the  date of the Change in Control, or their equivalent, or (B)&nbsp;provide
the Optionee with  all other fringe benefits (or their equivalent) from time to time in
effect for the  benefit of any employee group which customarily includes a person holding
the employment  or service provider position or a comparable position with the
Participating Company Group  then held by the Optionee; </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v)&nbsp;&nbsp;&nbsp;
any breach by the  Participating Company Group of any material agreement between the
Optionee and a  Participating Company concerning Optionee&#146;s employment; or </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi)&nbsp;&nbsp;&nbsp;
any failure by  the Company to obtain the assumption of any material agreement between
the Optionee and  the Company concerning the Optionee&#146;s employment by a successor or
assign of the  Company. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;
&#147;<B><I>Termination After Change In Control</I></B><I></I>&#148; shall mean either of
the following events occurring within twenty-four (24) months after a Change in Control: </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;
termination by the  Participating Company Group of the Optionee&#146;s Service with the
Participating Company  Group for any reason other than for Cause; or </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;&nbsp;&nbsp;
the  Optionee&#146;s resignation for Good Reason from all capacities in which the
Optionee is  then rendering Service to the Participating Company Group within a
reasonable period of  time following the event constituting Good Reason. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">Notwithstanding any
provision herein to the contrary, Termination After Change in Control shall not include
any termination of the Optionee&#146;s Service with the Participating Company Group which
(1)&nbsp;is for Cause; (2)&nbsp;is a result of the Optionee&#146;s death or Disability;
(3)&nbsp;is a result of the Optionee&#146;s voluntary termination of Service other than
for Good Reason; or (4)&nbsp;occurs prior to the effectiveness of a Change in Control.</FONT></P>

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<BR>
<BR>
<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-9- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.&nbsp;&nbsp;&nbsp;
<B><U>Change In  Control</U>.</B> In the event of a Change in Control, the surviving,
continuing,  successor, or purchasing corporation or other business entity or parent
thereof, as the  case may be (the &#147;<B><I>Acquiring Corporation</I></B><I></I>&#148;),
may, without the  consent of the Optionee, either assume the Company&#146;s rights and
obligations the  Option or substitute for the Option substantially equivalent options for
the Acquiring  Corporation&#146;s stock. In the event the Acquiring Corporation elects
not to assume or  substitute for the Option in connection with a Change in Control, the
exercisability and  vesting of the Option shall be accelerated, effective as of the date
ten (10) days prior  to the date of the Change in Control. The exercise or vesting of
this Option that was  permissible solely by reason of this Section shall be conditioned
upon the consummation of  the Change in Control. To the extent this Option is neither
assumed or substituted for by  the Acquiring Corporation in connection with the Change in
Control nor exercised as of the  date of the Change in Control, it shall terminate and
cease to be outstanding effective as  of the date of the Change in Control.
Notwithstanding the foregoing, shares acquired upon  exercise of the Option prior to the
Change in Control and any consideration received  pursuant to the Change in Control with
respect to such shares shall continue to be subject  to all applicable provisions of the
Agreement. Furthermore, notwithstanding the foregoing,  if the corporation the stock of
which is subject to the Option immediately prior to an  Ownership Change Event described
in Section&nbsp;1.1(q)(i) constituting a Change in  Control is the surviving or
continuing corporation and immediately after such Ownership  Change Event less than fifty
percent (50%) of the total combined voting power of its  voting stock is held by another
corporation or by other corporations that are members of  an affiliated group within the
meaning of Section&nbsp;1504(a) of the Code without regard  to the provisions of Section&nbsp;1504(b)
of the Code, the Option shall not terminate  unless the Board otherwise provides in its
discretion. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.&nbsp;&nbsp;&nbsp;
<B><U>Option Not A  Service Contract</U>.</B> This Option is not an employment or service
contract and nothing  in this Agreement or the Grant Notice shall be deemed to create in
any way whatsoever any  obligation on your part to continue in the service of the
Company, or of the Company to  continue your service with the Company. In addition,
nothing in your Option shall obligate  the Company, its stockholders, Board, Officers or
Employees to continue any relationship  which you might have as a Director or Consultant
for the Company. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.&nbsp;&nbsp;&nbsp;
<B><U>Adjustments  For Changes In Capital Structure</U></B><U></U>. In the event of any
stock dividend, stock  split, reverse stock split, recapitalization, combination,
reclassification or similar  change in the capital structure of the Company, appropriate
adjustments shall be made in  the number and class of shares subject to the Option and in
the exercise price per share  of the Option. If a majority of the shares of Stock are
exchanged for, converted into, or  otherwise become (whether or not pursuant to an
Ownership Change Event) shares of another  corporation (the &#147;<B><I>New Shares</I></B><I></I>&#148;),
the Board may unilaterally  amend this Agreement to provide that the Option is
exercisable for New Shares. In the  event of any such amendment, the number of shares
subject to, and the exercise price per  share of, the Option shall be adjusted in a fair
and equitable manner as determined by the  Board, in its discretion. Notwithstanding the
foregoing, any fractional share resulting  from an adjustment pursuant to this Section&nbsp;shall
be rounded down to the nearest  whole number, and in no event may the exercise price of
the Option be decreased to an  amount less than the par value, if any, of the Stock
subject to the Option. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10.&nbsp;&nbsp;&nbsp;
<B><U>Representations</U>.</B> By executing this Agreement, you hereby warrant and
represent that you are acquiring this Option for your own account and that you have no
intention of distributing, transferring or selling all or any part of this Option except
in accordance with the terms of this Agreement and Section&nbsp;25102(f) of the
California  Corporations Code. You also hereby warrant and represent that you have either
(i)&nbsp;preexisting personal or business relationships with the Company or any of its
officers, directors or controlling persons, or (ii)&nbsp;the capacity to protect your own
interests in connection with the grant of this Option by virtue of the business or
financial expertise of you or any of your professional advisors who are unaffiliated with
and who are not compensated by the Company or any of its affiliates, directly or
indirectly. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.&nbsp;&nbsp;&nbsp;
<B><U>Notices</U>.</B> Any notices provided for in this Agreement or the Grant Notice
shall be given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in the
United  States mail, postage prepaid, addressed to you at the last address you provided
to the  Company. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12.&nbsp;&nbsp;&nbsp;
<B><U>Transferability</U></B><U></U>. This Option shall not be transferable in any manner
(including without limitation, sale, alienation, anticipation, pledge, encumbrance, or
assignment) other than, (i)&nbsp;by will or by the laws of descent and distribution,  (ii)&nbsp;by
written designation of a beneficiary, in a form acceptable to the Company,  with such
designation taking effect upon the death of the Optionee, (iii)&nbsp;by  delivering
written notice to the Company, in a form acceptable to the Company (including  such
representations, warranties and indemnifications as the Company shall require the
Optionee to make to protect the Company&#146;s interests and ensure that this Option has
been transferred under the circumstances approved by the Company), by gift to the
Optionee&#146;s spouse, former spouse, children, stepchildren, grandchildren, parent,
stepparent, grandparent, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law,  daughter-in-law, brother-in-law, or sister-in-law, persons having one of the
foregoing  types of relationship with the Optionee due to adoption, any person sharing
the  Optionee&#146;s household (other than a tenant or employee), a foundation in which
these  persons or the Optionee control the management of assets, and any other entity in
which  these persons (or the Optionee) own more than fifty percent of the voting
interests. A  transfer to an entity in which more than fifty percent of the voting
interests are owned  by these persons (or the Optionee) in exchange for an interest in
that entity is  specifically included as a permissible type of transfer. In addition, a
transfer to a  trust created solely for the benefit (i.e., the Optionee and/or any or all
of the  foregoing persons hold more than 50&nbsp;percent of the beneficial interest in
the trust)  of the Optionee and/or any or all of the foregoing persons is also a
permissible  transferee, or (iv)&nbsp;such other transferees as may be authorized by the
Board in its  sole and absolute discretion. During the Optionee&#146;s life this Option
is exercisable  only by the Optionee or a transferee satisfying the above conditions.
Except in the event  of the Optionee&#146;s death, upon transfer of this Option to any or
all of the foregoing  persons, the Optionee is liable for any and all taxes due upon
exercise of this  transferred Option. At no time will a transferee who is considered an
affiliate under  Rule&nbsp;144(a)(1) be able to sell any or all such Stock without
complying with  Rule&nbsp;144. The right of a transferee to exercise the transferred
portion of this  Option shall terminate in accordance with the Optionee&#146;s right of
exercise under this  Option and is further subject to such representations, warranties
and indemnifications  from the transferee that the Company requires the transferee to
make to protect the  Company&#146;s interests and ensure that this Option has been
transferred under the  circumstances approved by the Company. Once a portion of this
Option is transferred, no  further transfer may be made of that portion of this Option. </FONT></P>

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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-11- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13.&nbsp;&nbsp;&nbsp;
<B><U>Arbitration</U></B><U></U>. Any dispute or claim concerning the Option, the Grant
Notice or this Agreement shall be fully, finally and exclusively resolved by binding
arbitration conducted by the American Arbitration Association pursuant to the commercial
arbitration rules in San Diego, California. By accepting the Option, the Optionee and the
Company waive their respective rights to have any such disputes or claims tried by a
judge  or jury. </FONT></P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14.&nbsp;&nbsp;&nbsp;
<B><U>Amendment</U>.</B> The Board may amend your Option at any time, provided no such
amendment may adversely affect the Option or any unexercised portion of your Option,
without your consent unless such amendment is necessary to comply with any applicable law
or government regulation. No amendment or addition to this Agreement shall be effective
unless in writing or, in such electronic form as may be designated by the Company. </FONT></P>


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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-12- </FONT></P>
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<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>6
<FILENAME>atco_10qex10-4.htm
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<P ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>EXHIBIT 10.4 </B></FONT></P>



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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>AMERICAN
TECHNOLOGY CORPORATION<BR>
SUMMARY SHEET<BR>
OF<BR>
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION </B></FONT></P>


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<P ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B><U>Compensation of
Directors</U></B></FONT></FONT> </P>



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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">We currently have no
standard arrangements pursuant to which our directors are compensated for services
provided as a director or committee member, other than in the form of reimbursement of
expenses of attending directors&#146; or committee meetings. Our directors have received
in the past, and may receive in the future, stock option grants. During fiscal 2005, the
Compensation Committee will be reevaluating our director compensation program.</FONT></P>


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<P ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B><U>Compensation of
Executive Officers</U></B></FONT></FONT> </P>

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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">The executive officers
of the Company serve at the discretion of the Board of Directors. From time to time, the
Compensation Committee of the Board of Directors reviews and determines the salaries that
are paid to the Company&#146;s executive officers. The following table sets forth the
annual salary rates for the Company&#146;s current executive officers as of the date of
this report on Form 10-Q:</FONT></P>


<TABLE CELLPADDING="0" CELLSPACING="0" BORDER="0" WIDTH="70%">
<TR VALIGN="BOTTOM">
     <TD WIDTH="89%" ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Elwood G. Norris, Chairman</FONT></TD>
     <TD WIDTH="11%" ALIGN="RIGHT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$200,000&nbsp;</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Kalani Jones, President and Chief Operating Officer</FONT></TD>
     <TD ALIGN="RIGHT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$220,000&nbsp;</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Michael A. Russell, Chief Financial Officer and Secretary</FONT></TD>
     <TD ALIGN="RIGHT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$185,000&nbsp;</FONT></TD></TR>
<TR VALIGN="BOTTOM">
     <TD ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">Bruce Gray, Vice President of the Commercial Products Group</FONT></TD>
     <TD ALIGN="RIGHT"><FONT FACE="Times New Roman, Times, Serif" SIZE="-1">$200,000&nbsp;</FONT></TD></TR>
</TABLE>
<BR>

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<P ALIGN=LEFT><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B><U>Employment
Arrangements with Current Executive Officers</U></B></FONT></FONT> </P>


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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">The following
discussion summarizes the employment arrangements between us and our current executive
officers as of the date of this report on Form 10-Q:</FONT></P>


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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>Mr. Elwood G.
Norris</B> - Effective September 1, 1997, we entered into a three year employment
contract with Mr. Norris, for his services as Chief Technology Officer. The three-year
term expired on August 31, 2000, but the agreement remains in effect until one party gives
thirty days advance notice of termination to the other. Mr. Norris now serves as Chairman
under the term of this agreement. The agreement, as amended by the Compensation Committee,
provides for a base salary of $16,667 per month. The agreement provides that Mr. Norris
will participate in bonus, benefit and other incentives at the discretion of the Board of
Directors. Mr. Norris has agreed not to disclose trade secrets and has agreed to assign
certain inventions to us during employment. We are also obligated to pay Mr. Norris
certain royalties. See &#147;Certain Relationships and Related Transactions&#148; in our
Form 10-K/A filed March 18, 2005.</FONT></P>



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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B>Mr. Kalani Jones</B> - We
entered into a letter agreement dated as of August 28, 2003, as amended on October 20,
2003, under which Mr. Jones was employed as our Senior Vice President of Operations. Mr.
Jones has since been promoted to President and Chief Operating Officer. Mr. Jones has
also assumed the duties of Vice President of the Government and Force Protection Systems
Group until we locate a replacement. The letter agreement provides for an annual base
salary of $140,000, and an annual performance bonus of up to 30% of base salary to be
determined by the Compensation Committee and the Board of Directors. Mr. Jones&#146; base
salary was $200,000 per year at September 30, 2004.</FONT></FONT></P>

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<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>


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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">On January 27, 2005,
our Compensation Committee increased Mr. Jones&#146; current annual base salary to
$220,000.&nbsp;&nbsp;For fiscal 2005, the Compensation Committee determined that Mr.
Jones&#146; bonus should be based upon a target bonus of 50% of base salary given his
increased responsibilities as President and Chief Operating Officer.&nbsp;We expect future
bonus determinations for Mr. Jones to be made based upon a target bonus of 50% of base
salary.&nbsp;Mr. Jones&#146; employment is terminable at-will by us or by Mr. Jones for
any reason, with or without notice.</FONT></P>



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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif"><FONT SIZE="2"><B>Mr. Michael Russell</B> -
We entered into a letter agreement dated June 15, 2004, under which Mr. Russell was
employed as our Chief Financial Officer. Mr. Russell has also been appointed as our
Secretary. The letter agreement provides for an annual base salary of $185,000, and an
annual performance bonus of up to 25% of base salary to be determined by the
Compensation Committee and the Board of Directors. Mr. Russell&#146;s employment is terminable
at-will by us or by Mr. Russell for any reason, with or without notice.</FONT></FONT></P>


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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><B>Mr. Bruce Gray</B> -
We entered into a letter agreement with Mr. Bruce Gray, under which Mr. Gray was
employed as our Vice President of the Commercial Products Group effective March 21, 2005.
The letter agreement provides for an annual base salary of $200,000, and an annual sales
bonus of up to $100,000, payable on a quarterly basis, based on attaining quarterly and
annual goals to be established. Mr. Gray&#146;s employment is terminable at-will by us or
by Mr. Gray for any reason, with or without notice.</FONT></P>


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<P ALIGN="LEFT"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">Executive officers in
charge of revenue producing business segments also participate in a broad-based commission
arrangement. Under our existing commission arrangement, commissions are awarded for each
of our business segments based on achievement of operating plan revenue within the
segment, with commissions increasing in percentage if operating plan is exceeded.
Executive officers in charge of each business unit recommend an allocation of such
commissions amongst sales personnel and themselves, which recommendation is reviewed and
approved by the Chairman and the President. All commissions payable to executive officers
are then reviewed and approved by the Compensation Committee.</FONT></P>


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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE="2">-2- </FONT></P>
<HR STYLE="page-break-after: always" SIZE=3 COLOR=GRAY NOSHADE>
<BR>



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<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>7
<FILENAME>atco_10qex31-1.htm
<TEXT>
<HTML><HEAD>
<TITLE>
Unassociated Document
</TITLE>
<!-- Licensed to: PublicEase, Inc.-->
<!-- Document Created using EDGARIZER HTML 3.0.0.17860 -->
<!-- Copyright 2005 EDGARfilings, Ltd., an IEC company.-->
<!-- All rights reserved EDGARfilings.com -->
</HEAD><BODY id=38 bgColor=#ffffff>
<DIV><BR>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=right><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">EXHIBIT
31.1 </FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG><U>CERTIFICATIONS</U></STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">I, Elwood
G. Norris, certify that:</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">1.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">I
      have reviewed this quarterly report on Form 10-Q of American Technology
      Corporation;</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">2.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Based
      on my knowledge, this 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
      report;</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">3.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Based
      on my knowledge, the financial statements, and other financial information
      included in this 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
      report;</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">4.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">The
      registrant'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></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">a)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">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 report is being
      prepared;</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">b)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">[paragraph
      omitted pursuant to SEC Release Nos. 33-2838 and
  34-47986];</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">c)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
and</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">d)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Disclosed
      in this report any change in the registrant's internal control over
      financial reporting that occurred during the registrant's most recent
      fiscal quarter (the registrant's fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect the registrant's internal control over financial
      reporting; and</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">5.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">The
      registrant's other certifying officers and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the registrant's independent registered public accounting firm and the
      audit committee of registrant's board of directors (or persons performing
      the equivalent functions):</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">a)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information;
and</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">b)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls over financial reporting.</FONT></DIV></TD></TR></TABLE></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Date: May
  10, 2005</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><U>/s/
ELWOOD G. NORRIS<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;</U></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Elwood G.
Norris, Chairman of the Board<BR></FONT><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">(Co-Principal
Executive Officer)</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV></DIV></DIV></BODY></HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>8
<FILENAME>atco_10qex31-2.htm
<TEXT>
<HTML><HEAD>
<TITLE>
Unassociated Document
</TITLE>
<!-- Licensed to: PublicEase, Inc.-->
<!-- Document Created using EDGARIZER HTML 3.0.0.17860 -->
<!-- Copyright 2005 EDGARfilings, Ltd., an IEC company.-->
<!-- All rights reserved EDGARfilings.com -->
</HEAD><BODY id=38 bgColor=#ffffff>
<DIV><BR>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=right><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>EXHIBIT
31.2</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG><U>CERTIFICATIONS</U></STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">I, Kalani
Jones, certify that:</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">1.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">I
      have reviewed this quarterly report on Form 10-Q of American Technology
      Corporation;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">2.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Based
      on my knowledge, this 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
      report;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">3.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Based
      on my knowledge, the financial statements, and other financial information
      included in this 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
      report;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">4.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">The
      registrant'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></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">a)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">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 report is being
      prepared;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">b)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">[paragraph
      omitted pursuant to SEC Release Nos. 33-2838 and
  34-47986];</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">c)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
and</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">d)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Disclosed
      in this report any change in the registrant's internal control over
      financial reporting that occurred during the registrant's most recent
      fiscal quarter (the registrant's fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect the registrant's internal control over financial
      reporting; and</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">5.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">The
      registrant's other certifying officers and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the registrant's independent registered public accounting firm and the
      audit committee of registrant's board of directors (or persons performing
      the equivalent functions):</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">a)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information;
and</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">b)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls over financial reporting.</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Date: May
  10, 2005</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><U>/s/
KALANI JONES<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;</U></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Kalani
Jones, President and Chief Operating Officer<BR></FONT><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">(Co-Principal
Executive Officer)</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV></DIV></DIV></BODY></HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.3
<SEQUENCE>9
<FILENAME>atco_10qex31-3.htm
<TEXT>
<HTML><HEAD>
<TITLE>
Unassociated Document
</TITLE>
<!-- Licensed to: PublicEase, Inc.-->
<!-- Document Created using EDGARIZER HTML 3.0.0.17860 -->
<!-- Copyright 2005 EDGARfilings, Ltd., an IEC company.-->
<!-- All rights reserved EDGARfilings.com -->
</HEAD><BODY id=38 bgColor=#ffffff>
<DIV><BR>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=right><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>EXHIBIT
31.3</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG><U>CERTIFICATIONS</U></STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">I,
Michael A. Russell, certify that:</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">1.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">I
      have reviewed this quarterly report on Form 10-Q of American Technology
      Corporation;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">2.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Based
      on my knowledge, this 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
      report;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">3.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Based
      on my knowledge, the financial statements, and other financial information
      included in this 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
      report;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">4.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">The
      registrant'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></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">a)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">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 report is being
      prepared;</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">b)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">[paragraph
      omitted pursuant to SEC Release Nos. 33-2838 and
  34-47986];</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">c)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
and</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">d)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Disclosed
      in this report any change in the registrant's internal control over
      financial reporting that occurred during the registrant's most recent
      fiscal quarter (the registrant's fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect the registrant's internal control over financial
      reporting; and</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 36pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">5.&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">The
      registrant's other certifying officers and I have disclosed, based on our
      most recent evaluation of internal control over financial reporting, to
      the registrant's independent registered public accounting firm and the
      audit committee of registrant's board of directors (or persons performing
      the equivalent functions):</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">a)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information;
and</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<TABLE id=list cellSpacing=0 cellPadding=0 width="100%">
  <TR style="LINE-HEIGHT: 1.25" vAlign=top>
    <TD style="WIDTH: 72pt" align=right><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">b)&nbsp;&nbsp;</FONT></TD>
    <TD>
      <DIV style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"
      align=justify><FONT
      style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls over financial reporting.</FONT></DIV></TD></TR></TABLE>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Date: May
  10, 2005</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><U>/s/
MICHAEL A. RUSSELL<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;</U></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Michael
A. Russell, Chief Financial Officer</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">(Principal
Financial Officer)</FONT></DIV>
<DIV></DIV></DIV></BODY></HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>10
<FILENAME>atco_10qex32-1.htm
<TEXT>
<HTML><HEAD>
<TITLE>
Unassociated Document
</TITLE>
<!-- Licensed to: PublicEase, Inc.-->
<!-- Document Created using EDGARIZER HTML 3.0.0.17860 -->
<!-- Copyright 2005 EDGARfilings, Ltd., an IEC company.-->
<!-- All rights reserved EDGARfilings.com -->
</HEAD><BODY id=38 bgColor=#ffffff>
<DIV><BR>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=right><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>EXHIBIT
32.1</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>CERTIFICATION
OF CO-PRINCIPAL EXECUTIVE OFFICERS AND PRINCIPAL FINANCIAL OFFICER
</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>PURSUANT
TO</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>18
U.S.C. SECTION 1350,</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>AS
ADOPTED PURSUANT TO</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=center><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><STRONG>SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002</STRONG></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Each of
the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an
officer of American Technology Corporation (the "Company"), that, to his
knowledge, the quarterly report of the Company on Form 10-Q for the quarter
ended March 31, 2005 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></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Dated:
May 10, 2005</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><U>/s/
ELWOOD G. NORRIS<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;</U></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Elwood G.
Norris, Chairman of the Board</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">(Co-Principal
Executive Officer)</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><U>/s/
KALANI JONES<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;</U></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Kalani
Jones, President and Chief Operating Officer</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">(Co-Principal
Executive Officer)</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><U>/s/
MICHAEL A. RUSSELL<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;<FONT id=TAB2
style="LETTER-SPACING: 9pt">&nbsp;&nbsp;&nbsp;</FONT>&nbsp;</U></FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Michael
A. Russell, Chief Financial Officer</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=left><FONT
style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">(Principal
Financial Officer)</FONT></DIV>
<DIV
style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt"
align=justify>&nbsp;</DIV>
<DIV></DIV></DIV></BODY></HTML>

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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