10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

or

[   ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________ .

Commission File Number: 0-24248

AMERICAN TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	87-03261799 (I.R.S. Empl. Ident. No.)
13114 Evening Creek Drive South, San Diego, California	92128
(Address of principal executive offices)	(Zip Code)

 

(858) 679-2114
(Registrant’s telephone number, including area code)

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.   þ YES   ¨  NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 30, 2004.

Common Stock, $0.00001 par value
(Class) 19,739,316
(Number of Shares)

AMERICAN TECHNOLOGY CORPORATION
INDEX
	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of March 31, 2004
and September 30, 2003 (unaudited)	3
Statements of Operations for the three and six months ended
March 31, 2004 and 2003 (unaudited)	4
Statements of Cash Flows for the six months ended
March 31, 2004 and 2003 (unaudited)	5
Notes to Interim Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures about Market Risk	27
Item 4. Controls and Procedures	27
PART II. OTHER INFORMATION	28
Item 1. Legal Proceedings	28
Item 2. Changes in Securities and Use of Proceeds	28
Item 3. Defaults upon Senior Securities	28
Item 4. Submission of Matters to a Vote of Security Holder	28
Item 5. Other Information	28
Item 6. Exhibits and Reports on Form 8-K	28
SIGNATURES	29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

American Technology Corporation
BALANCE SHEETS
(Unaudited)

	March 31,		September 30,
	2004		2003  (a)
ASSETS
Current Assets:
Cash	$	6,579,562	$	9,850,358
Trade accounts receivable, less allowance of
$25,000 each period for doubtful accounts		1,405,972		184,162
Inventories, net		624,030		408,944
Prepaid expenses and other		82,684		33,849
Total current assets		8,692,248		10,477,313
Equipment, net		244,700		200,262
Patents, net		1,225,918		1,066,796
Total assets	$	10,162,866	$	11,744,371
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	723,189	$	604,343
Accrued liabilities:
Payroll and related		370,069		463,788
Deferred revenue and deposits		339,508		276,708
Warranty reserve		325,000		319,500
Other		-		318,849
Capital lease short-term portion		10,515		9,915
Total current liabilities		1,768,281		1,993,103
Long-Term Liabilities:
Capital lease long-term portion		16,835		23,097
Total liabilities		1,785,116		2,016,200
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.00001 par value; 5,000,000 shares authorized:
Series D Preferred stock 250,000 shares designated: 50,000
issued and outstanding each period. Liquidation preference
of $558,000 and $542,000, respectively.		-		-
Series E Preferred stock 350,000 shares designated: 253,250
and 263,250 issued and outstanding. Liquidation preference
of $2,698,000 and $2,725,000, respectively.		3		3
Common stock, $0.00001 par value; 50,000,000 shares authorized;
19,634,398 and 19,342,657 shares issued and outstanding		196		193
Additional paid-in capital		47,046,231		46,095,032
Accumulated deficit		(38,668,680)		(36,367,057)
Total stockholders' equity		8,377,750		9,728,171
Total liabilities and stockholders' equity	$	10,162,866	$	11,744,371

See accompanying notes to interim financial statements.
(a) Derived from the audited financial statements as of September 30, 2003.

3

American Technology Corporation
STATEMENTS OF OPERATIONS
 (Unaudited)

	For the three months ended				For the six months ended
	March 31,				March 31,
	2004		2003		2004		2003
Revenues:
Product sales	$	1,493,250	$	145,611	$	2,111,834	$	533,578
Contract and license		-		92,331		156,194		127,663
Total revenues		1,493,250		237,942		2,268,028		661,241
Cost of revenues		945,224		350,784		1,353,702		672,419
Gross profit		548,026		(112,842)		914,326		(11,178)
Operating expenses:
Selling, general and administrative		1,079,472		908,992		2,151,786		1,665,309
Research and development		644,248		727,298		1,093,219		1,308,719
Total operating expenses		1,723,720		1,636,290		3,245,005		2,974,028
Loss from operations		(1,175,694)		(1,749,132)		(2,330,679)		(2,985,206)
Other income (expense):
Interest income		11,491		1,321		30,865		3,652
Interest expense		(993)		(104,828)		(1,809)		(602,730)
Other		-		(1,667)		-		(1,667)
Total other income (expense)		10,498		(105,174)		29,056		(600,745)
Net loss		(1,165,196)		(1,854,306)		(2,301,623)		(3,585,951)
Dividend requirements on convertible preferred stock		406,846		810,412		700,551		965,291
Net loss available to common stockholders	$	(1,572,042)	$	(2,664,718)	$	(3,002,174)	$	(4,551,242)
Net loss per share of common stock - basic and diluted	$	(0.08)	$	(0.18)	$	(0.15)	$	(0.31)
Average weighted number of common shares outstanding		19,508,387		14,897,662		19,442,192		14,629,077

See accompanying notes to interim financial statements.

4

American Technology Corporation
STATEMENTS OF CASH FLOWS
(Unaudited)
		For the six months ended
		March 31,
	2004			2003
Increase (Decrease) in Cash
Operating Activities:
Net loss	$	(2,301,623)	$	(3,585,951)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization		106,024		379,612
Allowance for doubtful accounts		-		(12,100)
Warranty reserve		25,933		41,542
Common stock issued for services and compensation		-		410,816
Amortization of debt discount		-		405,000
Changes in assets and liabilities:
Trade accounts receivable		(1,221,810)		86,682
Inventories		(215,086)		(294,875)
Prepaid expenses and other		(48,835)		(52,870)
Accounts payable		118,846		(255,891)
Change in warranty reserve		(20,433)		-
Accrued liabilities		(101,768)		197,690
Net cash used in operating activities		(3,658,752)		(2,680,345)
Investing Activities:
Purchase of equipment		(104,765)		(9,701)
Patent costs paid		(204,819)		(32,749)
Net cash used in investing activities		(309,584)		(42,450)
Financing Activities:
Payments on capital lease		(5,662)		(4,368)
Proceeds from issuance of convertible promissory notes		-		500,000
Proceeds from issuance of preferred stock		-		2,407,500
Cash paid for offering costs		-		(141,222)
Proceeds from exercise of stock options and warrants		703,202		19,500
Net cash provided by financing activities		697,540		2,781,410
Net increase (decrease) in cash		(3,270,796)		58,615
Cash, beginning of period		9,850,358		1,807,720
Cash, end of period	$	6,579,562	$	1,866,335
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	1,809	$	72,305
Cash paid for taxes		-		-
Non-cash financing activities:
Sale of equipment for accounts payable		-	$	117,000
Secured notes converted to Series E preferred stock		-	$	1,000,000
Series E preferred stock for subscription receivable		-	$	25,000
Common stock issued for legal settlement accrual	$	248,000		-

 

See accompanying notes to interim financial statements.

5

AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)

1. OPERATIONS
American Technology Corporation (the “Company”) is engaged in design, development and commercialization of sound, acoustic and other technologies. The Company produces products based on its HyperSonic Sound (HSS), Long Range Acoustic Device (LRAD), NeoPlanar and Purebass sound technologies.

In the fourth quarter of fiscal 2003 the Company organized operations into two segments by the end-user markets they serve. The Business Products and Licensing Group (Business Group) licenses and markets HSS, NeoPlanar and Purebass speakers to companies that employ audio in consumer, commercial and professional applications. The Government and Force Protection Systems Group (Government Group) markets LRAD, NeoPlanar and HSS products to government and military customers and to the expanding force protection market.

The Company continues to be subject to certain risks, including dependence on a limited number of customers; reliance on third party suppliers and manufacturers; competition; the uncertainty of the market for new sound products; limited manufacturing, marketing and sales experience; uncertainty regarding future warranty costs; and the uncertainty of future profitability and positive cash flow.

2. STATEMENT OF PRESENTATION AND MANAGEMENT’S PLAN
The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for interim periods. Operating results for the three and six month periods are not necessarily indicative of the results that may be expected for the year. The interim financial statements and notes thereto should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended September 30, 2003 included in the Company’s annual report on Form 10-K.

Other than cash of $6,579,562 at March 31, 2004 and accounts receivable collections, the Company has no other material unused sources of liquidity at this time. The Company has financed its operations primarily through the sale of common and preferred stock, sale of notes and margins from product sales and licensing. Based on the Company’s cash position assuming (a) currently planned expenditures and level of operations and (b) continuation of product sales, management believes the Company will have sufficient capital resources for the next twelve months. Management believes increased product sales will provide additional operating funds. Management has significant flexibility to adjust the level of research and development and selling and administrative expenses based on the availability of resources.

Management expects the Company to incur additional operating losses as a result of expenditures for research and development and marketing costs for sound products. The timing and amounts of these expenditures and the extent of the Company’s operating losses will depend on future product sales levels and other factors, some of which are beyond management’s control. There can be no assurance that revenues from products and technologies will become sufficient to sustain operations or achieve profits in the future.

Where necessary, prior year’s information has been reclassified to conform with the fiscal 2004 statement presentation.

3. NET LOSS PER SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common stockholders, after deduction for cumulative imputed and accredited dividends, by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the periods presented cause the inclusion of potential common stock instruments outstanding to be antidilutive. Stock options, warrants and convertible preferred stock exercisable into 4,900,870 shares of common stock were outstanding at March 31, 2004 and stock options, warrants and convertible preferred stock and notes exercisable into 6,445,474 shares of common stock were outstanding at March 31, 2003. These securities were not included in the computation of diluted earnings (loss) per share because of the losses but could potentially dilute earnings (loss) per share in future periods.

The Company has allocated the proceeds from preferred stock issuance between the preferred stock and warrants and also calculated the beneficial conversion discount for each series of preferred stock. The value of the beneficial conversion discount and the value of the warrants was recorded as a deemed dividend and is being accreted over the conversion period of the preferred stock. Net loss available to common stockholders was increased in each period presented in computing net loss per share by the accretion of the value of these imputed deemed dividends. Such imputed deemed dividends are not included in the Company’s stockholders’ equity as the Company has an accumulated deficit. Amounts are included in net loss available to common stockholders. The imputed deemed dividends are not contractual obligations of the Company to pay such imputed dividends.

6

AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)

The provisions of each of the Company’s series of preferred stock also provide for a 6% per annum accretion in the conversion value (similar to a dividend). These amounts also increase the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:

	Three Months Ended		Six Months Ended
	March 31,		March 31,
	2004	2003	2004	2003
Net loss	$(1,165,196)	$(1,854,306)	$(2,301,623)	$(3,585,951)
Imputed deemed dividends on Series D and E
warrants issued with preferred stock	(146,274)	(77,731)	(247,113)	(132,016)
Imputed deemed dividends on Series D and E
preferred stock	(214,112)	(677,622)	(359,990)	(739,592)
Accretion on preferred stock at 6% stated rate:
Series C preferred stock	-	(3,000)	-	(6,000)
Series D preferred stock	(7,500)	(52,059)	(15,000)	(87,683)
Series E preferred stock	(38,960)	-	(78,448)	-
Net loss available to common stockholders	$(1,572,042)	$(2,664,718)	$(3,002,174)	$(4,551,242)

At March 31, 2004 the balance of deemed dividends attributable to preferred stock warrants and to the preferred discount provision was $2,463,266. This amount will be accreted as the preferred stock is converted or warrants exercised and otherwise ratably over the remaining term of the Series D (June 30, 2006) and Series E Convertible Preferred Stock (December 31, 2006).

4. STOCK-BASED COMPENSATION
In December 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, which amended FAS No. 123, “Accounting for Stock-Based Compensation.” The new standard provides alternative methods of transition for a voluntary change to the fair market value based method for accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for the Company’s financial statements for the fiscal year ended September 30, 2003 and the Company adopted the disclosure requirements effective October 1, 2002. In compliance with FAS No. 148, the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation plan as defined by APB No. 25.

The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2004 and 2003, respectively: dividend yield of zero percent for all years; expected volatility 75%percent in 2004 and expected volatility of 68 to 84 percent in 2003; risk-free interest rates of 1.32 to 2.13 percent; and expected lives of 2.21 to 5 years.

7

AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2004		2003		2004		2003
Net loss available to common shareholders	$	(1,572,042)	$	(2,664,718)	$	(3,002,174)	$	(4,551,242)
Plus: Stock-based employee compensation
expense included in reported net loss		-		-		-		-
Less: Total stock-based employee compensation expense
determined using fair value based method		(262,566)		(136,076)		(507,855)		(258,152)
Pro forma net loss available to common stockholders	$	(1,834,608)	$	(2,800,794)	$	(3,510,029)	$	(4,809,394)
Net loss per common share - basic
and diluted - as reported	$	(0.08)	$	(0.18)	$	(0.15)	$	(0.31)
Net loss per common share - basic
and diluted - pro forma	$	(0.09)	$	(0.19)	$	(0.18)	$	(0.33)

 

5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FIN 46-R, “Consolidation of Variable Interest Entities — an interpretation of ARB 51 (revised December 2003)”, which replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent to the issuance of FIN 46, including modifications of the scope of FIN 46. For all non-special purpose entities (“SPE”) created prior to February 1, 2003, public entities will be required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. For all entities (regardless of whether the entity is an SPE) that were created subsequent to January 31, 2003, public entities are already required to apply the provisions of FIN 46, and should continue doing so unless they elect to adopt the provisions of Fin 46-R early as of the first interim or annual reporting period ending after December 15, 2003. If they do not elect to adopt FIN 46-R early, public entities would be required to apply FIN 46-R to those post-January 31, 2003 entities as of the end of the first interim or annual reporting period ending after March 15, 2004. Management did not elect to adopt FIN 46-R early and will need to review and assess the effects, if any, FIN 46-R will have on the Company’s financial statements, but does not believe the adoption of FIN 46-R for non-SPEs will have a material impact to the Company’s financial position, results of operations or cash flows.

6. INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of the following:

		March 31,		September 30,
	2004		2003
Finished goods	$	17,730	$	13,690
Work in process		151		182,638
Raw materials		626,149		232,616
		644,030		428,944
Reserve for obsolescence		(20,000)		(20,000)
	$	624,030	$	408,944

 

8

AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)

7. CUSTOMER CONCENTRATION
For the six months ended March 31, 2004 sales to three customers accounted for 41%, 32% and 11% of total revenues, respectively. For the three months ended March 31, 2004 sales to two customers accounted for 62% and 17% of total revenues, respectively. 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.

Some of the Company’s past reliance on a limited number of customers has been due to the Company’s former strategy of pursuing sales in key markets through distributors who often had exclusive rights to sell to specific customers or for specific uses. The Company’s current strategy is to pursue markets and customers directly or through non-exclusive distributors, but this strategy has not yet demonstrated sustained success. However, the Company may still be dependent on the success and timing of large orders from individual customers that may not be recurring, or may not recur in a predictable fashion. Accordingly, sales to individual customers may continue to represent significant percentages of future sales volume, and the loss or delay in orders to individual customers may significantly impair quarterly results of operations.

8. INTANGIBLES
Patents are carried at cost and, when granted are amortized over their estimated useful lives. The carrying value of patents is periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than its carrying value. Patents consist of the following:

	March 31,	September 30,
	2004	2003
Patents at cost	$ 1,491,877	$ 1,287,058
Accumulated amortization	(265,959)	(220,262)
Net patent	$ 1,225,918	$ 1,066,796

9. PRODUCT WARRANTY COST
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.

Changes in the warranty reserves during the three and six months ended March 31, 2004 and 2003 were as follows:

		Three Months Ended				Six Months Ended
		March 31,				March 31,
	2004		2003		2004		2003
Beginning balance	$	315,000	$	6,313	$	319,500	$	6,313
Warranty provision		30,433		41,542		25,933		41,542
Warranty payments		(20,433)		-		(20,433)		-
Ending balance	$	325,000	$	47,855	$	325,000	$	47,855

 

9

AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)

10. STOCKHOLDERS' EQUITY
The following table summarizes changes in equity components from transactions during the six months ended March 31, 2004

					Additional
	Preferred Stock		Common Stock		Paid-In	Accumulated
	Shares	Amount	Shares	Amount	Capital	Deficit
Balance as of October 1, 2003	313,250	$    3	19,342,657	$ 193	$46,095,032	$(36,367,057)
Stock issued upon exercise of
stock options	-	-	184,008	2	653,200	-
Stock issued upon exercise of
warrants	-	-	25,000	-	50,000	-
Stock issued upon conversion of
Series E preferred stock	(10,000)	-	32,733	-	-	-
Legal settlement and royalty buyout
At $4.96 per share	-	-	50,000	1	247,999	-
Deemed dividends and accretion on
convertible preferred stock of $700,551	-	-	-	-	-	-
Net loss for the period	-	-	-	-	-	(2,301,623)
Balance as of March 31, 2004	303,250	$    3	19,634,398	$  196	$47,046,231	$(38,668,680)

At March 31, 2004 the Company’s 50,000 outstanding shares of Series D Convertible Preferred Stock would have been convertible into 123,943 shares of common stock and the 253,250 outstanding shares of Series E Convertible Preferred Stock would have been convertible into 830,140 shares of common stock. Subsequent to March 31, 2004 one holder converted 20,000 shares of Series E Convertible Preferred Stock into 65,856 common shares.

The following table summarizes information about stock option activity during the six months ended March 31, 2004:

	Number of	Weighted Average
	Options	exercise price
Outstanding October 1, 2003	1,612,274	$4.00
Canceled/expired	(266,781)	$5.57
Exercised	(184,008)	$3.55
Granted	432,500	$4.91
Outstanding March 31, 2004	1,593,985	$4.05
Exercisable at March 31, 2004	931,567	$3.60

Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and expire over the period from 2004 to 2009 with an average life of 3.4 years.

The following table summarizes information about warrant activity during the six months ended March 31, 2004:

	Number of	Weighted Average
	Warrants	Exercise Price
Outstanding October 1, 2003	2,427,802	$3.85
Canceled/expired	(50,000)	$10.00
Exercised	(25,000)	$2.00
Issued	-	-
Outstanding March 31, 2004	2,352,802	$3.74

 

10

AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS 
(Unaudited)

At March 31, 2004, the following stock purchase warrants were outstanding arising from offerings and other transactions, each exercisable into one common share: 

	Exercise	Expiration
Number	Price	Date
75,000	$11.00	March 31, 2005
812,500	$2.00	September 30, 2006
495,880	$3.01	March 31, 2007
454,547	$6.75	July 10, 2007
100,000	$4.25	September 30, 2007
364,875	$3.25	December 31, 2007
50,000	$3.63	April 8, 2007
2,352,802

11. BUSINESS SEGMENT DATA AND MAJOR CUSTOMERS
The Company is engaged in design, development and commercialization of sound, acoustic and other technologies. In the fourth quarter of fiscal 2003 the Company organized operations into two segments by the end-user markets they serve. The Company’s reportable segments are strategic business units that sell the Company’s products to distinct distribution channels. The Business Products and Licensing Group (Business Group) licenses and markets HSS, NeoPlanar and Purebass products to companies that employ audio in consumer, commercial and professional applications. The Government and Force Protection Systems Group (Government Group) markets LRAD, NeoPlanar and HSS products to government and military customers and to the expanding force protection market. The segments are managed separately because each segment requires different selling and marketing strategies as the class of customers within each segment is different.

The Company does not allocate operating expenses or assets between its two reportable segments. Accordingly the measure of profit for each reportable segment is based on gross profit. Although the segments became separately managed only in the last quarter of fiscal 2003, the Company has segmented historical operations for comparable customers for comparison.

		Three Months  Ended				Six Months Ended
		March 31,				March 31,
	2004		2003		2004		2003
Revenues:
Business Group	$	455,156	$	192,834	$	537,095	$	581,187
Government Group		1,038,094		45,108		1,730,933		80,054
	$	1,493,250	$	237,942	$	2,268,028	$	661,241
Gross Profit (Loss):
Business Group	$	(73,180)	$	(110,606)	$	(76,792)	$	(26,604)
Government Group		621,206		(2,236)		991,118		15,426
	$	548,026	$	(112,842)	$	914,326	$	(11,178)

For the six months ended March 31, 2004 sales to three customers accounted for 41%, 32% and 11% of total revenues, respectively. For the three months ended March 31, 2004 sales to two customers accounted for 62%, and 17% of total revenues, respectively.

11

AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)

12. LEGAL PROCEEDINGS
In September 2003, the Company filed a complaint against eSOUNDideas, Inc., in the Superior Court of California, County of San Diego, alleging breach of contract and seeking a declaratory judgement to the effect that a License, Purchase and Marketing Agreement dated September 28, 2000 (the “ESI License Agreement”) with eSOUNDideas, a California partnership, was properly terminated in May 2003. The principals of eSOUNDideas are Greg O. Endsley and Douglas J. Paschall. The principals also founded a corporation, eSOUNDideas, Inc., which purported to assume the contractual obligations of eSOUNDideas. The Company amended the complaint in November 2003 to include eSOUNDideas (the general partnership), Mr. Endsley and Mr. Paschall as defendants. For convenience, the following discussion refers to eSOUNDideas and eSOUNDideas, Inc. collectively as “ESI.” In November 2003, the Company filed complaints in the Superior Court of California, County of San Diego, against Mr. Endsley and Paschall seeking declaratory judgments that options granted to each of Mr. Endsley and Mr. Paschall in April 2001 were terminated in October 2002.

The ESI License Agreement formerly appointed ESI as an exclusive distributor of HSS products specifically targeted to the point of sale/purchase, kiosk and display, and the event, trade show and exhibit markets in North America for five years. In June 2002, the Company and ESI purported to enter into an amendment to the ESI License Agreement, extending the term to ten years commencing on the first delivery of a commercial HSS product to an end user, and eliminating minimum purchase requirements for the first three years. The Company believes the amendment was invalid as it was given in consideration for a large order from ESI which was later withdrawn by ESI due to a dispute over the payment and delivery terms of such order. In May 2003, the Company gave notice to ESI of termination of the ESI License Agreement. The Company based its termination on its belief that ESI had failed to fulfill certain covenants contained in the ESI License Agreement related to efforts and resources required to maximize the distribution and sales of HSS products in its product categories. Under the terms of the ESI License Agreement, the termination was effective immediately, but ESI had sixty days to cure conditions giving rise to termination and reinstate the agreement. ESI did not tender a cure within such sixty day period.

The three cases were consolidated upon motion by the defendants and order of the court. The defendants have filed an amended cross-complaint against the Company alleging fraud, breach of contract in connection with the ESI License Agreement and the options, breach of the implied covenant of good faith and fair dealing, intentional interference with contract, negligent interference with contract, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, defamation, and violation of California Business and Professions Code §17200. The defendants seek actual and punitive damages in unstated amounts and other relief. The Company has filed a demurrer and motion to strike as to the amended cross-complaint, which is scheduled to be decided in May 2004. Discovery has commenced.

The Company intends to vigorously pursue its complaints against the defendants in these cases, and to vigorously challenge the defendants’ amended cross-complaint.

Related to the Company’s April 2000 purchase of the NeoPlanar speaker technology, the Company was in dispute with a predecessor owner of the technology regarding a minimum film royalty for 2002 of approximately $228,000. In September 2003 the Company accrued $292,500 as the estimated cost to settle this matter and to buyout all future per unit film royalties. In March 2004 the Company settled this matter for a payment of $25,000 and the issuance of 50,000 shares of common stock.

In February 2004, the Company gave notice of termination of two licensing and sales agreements with General Dynamics Armament and Technical Products, Inc. (GD-ATP), originally entered into in February 2003. GD-ATP was the original licensee under one agreement, and took assignment of the rights of Bath Iron Works Corporation, another subsidiary of General Dynamics Corporation, under the other agreement. The agreements gave GD-ATP the right to purchase, market and resell NeoPlanar and HIDA (High Intensity Directional Acoustics) products and components with exclusive rights for specified applications to certain government customers, including the Department of Defense, Department of Homeland Security and certain Federal, State and local agencies. GD-ATP disputed the Company’s right to terminate the agreements and demanded arbitration. In April 2004 the Company announced that it and GD-ATP had mutually agreed to resolve their disputes in an amicable manner, and to dismiss the arbitration proceedings. GD-ATP and the Company agreed that neither was liable to the other and that no party engaged in any wrongdoing. The resolution resulted in the termination of the two agreements, and in the Company assuming GD-ATP’s role in servicing certain LRAD customers previously serviced by GD-ATP.

12

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS

(Unaudited)

The Company may at times be involved in litigation in the ordinary course of business. Except as set forth above, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

13. INCOME TAXES

At March 31, 2004, a valuation allowance has been provided to offset the net deferred tax asset as management has determined that it is more likely than not that the deferred tax asset will not be realized. At September 30, 2003 the Company had for federal income tax purposes net operating loss carryforwards of approximately $28,500,000 which expire through 2024 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended.

13

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
This Report contains certain statements of a forward-looking nature relating to future events or the future performance. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” 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 “Business Risks”, which could cause actual results to differ materially from those indicated by such forward-looking statements.

Overview
We are an innovator of proprietary sound reproduction technologies and products. Our HyperSonic Sound (HSS) technology is a new method of sound reproduction that uses parametric acoustics to create sound “in the air.” Sound is generated along an air column using ultrasonic frequencies, those above the normal range of hearing. The HSS sound beam is highly directional and maintains sound volume over longer distances than traditional loudspeakers. We believe HyperSonic Sound’s unique features are useful in new sound applications. We believe we are the leader in developing and commercializing parametric loudspeakers.

We also have developed additional sound reproduction technologies. Our Long Range Acoustic Device (LRAD) technology produces variable intensity acoustical sound intended for use in long-range delivery of directional sound information, effectively a supercharged megaphone. LRAD products are used as directed long-range hailing and warning systems. Our NeoPlanar technology is a thin film magnetic speaker that produces sound of high quality, low distortion and high volume. NeoPlanar applications include high-end sound systems and public address. Our PureBass extended range woofer employs unique cabinet construction, novel vent configurations and multiple acoustic filters to minimize distortion and provide high output. It provides a high frequency interface with our NeoPlanar panels and other upper range satellite speaker systems.

We are focusing our marketing efforts on providing sound reproduction products and components to customers and licensing our technologies for customer applications. When we supply systems or components used in other products to customers, distributors or OEMs, we include our intellectual property fees in the selling prices of the systems or components. We currently produce HSS systems and NeoPlanar panels as components of a sound system. When we license a sound technology, we typically receive a flat fee up-front, with the balance of payments based upon a percentage of net revenues of the products in which our technology is incorporated. Revenues from up-front license fees are recognized ratably over the specified term of the particular license. Contract fees are recorded as services are performed.

The following is a summary description of our operating results for the three and six months ended March 31, 2004. A more detailed discussion of our operating results is included below under the heading “Results of Operations.”

Our second quarter of fiscal 2004 represented a continuation of business and strategic initiatives implemented in the first quarter of fiscal 2004, including:

-	Organization:
		We changed 70% of our senior management team. We now have a management team with significant experience in successfully bringing products to market.
		We have formed separate Engineering and Advanced Development Departments. The Advanced Development Department will continue to foster creative innovation. The Engineering Department will focus on bringing reliable products to market.
		We have reorganized the sales and marketing of our products by the end-user markets they serve. We now have a Business Products and Licensing Group and a Government and Force Protection Systems Group.
-	Management Process:
		We are implementing a phase gate development process. This process provides executive review of each project at key phases within the development cycle. The goal is to ensure development of products which meet our cost, reliability and business goals.

14

		We have instituted a rigorous engineering verification, design verification and product life testing process. The purpose of this process is to ensure that our products are reliable and meet customer requirements.
-	Sales:
		We are focusing greater effort on pursuing sales opportunities internally with marketing teams in the Business Group and Government Group experienced in the target markets. In the past, we relied primarily on outside licensees for sales and marketing of our key products.
		While we will continue to consider certain sales at lower margins to showcase our technologies for target audiences and markets, we are focusing on maintaining acceptable margins for the substantial majority of our sales.
		Our marketing teams are focused on sales growth and we expect continued revenue growth in the second half of fiscal 2004.
-	Business Relationships:
		We are establishing relationships with established national or global partners for sales, manufacturing and distribution to accelerate the worldwide adoption of our products. We are generally pursuing relationships on a non-exclusive basis to maximize the performance incentives for our partners and market penetration of our products.
		Relationships are being chosen and structured carefully for complimentary fit with our strategy and achievement of desired objectives.

We believe our second quarter shows positive results deriving from these initiatives. Our revenues for the quarter ended March 31, 2004 were approximately $1.5 million, compared to $775,000 for the first quarter of fiscal 2004, and $238,000 for the quarter ended March 31, 2003. Our gross profit for the three and six months ended March 31, 2004 was 37% and 40% of revenues, compared to (47)% and (2)% gross losses for the comparable three and six months of the prior fiscal year. We accomplished these significant improvements in sales and margins while increasing only modestly our total operating expenses. Overall, we reduced our net loss from $3.6 million in the first six months of fiscal 2003 to $2.3 million for the first six months of fiscal 2004, and from $1.9 million in the second quarter of fiscal 2003 to $1.2 million in the second quarter of fiscal 2004.

Management is continuing to focus efforts upon near-term revenue and gross margin improvement from our existing, marketable products. We expect to continue to see modest increases in personnel costs to further in-house sales and marketing and to grow our Advanced Development Department to develop new products and product applications, and to fill key management and operational positions, including Chief Financial Officer. We are focusing resources on sales, marketing, engineering and production of existing products, and we will closely monitor research and development activities in future periods with a view toward establishing a compelling business case for each Advanced Development initiative.

Our various technologies are high risk in nature. Our future is largely dependent upon the success of our sound technologies. We invest significant funds in research and development and on patent applications related to our proprietary technologies. Unanticipated technical or manufacturing obstacles can arise at any time and disrupt sales or licensing activities and result in lengthy and costly delays. Our technologies may not achieve market acceptance sufficient to sustain operations or achieve future profits.

Recent Developments
In April 2004, Kalani Jones was appointed President and Chief Operating Officer. He formally served as Chief Operating Officer. In the new position, he will assume greater responsibilities for all aspects of our business operations.

In February 2004, we gave notice of termination of two licensing and sales agreements with General Dynamics Armament and Technical Products, Inc. (GD-ATP), originally entered into in February 2003. GD-ATP was the original licensee under one agreement, and took assignment of the rights of Bath Iron Works Corporation, another subsidiary of General Dynamics Corporation, under the other agreement. The agreements gave GD-ATP the right to purchase, market and resell NeoPlanar and HIDA (High Intensity Directional Acoustics) products and components with exclusive rights for specified applications to certain government customers, including the Department of Defense, Department of Homeland Security and certain Federal, State and local agencies. GD-ATP disputed our right to terminate the agreements and demanded arbitration. In April 2004 we announced that we and GD-ATP had mutually agreed to resolve our disputes in an amicable manner, and to dismiss the arbitration proceedings. We and GD-ATP agreed that neither was liable to the other and that no party engaged in any wrongdoing. The resolution resulted in the termination of the two agreements, and us assuming GD-ATP’s role in servicing certain LRAD customers previously serviced by GD-ATP.

15

Revenues under the GD-ATP agreements and a prior professional services agreement with Bath Iron Works represented approximately 32% of our revenues during the six months ended March 31, 2004, and 24% of our revenues during the fiscal year ended September 30, 2003. We do not believe that the termination of the GD-ATP agreements will have an adverse effect on our future results of operations.

Critical Accounting Policies
We have identified the policies below as critical to our business operations and the understandings of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information. Actual results could materially differ from those estimates under different assumptions and conditions and operating results for the three and six month periods presented are not necessarily indicative of the results that may be expected for the year. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition. We derive our revenue primarily from two sources: (i) component and product sale revenues and (ii) contract and license fee revenue. Component and product sale revenues are recognized in the periods that products are shipped to customers, FOB shipping point, if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and there are no remaining obligations. Revenues from ongoing per unit license fees are earned based on units shipped incorporating our patented proprietary technologies and are recognized in the period when the ultimate customer accepts the product and collectibility is reasonably assured. Revenues from up-front license and other fees and annual license fees are recognized ratably over the specified term of the particular license or agreement.

Intangible Assets. Intangible assets include purchased technology and patents which are amortized over their estimated useful lives. The carrying value of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than its carrying value.

Warranty Reserve. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold and anticipated cost of warranty repairs and anticipated rates of warranty claims. We evaluate the adequacy of the provision for warranty costs each reporting period.

Guarantees and Indemnifications. Under our charter documents, we have agreed to indemnify our officers and directors for certain events. We also enter into certain indemnification agreements in the normal course of our business. We have no liabilities recorded for such indemnities.

Stock-Based Compensation. In December 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, which amended FAS No. 123, “Accounting for Stock-Based Compensation.” The new standard provides alternative methods of transition for a voluntary change to the fair market value based method for accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for our financial statements for the fiscal year ended September 30, 2003 and we adopted the disclosure requirements effective October 1, 2002. In compliance with FAS No. 148, we have elected to continue to follow the intrinsic value method in accounting for our stock-based employee compensation plan as defined by APB No. 25.

16

Research and Development Expenses. Research and development expenses are salaries and related expenses associated with the development of our proprietary sound technologies and include compensation paid to engineering personnel and fees to outside contractors and consultants.

Deferred Tax Asset. We have provided a full valuation reserve related to our substantial deferred tax assets. In the future, if sufficient evidence of our ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce our valuation allowances, resulting in income tax benefits in our consolidated statement of operations. We evaluate the realizability of the deferred tax assets and assess the need for valuation allowance quarterly. The utilization of the net operating loss carryforwards could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership.

Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

Results of Operations

Revenues
Revenues increased 243% for the six month period ended March 31, 2004 to $2,268,028 compared to $661,241 for the comparable first six months of fiscal 2003. Revenues for the three months ended March 31, 2004 were $1,493,250, a 528% increase over revenues of $237,942 for the comparable three months of fiscal 2003. Revenues for the first six months of fiscal 2004 included $2,111,834 of product and component sales and $156,194 of contract and license revenues. Revenues for the first six months of fiscal 2003 included $533,578 of product sales and $127,663 of contract and license revenues. The increases in the 2004 period were primarily a result of two large LRAD contracts and one large NeoPlanr contract. The six month 2003 revenues included $78,680 for portable consumer products. Portable consumer product revenues represented products sourced by us, private labeled under our name and resold to sporting good stores and other retailers. During fiscal 2003 we ceased marketing marketing and selling portable consumer products in order to focus financial, personnel and facility resources on our sound technologies. There were no sales of portable consumer products in the first six months of fiscal 2004.

Contract and license revenues for the six months ended March 31, 2004 and 2003 were $156,194 and $127,663. At March 31, 2004 and 2003 we had $339,508 and $388,168 recorded as deferred revenue for existing contracts and licenses.

As we have only recently commenced product manufacturing and sales, have limited record of recurring sales and because difficulties producing HSS systems in fiscal 2003 caused delays in order fulfillment, we do not consider order backlog to be an important index of future performance at this time. Our order backlog was approximately $600,000 and $240,000 at March 31, 2004 and 2003. Backlog orders are subject to modification, cancellation or rescheduling by our customers. Future shipments may also be delayed due to production delays, component shortages and other production and delivery related issues.

Late in fiscal 2003, with the addition of new personnel, we organized operations into two segments by the end-user markets they serve. Our Business Products and Licensing Group (Business Group) licenses and markets HSS, NeoPlanar and Purebass products to companies which employ audio in consumer, commercial and professional applications. Our Government and Force Protection Systems Group (Government Group) markets LRAD, NeoPlanar and HSS products to government and military customers and to the expanding force protection market. Although the segments became separately managed in the last quarter of fiscal 2003, we have segmented historical operations for comparable end-user customers for comparison purposes.

Presented below is a summary of revenues by business segment:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2004		2003		2004		2003
Revenues:
Business Group	$	455,156	$	192,834	$	537,095	$	581,187
Government Group		1,038,094		45,108		1,730,933		80,054
	$	1,493,250	$	237,942	$	2,268,028	$	661,241

 

17

Business Group revenues for the six months ended March 31, 2004 included both HSS and NeoPlanar product sales. Business Group revenues for the comparable six months of the prior year included $78,680 for portable consumer products with the balance from initial HSS startup sales and NeoPlanar product sales. HSS sales declined and shipments were sporadic in the last three quarters of fiscal 2003 as we worked through manufacturing and material issues. In the first quarter of fiscal 2004 we began to slowly ramp HSS shipments to selected customers. We expect Business Group HSS product shipments to ramp up during the balance of fiscal 2004.

Government Group revenues for the six months ended March 31, 2004 included sales of $1,574,739 of LRAD and NeoPlanar products and $156,194 of revenues from engineering and contract work. These revenues derived primarily from two large orders and the timing of follow-on orders, if any, is difficult to predict. Government Group revenues for the prior year’s first six months were primarily from contract work related to the development of LRAD technology. Our Government Group has only recently been formed and until recently was highly dependent on the contracts described above under “Recent Developments,” which have been terminated. Accordingly, we do not believe historical revenues are indicative of future revenues. We expect continued revenue growth in the second half of fiscal 2004.

For the six months ended March 31, 2004 sales to three customers accounted for 41%, 32% and 11% of total revenues, respectively. For the three months ended March 31, 2004 sales to two customers accounted for 62%, and 17% of total revenues.

Gross Profit

Presented below is the gross profit or loss by business segment.

	Three Months Ended		Six Months Ended
	March 31,		March 31,
	2004	2003	2004	2003
Gross Profit (Loss):
Business Group	$(73,180)	$(110,606)	$(76,792)	$(26,604)
Government Group	621,206	(2,236)	991,118	15,426
	$548,026	$(112,842)	$914,326	$(11,178)

The overall gross profit for the six months ended March 31, 2004 was 40% of revenues, a significant improvement from the 2% gross loss reported for the comparable first six months of the prior year. We experienced a gross loss on Business Group operations for the first six months of fiscal 2004 of $76,792 due to a slow ramping of sales efforts following manufacturing and warranty issues encountered in fiscal 2003 on HSS systems. We also recognized lower than standard margins on a Business Group NeoPlanar installation that demonstrates the benefits of NeoPlanar speakers in theaters, concert halls and other venues. For the 2003 fiscal year we had a gross loss in Business Group operations primarily as a result of warranty costs incurred in the last quarter of fiscal 2003. We expect Business Group product sales to produce positive margins in the balance of fiscal 2004 as we grow manufacturing capacity.

We do not believe historical gross profit results are necessarily indicative of future results. Gross profit percentage is highly dependent on sales prices, volumes, personnel allocations and assignments, purchasing costs and overhead allocations. Our various sound products have different margins so product sales mix can materially affect gross profits. We continue to make model changes including raw material and component changes thus changing cost inputs. Margins may vary significantly from period to period.

Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were 95% for the first six months of fiscal 2004 compared to 252% in the comparable period for fiscal 2003. These costs in the first six months of fiscal 2004 totaled $2,151,786 an increase of $486,477 from the $1,665,309 incurred in the first six months of fiscal 2003. Personnel and consulting costs increased $397,000 in the current six month period compared to the prior period primarily as a result of personnel additions made in late fiscal 2003 including the formation of our Government Group and recruiting and related costs. Legal costs decreased by $113,000 but may vary significantly quarter to quarter due to licensing and contract initiatives, legal disputes and other matters. Other increases in the current year included an $83,000 increase in our public company and stock market obligations and an $81,000 increase in occupancy costs resulting from increased activity. Selling, general and administrative expenses for the second quarter ended March 31, 2004 were $1,079,472 compared to $908,992 for the comparable quarter of fiscal 2003.

18

We expect to expend additional resources on growing our management team and in marketing our sound technologies in future periods, which we expect will increase selling, general and administrative expenses.

Research and Development Expenses
Research and development expenses declined from fiscal 2003 to 2004. Research and development expenses as a percentage of sales were 48% for the first six months of fiscal 2004 compared to 198% in the comparable period for fiscal 2003. These costs in the first six months of fiscal 2004 totaled $1,093,219, a decrease of $215,500 from the $1,308,719 incurred in the first six months of fiscal 2003. Personnel and consulting costs decreased in the first six months of 2004 by $165,000 while component and prototype related costs increased by $100,000. Fiscal 2003 research and development costs included $210,414 of amortization expense related to purchased technology. There was no comparable amortization in the most recent six month period as the purchased technology is fully amortized. Research and development expenses for the second quarter ended March 31, 2004 were $644,248 compared to $727,298 for the comparable quarter of fiscal 2003.

Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. We expect fiscal 2004 development costs to increase in the second half of the year compared to the first six months as we add personnel and develop new applications and products based on our HSS and LRAD technologies.

Loss From Operations
Total operating expenses were $3,245,005 for the six months ended March 31, 2004, compared to the $2,974,028 for the comparable period ended March 31, 2003. Our loss from operations was $2,330,679 for the first six months of fiscal 2004 compared to $2,985,206 for the first six months of fiscal 2003. We expect increased product sales and margin contributions in fiscal 2004 to continue to reduce the loss from operations from fiscal 2003 levels. The loss from operations for the second fiscal quarter ended March 31, 2004 was $1,175,694. This represents a $573,438 reduction compared to $1,749,132 loss from operations for the second fiscal quarter ended March 31, 2003. The reduced loss from operations experienced in the most recent quarter resulted primarily from a $660,000 improvement in gross margin contribution.

Other Income (Expense)
The major items in other income (expense) are interest expense and interest income. In the first six months of fiscal 2004 we incurred interest expense of $1,809 a reduction of $600,921 from interest expense of $602,730 in the first six months of fiscal 2003, which included non-cash amortization of debt discount of $405,000. During fiscal 2003 our outstanding long-term debt was converted to equity causing the decline in interest expense. We do not expect any significant interest costs for the balance of fiscal 2004. We recognized $30,865 in interest income for the six months ended March 31, 2004 from invested cash balances.

Net Loss
The net loss for first six months of fiscal 2004 was $2,301,623 compared to the net loss of $3,585,951 for the first six months of the prior year. The $1,284,328 reduction in the net loss resulted primarily from increased revenues and margins and reduced interest expense. The net loss for the second fiscal quarter of 2004 was $1,165,196 representing an improvement of $689,110 compared to the second quarter of fiscal 2003.

Net Loss Available to Common Stockholders
Net loss available to common stockholders was increased in each period presented in computing net loss per share by the accretion of the value of imputed deemed dividends arising from the beneficial conversion discount and the value of warrants associated with convertible preferred stock. The imputed deemed dividends are not contractual obligations to pay such imputed dividends. Net loss available to common stockholders is also increased by the 6% accretion (similar to a dividend) on outstanding preferred stock. These amounts aggregated $700,551 in the first six months of fiscal 2004 and $965,291 in the first six months of fiscal 2003. Accordingly the net loss available to common stockholders was $3,002,174 and $4,551,242 each period.

Liquidity and Capital Resources
We have experienced significant negative cash flow from operating activities including developing and introducing our sound technologies. Our net cash used in operating activities was $3,658,752 for the six months ended March 31, 2004. As of March 31, 2004, the net loss of $2,301,623 included certain expenses not requiring the use of cash totaling

19

$111,524. In addition, cash was used in operating activities through an increase of $1,221,810 in accounts receivable, an increase of $215,086 in inventory, an increase of $48,835 in prepaid expenses and a $101,768 reduction in accrued liabilities. Cash was provided by an increase of $118,846 in accounts payable.

At March 31, 2004, we had accounts receivable of $1,405,972 as compared to $184,162 at September 30, 2003. Accounts receivable at March 31, 2004 included over $1.1 million billed for two customers in March 2004. The balance at March 31, 2004 represented approximately 113 days of revenues. Terms with individual customers vary greatly. We typically require pre-payment or a maximum of thirty-day terms for our sound technology components and products. Our receivables can also vary substantially due to overall sales volumes and due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers and the timing of contract payments.

For the first six months of fiscal 2004, we used $104,765 for the purchase of equipment and software and made a $204,819 investment in patents and new patent applications. We anticipate a continued investment in patents in the balance of fiscal 2004. Dollar amounts to be invested on these patents are not currently estimable by management.

At March 31, 2004, we had working capital of $6,923,967 compared to working capital of $8,484,210 at September 30, 2003.

We have financed our working capital requirements primarily through sales of common and preferred stock and warrants, exercises of stock options and warrants, sales of convertible and non-convertible notes, and margins from product sales. Private equity and debt capital has generally been available to us when needed. The availability of such capital in the future will depend on a number of factors, some of which are outside our control. These include general market conditions, conditions in the private equity markets where we have historically raised capital, the then-current market price of our common stock, and our historical financial performance and future prospects. Our ability to raise capital could also be affected by any of the risks affecting our business discussed below under the heading "Business Risks."

In July 2003, we raised approximately $9.4 million in net proceeds from an equity financing, and since that financing, we have not needed outside capital to fund our operations. Cash from financing activities of $697,540 consisted almost entirely of option and warrant exercises, the timing and amount of which are not in our control.

Based on our current cash position and assuming (a) currently planned expenditures and level of operations and (b) continuation of product sales, we believe we have sufficient cash for operations for the next twelve months. We believe increased sales of HSS, LRAD and NeoPlanar products will also contribute cash during the next twelve months. We have flexibility to adjust the level of research and development and selling and administrative expenses based on the availability of resources. However reductions in expenditures could delay development and adversely affect our ability to generate future revenues.

Other than cash of $6,579,562 at March 31, 2004 and accounts receivable collections, we have no other material unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for sound products. The timing and amounts of these expenditures and the extent of our operating losses will depend on future product sales levels and other factors, some of which are beyond management’s control. There can be no assurance that revenues from products and technologies will become sufficient to sustain operations or achieve profits in the future.

Contractual Commitments and Commercial Commitments
The following table summarizes our contractual obligations, including purchase commitments at March 31, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Payments Due by Period
			Less than 1							More Than
Contractual Obligations	Total		Year		1-3 Year		s	3-5 Years		5 Years
Capital leases	$	28,814	$	12,806	$	16,008		$	-0-	$	-0-
Operating leases		619,992		284,421		319,448			16,123		-0-
Employment agreements		61,000		61,000		-0-			-0-		-0-
Total contractual cash obligations	$	709,806	$	358,227	$	335,456		$	16,123	$	-0-

20

In January 2004 we executed a new operating lease on our corporate offices, which resulted in a substantial increase in our operating lease commitments.

We had no purchase obligations or long-term debt obligations at March 31, 2004.

New Accounting Pronouncements
A number of new pronouncements have been issued for future implementation as discussed in the footnotes to our interim financial statements (see page 8, Note 5). As discussed in the notes to the interim financial statements, the implementation of these new pronouncements is not expected to have a material effect on our financial statements.

Business Risks
You should consider each of the following factors as well as the other information in this Quarterly Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003, including our financial statements and the related notes.

We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability.

We have incurred significant operating losses and anticipate continued losses in fiscal 2004. At March 31, 2004, we had an accumulated deficit of $38.7 million.We need to generate additional revenue to be profitable in future periods. Failure to achieve profitability, or maintain profitability if achieved, may cause our stock price to decline.

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.

Our HSS, NeoPlanar, PureBass and LRAD technologies have only recently been introduced to market and are still being improved. Commercially viable sound technology systems may not be successfully and timely produced by us or by original equipment manufacturers (OEMs) due to the inherent risks of technology development, new product introduction, limitations on financing, manufacturing problems, competition, obsolescence, loss of key technical personnel and other factors. Revenues from our sound technologies have been sporadic to date, and we cannot guarantee significant revenues in the future. The development and introduction of our products has taken longer than anticipated by management and could be subject to additional delays. Customers may not wait for our products and may elect to purchase products from competitors. We have experienced manufacturing quality control problems with some of our initial commercial HSS systems, and we may not be able to resolve future manufacturing problems in a timely and cost effective manner. Products employing our sound technologies may not achieve market acceptance. Our various sound projects are high risk in nature, and unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in a determination that further exploitation is unfeasible. If we do not successfully exploit our technologies, our financial condition and results of operations and business prospects would be adversely affected.

Our products have never been produced in quantity, and we may incur significant and unpredictable warranty costs as these products are mass produced. We have incurred substantial warranty costs related to our first generation HSS systems, which caused a negative gross margin for the fiscal year ended September 30, 2003.

None of our products has been mass produced, and certain of our technologies, including HSS and LRAD, are substantially different from proven, mass produced sound transducer designs. We may incur substantial and unpredictable warranty costs from post-production product or component failures. We generally warrant our products to be free from defects in materials and workmanship for a period up to one year from the date of purchase, depending on the product.

Due to performance failures of components in some of our first generation of HSS systems, we are voluntarily replacing emitters on an estimated 700 Generation I HSS units. At March 31, 2004 we had a warranty reserve of $325,000 with $257,000 allocated for this replacement program. Future warranty costs could further adversely affect our financial position, results of operations and business prospects.

21

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.

Our historical revenues have included sales of portable consumer products. The majority of our fiscal 2003 and all of our fiscal 2004 to date revenues were generated from our sound reproduction technologies, and we expect these to be the source of substantially all of our future revenues. Revenues from our sound reproduction technologies are expected to vary significantly due to a number of factors. Many of these factors are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue expectations. These factors include:

 -  our ability to develop and supply sound reproduction components to customers, distributors or OEMs or to license our technologies;

 -  market acceptance of and changes in demand for our products or products of our customers;

 -  gains or losses of significant customers, distributors or strategic relationships;

 -  unpredictable volume and timing of customer orders;

 -  the availability, pricing and timeliness of delivery of components for our products and OEM products;

 -  fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs;

 -  the timing of new technological advances, product announcements or introductions by us, by OEMs or licensees and by our competitors;

 -  product obsolescence and the management of product transitions and inventory;

 -  unpredictable warranty costs associated with new product models;

 -  production delays by customers, distributors, OEMs or by us or our suppliers;

 -  seasonal fluctuations in sales;

 - the conditions of other industries, such as military and commercial industries, into which our technologies may be licensed;

 - general consumer electronics industry conditions, including changes in demand and associated effects on inventory and inventory practices; and

 -  general economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling.

Some or all of these factors could adversely affect demand for our products, and therefore adversely affect our future operating results.

Some of our operating expenses are relatively fixed in the short term. We may be unable to rapidly adjust spending to compensate for any unexpected sales or license revenue shortfalls, which could harm our quarterly operating results. We do not have the ability to predict future operating results with any certainty.

Our expenses may vary from period to period, which could affect quarterly results and our stock price.

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:

 -  the timing and extent of our research and development efforts;

 -  investments and costs of maintaining or protecting our intellectual property;

 -  the extent of marketing and sales efforts to promote our products and technologies; and

 -  the timing of personnel and consultant hiring.

Sound reproduction markets are subject to rapid technological change, so our success will depend on our ability to develop and introduce new technologies.

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

22

to industry changes, or if our technologies do not perform well, our business and financial condition will be adversely affected. The life cycles of our technologies are difficult to estimate, particularly those such as HSS and LRAD for which there are no established markets. As a result, our technologies, even if successful, may become obsolete before we recoup our investment.

Our HSS technology is subject to government regulation, which could lead to unanticipated expense or litigation.

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.

We may face personal injury and other liability claims that harm our reputation and adversely affect our sales and financial condition.

Some of our products are capable of sufficient acoustic output to cause damage to human hearing or human health if used improperly, such as when the products are used at close ranges or for long periods of exposure. A person injured in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including personal injury, negligent design, dangerous product or inadequate warning. We may also be subject to lawsuits involving allegations of misuse of our products. Our product liability insurance coverage may be insufficient to pay all such claims. Product liability insurance may become too costly for us or may become unavailable for us in the future. We may not have sufficient resources to satisfy any product liability claims not covered by insurance which would materially and adversely affect our financial position. Significant litigation could also result in a diversion of management’s attention and resources, and negative publicity.

We may not be successful in obtaining the necessary licenses required for us to sell some of our products abroad.

Licenses for the export of certain of our products may be required from government agencies in accordance with various statutory authorities, including the Export Administration Act of 1979, the International Emergency Economic Powers Act, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976. We may not be able to obtain the necessary licenses in order to conduct business abroad. In the case of certain sales of defense equipment and services to foreign governments, the U.S. Department of State must notify Congress at least 15 to 30 days, depending on the size and location of the sale, prior to authorizing these sales. During that time, Congress may take action to block the proposed sale. Failure to receive required licenses or authorization would hinder our ability to sell some of our products outside the United States.

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.

We sell or products worldwide. The risks inherent in international trade may reduce our international sales and harm our business and the businesses of our customers and our suppliers. These risks include:

 -  changes in tariff regulations;

 -  political instability, war, terrorism and other political risks;

 -  foreign currency exchange rate fluctuations;

 -  establishing and maintaining relationships with local distributors and dealers;

 -  lengthy shipping times and accounts receivable payment cycles;

 -  import and export licensing requirements;

 -  compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and
regulatory requirements;

 -  greater difficulty in safeguarding intellectual property than in the U.S.; and

 -  difficulty in staffing and managing geographically diverse operations.

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.

23

Many potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete.

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.

Our agreements with General Dynamics Armament and Technical Products, Inc. were recently terminated. Our business was formerly highly dependent on our level of sales to that company and its affiliate.

In April 2004, we and General Dynamics Armament and Technical Products, Inc. (GD-ATP), agreed to the formal termination of two licensing and sales agreements originally entered into in February 2003. See “Recent Developments” above. GD-ATP was the original licensee under one agreement, and took assignment of the rights of Bath Iron Works Corporation, another subsidiary of General Dynamics Corporation, under the other agreement. The agreements gave GD-ATP the right to purchase, market and resell NeoPlanar and HIDA (High Intensity Directional Acoustics) products and components with exclusive rights for specified applications to certain government customers, including the Department of Defense, Department of Homeland Security and certain Federal, State and local agencies. Revenues under the GD-ATP agreements and a prior professional services agreement with Bath Iron Works Corporation represented approximately 32% of our revenues during the six months ended March 31, 2004, and 24% of our revenues during the fiscal year ended September 30, 2003. If we do not through our Government and Force Protection sales staff, or through the appointment of other external distributors, successfully market to customers covered under the former GD-ATP agreements, our results of operations will suffer.

Our business has been highly dependent on a limited number of customers.

For the six months ended March 31, 2004 sales to three customers accounted for 41%, 32% and 11% of total revenues, respectively. For the three months ended March 31, 2004, sales to two customers accounted for 62% and 17% of total revenues.Some of this past reliance has been due to our former strategy of pursuing sales in key markets through distributors who often had exclusive rights to sell to specific customers or for specific uses. Our current strategy is to pursue markets and customers directly or through non-exclusive distributors, but this strategy has not yet demonstrated sustained success. Even if our current strategy succeeds, it is likely that our results for particular quarters in the near future will depend on the success and timing of large orders from individual customers that may not be recurring, or may not recur in a predictable fashion. Accordingly, sales to individual customers may continue to represent significant percentages of our sales volume, and the loss or delay in orders to individual customers may significantly impair quarterly results of operations, and could cause our stock price to decline.

Commercialization of our sound technologies depends on collaborations with other companies. If we are not able to maintain or find collaborators and strategic alliance relationships in the future, we may not be able to develop our sound technologies and products.

Our strategy includes establishing business relationships with leading participants in various segments of the electronics, government and sound reproduction markets to assist us in producing, distributing, marketing and selling products that include our sound technologies.

Our success will therefore depend in part on our ability to maintain or enter into new strategic arrangements with partners on commercially reasonable terms. If we fail to enter into such strategic arrangements with third parties, our financial condition, results of operations, cash flows and business prospects may be adversely affected. Any future relationships may require us to share control over our development, manufacturing and marketing programs or to relinquish rights to certain versions of our sound and other technologies.

We will be dependent on outside manufacturers, and we do not have established manufacturing relationships to support our production schedules.

During fiscal 2003, we terminated our manufacturing relationship with HST, Inc., formerly our sub-contract manufacturer of our HSS and NeoPlanar products. In addition, Amtec Manufacturing, previously the sole manufacturer of our PureBass subwoofer units, ceased operations. In addition to in-house manufacturing of our products, we will need to establish relationships with outside manufacturers to be able to be able to meet our production schedules. Failure to establish quality contract manufacturing could reduce future revenues, adversely affecting financial condition and results of operations.

24

We rely on outside suppliers to provide a large number of components incorporated in our products.

Our products have a large number of components produced by outside suppliers. In addition, for certain of these items, we qualify only a single source, which can magnify the risk of shortages and decrease our ability to negotiate with our suppliers on the basis of price. In particular, we depend on our HSS piezo-film supplier to provide expertise and materials used in our proprietary HHS emitters. If shortages occur, or if we experience quality problems with suppliers, then our production schedules could be significantly delayed or costs significantly increased, which would have a material adverse effect on our business, liquidity, results of operation and financial position.

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.

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.

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.

Our government business has involved and is expected in the future to involve providing products and services under contracts or subcontracts with U.S. federal, state, local and foreign government agencies. Obtaining contracts and subcontracts from government agencies is challenging, and contracts often include provisions that are not standard in private commercial transactions. For example, government contracts may:

 -  include provisions that allow the government agency to terminate the contract without penalty under some circumstances;

 -  be subject to purchasing decisions of agencies that are subject to political influence;

 -  contain onerous procurement procedures; and

 -  be subject to cancellation if government funding becomes unavailable.

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.

Our Government Group revenues are materially dependant on acceptance of our LRAD products by government, military and developing force protection and emergency response agencies, and if these agencies do not purchase our products, our revenues will be adversely affected.

If our LRAD product is not widely accepted by the government, military and the developing force protection and emergency response markets, we may not be able to identify other markets. Government, military and the developing force protection and emergency response agencies may be influenced by claims or perceptions that long range hailing devices are unsafe or may be used in an abusive manner. Sales of our products to these agencies may also be delayed or limited by these claims or perceptions.

25

Any inability to adequately protect our proprietary technologies could harm our competitive position.

We are heavily dependent on patent protection to secure the economic value of our technologies. We have both issued and pending patents on our sound reproduction technologies and we are considering additional patent applications. Patents may not be issued for some or all of our pending applications. Claims allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Issued patents may be challenged or invalidated. Further, we may not receive patents in all countries where our products can be sold or licensed. Our competitors may also be able to design around our patents. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. There is currently no pending litigation against us that questions our intellectual property rights. Third parties may charge that our technologies or products infringe their patents or proprietary rights. Problems with patents or other rights could potentially increase the cost of our products, or delay or preclude our new product development and commercialization. If infringement claims against us are deemed valid, we may be forced to obtain licenses, which might not be available on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions, or to defend against infringement claims. A successful challenge to our sound technology could have a negative effect on our business prospects.

If our key employees do not continue to work for us, our business will be harmed because competition for replacements is intense.

Our performance is substantially dependent on the performance of our executive officers and key technical employees, including Elwood G. Norris, our Chairman, and Kalani Jones, our President and Chief Operating Officer. We are dependent on our ability to retain and motivate high quality personnel, especially highly skilled technical personnel. Our future success and growth also depend on our continuing ability to identify, hire, train and retain other highly qualified technical, managerial and sales personnel. Competition for such personnel is intense, and we may not be able to attract, assimilate or retain other highly qualified technical, managerial or sales personnel in the future. The inability to attract and retain the necessary technical, managerial or sales personnel could cause our business, operating results or financial condition to suffer.

We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of your common stock.

We are authorized to issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors may determine the terms of future preferred stock without further action by our stockholders. If we issue additional preferred stock, it could affect your rights or reduce the value of your common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions.

Our Series D and Series E Preferred Stock financings may result in dilution to our common stockholders. The holders of Series D and Series E Preferred Stock will receive more common shares on conversion if the market price of our common stock declines.

Dilution of the per share value of our common shares could result from the conversion of the outstanding Series D and Series E Preferred Stock.

The holders of our outstanding shares of Series D Preferred Stock may convert these shares into shares of our common stock at a conversion price equal to the lower of $4.50 or 90% of volume-weighted average price of our common stock for the five trading days prior to conversion. The conversion rate cannot however be lower than $2.00. The $2.00 floor price may however be adjusted downward if we sell securities for less than an effective price of $2.00 per share. As of March 31, 2004, the outstanding 50,000 shares of Series D Preferred Stock were convertible into an aggregate of 123,943 common shares. In addition, the Series D Preferred Stock purchasers received warrants to purchase 2.2 common shares for each share of Series D Preferred Stock purchased. The exercise price of the warrants was initially $4.50 per share, but was reduced to $3.01 per share as a result of anti-dilution provisions in the warrants. The exercise price for warrants on 495,880 common shares will be subject to further reduction if we sell securities for less than an effective price of $3.01 per share.

The holders of our outstanding shares of Series E Preferred Stock may convert these shares into shares of our common stock at a conversion price equal to the lower of $3.25 or 90% of volume-weighted average price of our common stock for the five trading days prior to conversion. The conversion rate cannot however be lower than $2.00. As of March 31, 2004, the 253,250 outstanding shares of Series E Preferred Stock were convertible into an aggregate of 830,140 common shares. The Series E Warrants on 364,875 common shares also contain an antidilution adjustment for certain security sales by the Company below $3.25 per share.

26

Holders of our common stock could experience substantial dilution from the conversion of the Series D and Series E Preferred Stock and exercise of the related warrants. As a result of the floating conversion price, the holders of Series D and Series E Preferred Stock will receive more common shares on conversion if the price of our common shares declines. To the extent that the Series D or Series E stockholders convert and then sell their common shares, the common stock price may decrease due to the additional shares in the market. This could allow the Series D or Series E stockholders to receive greater amounts of common stock, the sales of which would further depress the stock price. Furthermore, the significant downward pressure on the trading price of our common stock as Series D and Series E Preferred Stock and related warrant holders convert or exercise these securities and sell the common shares received could encourage short sales by the holders of Series D and Series E Preferred Stock and the related warrants, or other stockholders. This would place further downward pressure on the trading price of our common stock. Even the mere perception of eventual sales of common shares issued on the conversion of the Series D and Series E Preferred Stock or exercise of the related warrants could lead to a decline in the trading price of our common stock.

Our stock price is volatile and may continue to be volatile in the future.

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:

 -  our anticipated or actual operating results;

 -  developments concerning our sound reproduction technologies;

 -  technological innovations or setbacks by us or our competitors;

 -  conditions in the consumer electronics market;

 -  announcements of merger or acquisition transactions; and

 -  other events or factors and general economic and market conditions.

The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, and that have often been unrelated or disproportionate to the operating performance of companies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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.

We are exposed to some market risk through interest rates, related to our investment of current cash and cash equivalents of approximately $6.5 million. Based on this balance, a change of one percent in interest rate would cause a change in interest income of $65,000. 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.

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to ensure that material information related to American Technology Corporation, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of management, including our Co-Principal Executive Officers and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 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.

27

(b) Changes in Internal Controls Over Financial Reporting. In October 2003, we implemented a new integrated accounting and supply chain management software system. We have adapted certain of our internal controls to the new system, and we will continue to evaluate, document and monitor any required changes to internal controls in connection with the full implementation of the new system. Other than as described above, there were no significant changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recently completed fiscal quarter.

Limitations of Disclosure Controls and Procedures. Our management, including our Co-Principal Executive Officers and Principal Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Reference is made to Footnote 11 on page 11 of this report for information regarding Legal Proceedings.

Item 2. Changes in Securities and Use of Proceeds.

During the quarter ended March 31, 2004, we issued 50,000 shares of common stock as part of a legal settlement to one party. These securities were offered and sold without registration under the Securities Act to one sophisticated investor in reliance upon the exemption provided by Rule 506 of Regulation D thereunder, and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act. An appropriate legend was placed on the shares issued.

Item 3. Defaults Upon Senior Securities.

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable

Item 5. Other Information.

Not applicable

Item 6. Exhibits and Reports on Form 8-K.

(a)	Exhibits:
	3.1	Amended and Restated Bylaws of American Technology Corporation.
	10.1	First Amendment to Amended and Restated Sublease Agreement between the Company and Smiths Aerospace, Inc. dated January 1, 2004.

28

31.1	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.
31.2	Certification of Kalani Jones, Co-Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.3	Certification of Carl Gruenler, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	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 Carl Gruenler, Principal Financial Officer.

(b) Reports on Form 8-K:
On February 20, 2004, we filed a Form 8-K containing disclosure in Item 5.
On February 12, 2004, we filed a Form 8-K containing disclosure furnished in Item 12.

SIGNATURES

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.

	AMERICAN TECHNOLOGY CORPORATION
Date: May 5, 2004	By:     /s/ CARL GRUENLER           Carl Gruenler, Vice President, Military Operations and           Interim Chief Financial Officer           (Principal Financial and Accounting Officer and duly          authorized to sign on behalf of the Registrant)

29

EX-3.1

                                                                     EXHIBIT 3.1

                                     BYLAWS
                                       OF
                         AMERICAN TECHNOLOGY CORPORATION
                            (A DELAWARE CORPORATION)
                           (AS AMENDED APRIL 13, 2004)

                                   ARTICLE I
                                     GENERAL

         1.01. APPLICABILITY. These Bylaws provide rules for conducting the
business of this corporation (the "Company"). Every shareholder and person who
subsequently becomes a shareholder, the Board of Directors, Committees and
Officers of the Company shall comply with these Bylaws, as amended from time to
time. All Bylaws and resolutions heretofore adopted by the Board of Directors
are hereby repealed, to the extent in conflict with the provisions of these
Bylaws.

         1.02. OFFICES. The principal office of Company shall be selected by the
Board of Directors from time to time and may be within or without the State of
Delaware. The Company may have such other offices, within or without the State
of Delaware, as the Board of Directors may, from time to time, determine. The
registered office of the Company required by the General Corporation Law of
Delaware to be maintained in Delaware may be, but need not be, identical with
the principal office if in Delaware, and the address of the registered office
may be changed from time to time by the Board of Directors.

         1.03. DEFINITION OF TERMS. Terms defined in the Company's Certificate
of Incorporation, as amended and restated from time to time in effect (the
"CHARTER"), shall have the same meanings when used in these Bylaws.

                                   ARTICLE II
                         STOCK AND THE TRANSFER THEREOF

         2.01. STOCK CERTIFICATES. The shares of the Company's capital stock
shall be represented by consecutively numbered certificates signed by the
President or a Vice President and the Secretary or Assistant Secretary of the
Company, and sealed with the seal of the Company, or a facsimile thereof. If
certificates are signed by a transfer agent and registrar other than the Company
or an employee thereof, the signatures of the officers of the Company may be
facsimile. In case any officer who has signed (by real or facsimile signature) a
certificate shall have ceased to hold such office before the certificate is
issued it may be issued by the Company with the same effect as if he continued
to hold such office on the date of issue. Each certificate representing shares
shall state upon the face thereof: (i) that the Company is organized under the
laws of the State of Delaware; (ii) the name of the person to whom issued; (iii)
the number, class and series (if any) of shares which such certificate
represents; and (iv) the par value, if any, of the shares represented by such
certificate, or a statement that the shares have no par value.

         If any class or series of shares is subject to special powers,
designations, preferences or relative, participating or other special rights,
then such (together with all qualifications, limitations or restrictions of such
preferences or rights) shall be set forth in full or summarized on the
certificate representing such class or series. Moreover, each certificate shall
state that the Company will furnish, without charge, to the registered holder of
the shares represented by such certificate who so requests a statement setting
forth such information in full.

         Each certificate also shall set forth restrictions upon transfer, if
any, or a reference thereto, as shall be adopted by the Board of Directors or by
the shareholders, or as may be contained in this Article II. Any shares issued
without registration under the Securities Act of 1933, as amended, shall bear a
legend restricting transfer unless such shares are registered under such act or
an exemption from registration is available for a proposed transfer.

                                      -1-


         2.02. CONSIDERATION FOR SHARES. Shares shall be issued for such
consideration or considerations as shall be fixed from time to time by the Board
of Directors. Treasury shares may be disposed of by the Company for such
consideration as may be fixed from time to time by the Board of Directors. No
shares shall be issued for less than the par value thereof. The consideration
for the issuance of shares may be paid, in whole or in part, in money, in other
property, tangible or intangible, or in labor or services actually received by
or performed for the Company or for its benefit or in its formation or
reorganization, or as otherwise permitted in the Charter.

         2.03. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Company alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, and the Board of Directors when authorizing
such issue of a new certificate or certificates may in its discretion, and as a
condition precedent to the issuance thereof, require the owner of such lost or
destroyed certificate or certificates or his legal representative to advertise
the same in such manner as it shall require, and/or furnish to the Company a
bond in such sum as it may direct, as indemnity against any claim that may be
made against the Company. Except as hereinabove in this section provided, no new
certificate or certificates evidencing shares of stock shall be issued unless
and until the old certificate or certificates, in lieu of which the new
certificate or certificates are issued, shall be surrendered for cancellation.

         2.04. REGISTERED HOLDER AS OWNER. The Company shall be entitled to
treat the registered holder of any shares of the Company as the owner of such
shares, and shall not be bound to recognize any equitable or other claim to, or
interest in, such shares or rights deriving from such shares, unless and until
such purchaser, assignee, transferee or other person becomes the registered
holder of such shares, whether or not the Company shall have either actual or
constructive notice of the interests of such purchaser, assignee, or transferee
or other person. The purchaser, assignee, or transferee of any of the shares of
the Company shall not be entitled to receive notice of the meetings of the
shareholders; to vote at such meetings; to examine a list of the shareholders;
to be paid dividends or other sums payable to shareholders; or to own, enjoy and
exercise any other property or rights deriving from such shares against the
Company, until such purchaser, assignee, or transferee has become the registered
holder of such shares.

         2.05. REVERSIONS. Cash, property or share dividends, shares issuable to
shareholders in connection with a reclassification of stock, and the redemption
price of redeemed shares, which are not claimed by the shareholders entitled
thereto within TWO years after the dividend or redemption price became payable
or the shares became issuable, despite reasonable efforts by the Company to pay
the dividend or redemption price or deliver the certificate(s) for the shares to
such shareholders within such time shall, at the expiration of such time, revert
in full ownership to the Company, and the Company's obligation to pay any such
dividend or redemption price or issue such shares, as the case may be, shall
thereupon cease; provided, that the Board of Directors may at any time and for
any reason satisfactory to it, but need not, authorize (i) payment of the amount
of cash or property dividend or (ii) issuance of any shares, ownership of which
has reverted to the Company pursuant to this Section of Article II, to the
person or entity who or which would be entitled thereto had such reversion not
occurred.

         2.06. RETURNED CERTIFICATES. All certificates for shares changed or
returned to the Company for transfer shall be marked by the Secretary
"CANCELLED," with the date of cancellation, and the transaction shall be
immediately recorded in the certificate book opposite the memorandum of their
issue. The returned certificate may be inserted in the certificate book.

         2.07. TRANSFER OF SHARES. Upon surrender to the Company or to a
transfer agent of the Company of a certificate of stock endorsed or accompanied
by proper evidence of succession, assignment or authority to transfer, and such
documentary stamps as may be required by law, it shall be the duty of the
Company to issue a new certificate, upon payment by the transferree of such
nominal charge therefor as the Company or its transfer agent may impose. Each
such transfer of stock shall be entered on the stock book of the Company.
Respecting any securities issued in reliance upon Rule 903 of Regulation S of
the Securities and Exchange Commission at any time when the Company is not a
"reporting issuer" as defined in Regulation S, no transfer of such securities
shall be registered unless made in accordance with the provisions of Regulation
S, except where foreign law prevents the Company from refusing to register the
securities.

                                      -2-


         At any time when the Company has appointed a transfer agent for its
shares, this paragraph shall apply. A transfer of shares evidenced by a
certificate bearing a standard form of legend which restricts transfer of the
shares (except in the event of registration or the availability of an exemption
under the Securities Act of 1933) shall not require the Company's consent if the
shares to be sold are proposed to be sold in compliance with either Rule 144,
Rule 701 or Rule 904 of Regulation S of the Securities and Exchange Commission
and the transfer is accompanied by an opinion of counsel (which need not be the
Company's counsel) which states that the proposed transfer will comply with the
applicable rule or regulation being relied upon for transfer. In view of
potential liability to the Company and its officers and directors for
interfering without firm and clear legal grounds in the making of, or delaying,
any sale of the Company's shares pursuant to Rules 144, 701 or 904, it is
declared to be the Company's policy not to interfere with, object to or hinder,
in any way, any transfer proposed to be made pursuant to either of Rules 144,
701 or 904, if accompanied by an opinion of counsel which states that the
proposed sale will, in the manner proposed to be made, comply with the
applicable rule or regulation being relied upon for sale. The Company shall be
deemed automatically to have consented to any transfer which complies with the
immediately preceding sentence.

         2.08. TRANSFER AGENT. The Board of Directors shall have power to
appoint one or more transfer agents and registrars for the transfer and
registration of certificates of stock of any class, and may require that stock
certificates shall be counter signed and registered by one or more of such
transfer Agents and registrars. Any powers or duties with respect to the
transfer and registration of certificates may be delegated to the transfer agent
and registrar.

                                  ARTICLE III

         3.01. ANNUAL MEETING.

         (a) The annual meeting of the shareholders of the Company, for the
purpose of election of Directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.

         (b) At an annual meeting of the shareholders, only such business shall
be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not later than the close of business
on the sixtieth (60th) day nor earlier than the close of business on the
ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the shareholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
Company fewer than seventy (70) days prior to the date of such annual meeting,
the close of business on the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made by the Company. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the Company's books, of the shareholder proposing such
business, (iii) the class and number of shares of the Company which are
beneficially owned by the shareholder, (iv) any material interest of the
shareholder in such business and (v) any other information that is required to
be provided by the shareholder pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a
proponent to a shareholder proposal. Notwithstanding the foregoing, in order to
include information with respect to a shareholder proposal in the proxy
statement and form of proxy for a shareholders' meeting, shareholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.

                                      -3-


         (c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (c) shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the Company may
be made at a meeting of shareholders by or at the direction of the Board of
Directors or by any shareholder of the Company entitled to vote in the election
of Directors at the meeting who complies with the notice procedures set forth in
this paragraph (c). Such nominations, other than those made by or at the
direction of the Board of Directors or a duly authorized committee thereof,
shall be made pursuant to timely notice in writing to the Secretary of the
Company in accordance with the provisions of paragraph (b) of this Section 3.01.
Such shareholder's notice shall set forth (i) as to each person, if any, whom
the shareholder proposes to nominate for election or re-election as a Director:
(A) the name, age, business address and residence address of such person, (B)
the principal occupation or employment of such person, (C) the class and number
of shares of the Company that are beneficially owned by such person, (D) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nominations are to be made by the shareholder, and (E) any
other information relating to such person that is required to be disclosed in
solicitations of proxies for elections of Directors, or is otherwise required,
in each case pursuant to Regulation 14A under the 1934 Act (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a Director if elected); and (ii) as to
such shareholder giving notice, the information required to be provided pursuant
to paragraph (b) of this Section 3.01. At the request of the Board of Directors,
any person nominated by a shareholder for election as a Director shall furnish
to the Secretary of the Company that information required to be set forth in the
shareholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a Director of the Company unless nominated in
accordance with the procedures set forth in this paragraph (c). The chairman of
the annual meeting shall, if the facts warrant, determine and declare at the
meeting that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, and if he should so determine, he shall so declare
at the meeting, and the defective nomination shall be disregarded.

         (d) For purposes of this Section 301, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Company with the Securities and Exchange Commission pursuant to Section 13, 14
or 15(d) of the 1934 Act.

         3.02. SPECIAL MEETINGS.

         (a) Special meetings of the shareholders of the Company may be called,
for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii)
the Chief Executive Officer, (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized Directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption) or (iv) by the holders of shares entitled to cast not less than 10
percent (10%) of the votes at the meeting, and shall be held at such place, on
such date, and at such time as the Board of Directors shall fix.

         (b) If a special meeting is properly called by any person or persons
other than the Board of Directors, the request shall be in writing, specifying
the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the Chairman of the Board of Directors, the Chief
Executive Officer, or the Secretary of the Company. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the shareholders entitled to vote, in
accordance with the provisions of Section 3.03 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person or
persons properly requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this paragraph (b) shall be
construed as limiting, fixing, or affecting the time when a meeting of
shareholders called by action of the Board of Directors may be held.

                                      -4-


                                   ARTICLE IV
                          MEETINGS OF THE SHAREHOLDERS

         4.01. ANNUAL MEETING. The annual meeting of the shareholders shall be
held between the 90th and 180th day after the Company's tax year end, at such
date and time and at such place, within or without the State of Delaware, as is
designated from time to time by the Board of Directors and stated in the notice
of the meeting. At each annual meeting the shareholders shall elect a Board of
Directors in accordance with the Charter and shall transact such other business
as may properly be brought before the meeting.

         4.02. SPECIAL MEETINGS. Unless otherwise proscribed by law, the Charter
or these Bylaws, special meetings of the shareholders may be called by the
Chairman of the Board, the President, or a majority of the Board of Directors or
the Executive Committee. The President shall call a special meeting upon the
Secretary's receipt of written demand therefor by the holders of not less than
ten percent (10%) of the total voting power. Requests for special meetings shall
state the purpose or purposes of the proposed meeting.

         4.03. NOTICE OF MEETINGS. Except as otherwise provided by law, the
Charter or these Bylaws, written notice of any annual or special meeting of the
shareholders shall state the place, date, and time thereof and, in the case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be given to each shareholder of record entitled to vote at such meeting not
fewer than 10 nor more than 60 days prior to the meeting by any means permitted
in Section 9.01 hereof. No business other than that specified in the notice of a
special meeting shall be transacted at any such special meeting.

         4.04. RECORD DATE. In order that the Company may determine shareholders
of record who are entitled (i) to notice of or to vote at any shareholders
meeting or adjournment thereof, (ii) to express written consent to corporate
action in lieu of a meeting, (iii) to receive payment of any dividend or other
distribution, or (iv) to allotment of any rights or to exercise any rights in
respect of any change, conversion or exchange of stock, or in order that the
Company may make a determination of shareholders of record for any other lawful
purpose, the Board of Directors may fix in advance a date as the record date for
any such determination. Such date shall not be more than 60 days, and in case of
a meeting of shareholders, not less than 10 days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken,
and in no event may the record date precede the date upon which the Directors
adopt a resolution fixing the record date.

         If no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is given (as defined in Section 10.01 hereof) or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of the
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this Section such
determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date for the adjournment. The record date for
determining shareholders entitled to consent to corporate actions without a
meeting shall be fixed as provided in Section 4.12 hereof.

         4.05. VOTING LIST. At least 10 days but not more than 60 days before
any meeting of shareholders, the officer or transfer agent in charge of the
Company's stock transfer books shall prepare a complete alphabetical list of the
shareholders entitled to vote at such meeting, which list shows the address of
each shareholder and the number of shares registered in his or her name. The
list so prepared shall be maintained at the corporate offices of the Company and
shall be open to inspection by any shareholder, for any purpose germane to the
meeting, at any time during usual business hours during a period of no fewer
than 10 days prior to the meeting. The list shall also be produced and kept open
at any shareholders meeting and, except as otherwise provided by law, may be
inspected by any shareholder or proxy of a shareholder who is present in person
at the meeting. The original stock transfer books shall be PRIMA FACIE evidence
as to who are the shareholders entitled to examine the list of shareholders and
to vote at any meeting of shareholders.


                                      -5-


         4.06. QUORUM; ADJOURNMENTS.

         (a) The holders of a majority of the total voting power at any
shareholders meeting present in person or by proxy shall be necessary to and
shall constitute a quorum for the transaction of business at all shareholders
meetings, except as otherwise provided by law or by the Charter.

         (b) If a quorum is not present in person or by proxy at any
shareholders meeting, a majority of the voting shares present or represented
shall have the power to adjourn the meeting from time to time to the same or
another place within 30 days thereof and no further notice of such adjourned
meeting need be given if the time and place thereof are announced at the meeting
at which the adjournment is taken.

         (c) Even if a quorum is present in person or by proxy at any
shareholders meeting, a majority of the voting shares present or represented
shall have the power to adjourn the meeting from time to time, for good cause,
without notice of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken, until a new date
which is not more than 30 days after the date of the original meeting.

         (d) Any business which might have been transacted at a shareholders
meeting as originally called may be transacted at any meeting held after
adjournment as provided in this Section 4.06 at which reconvened meeting a
quorum is present in person or by proxy. Anything in paragraph (b) of this
Section to the contrary notwithstanding, if an adjournment is for more than 30
days, or if after an adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each shareholder of
record entitled to vote thereat.

         (e) The shareholders present at a duly called meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.

         4.07. PROXIES. At all meetings of shareholders, a shareholder may vote
by proxy, executed in writing by the shareholder or by his duly authorized
attorney in fact. Any proxyholder shall be authorized to sign, on the
shareholder's behalf, any written consent for shareholder action taken in lieu
of a meeting. Such proxy shall be filed with the Secretary of the Company before
or at the time of the meeting. No proxy shall be valid after three (3) years
from the date of its execution, unless otherwise provided in the proxy.

         4.08. VOTING OF SHARES. At any shareholders meeting every shareholder
having the right to vote shall be entitled to vote in person or by proxy. Except
as otherwise provided by law, by the Articles or in the Board resolution
authorizing the issuance of shares, each shareholder of record shall be entitled
to one vote (on each matter submitted to a vote) for each share of capital stock
registered in his, her or its name on the Company's books. Except as otherwise
provided by law or by the Articles, all matters submitted to the shareholders
for approval shall be determined by a majority of the votes cast (not counting
abstentions) at a legal meeting commenced with a quorum.

         4.09. VOTING OF SHARES BY CERTAIN HOLDERS. Neither treasury shares, nor
shares of its own stock held by the Company in a fiduciary capacity, nor shares
held by another corporation if the majority of the shares entitled to vote for
the election of directors of such other corporation is held by the Company,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time.

         Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent, or proxy as the bylaws of such
corporation may prescribe, or, in the absence of such provision, as the board of
directors of such corporation may determine.

         Shares held by an administrator, executor, personal representative,
guardian, or conservator may be voted by him, either in person or by proxy,
without a transfer of such shares into his name. Shares standing in the name of
a trustee may be voted by him, either in person or by proxy, but no trustee
shall be entitled to vote shares hold by him without a transfer of such shares
into his name.

         Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
be contained in an appropriate order of the court by which such receiver was
appointed.


                                      -6-


         A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.

         4.10. CHAIRMAN. The Chairman of the Board of Directors of the Company,
if there is one, or is his absence, the President, shall act as chairman at all
meetings of shareholders.

         4.11. MANNER OF SHAREHOLDER VOTING. Voting at any shareholders meeting
shall be oral or by show of hands; PROVIDED HOWEVER, that voting shall be by
written ballot if such demand is made by any shareholder present in person or by
proxy and entitled to vote.

         4.12. ACTION BY SHAREHOLDERS WITHOUT A MEETING RECORD DATE. Any action
required or permitted to be taken at a meeting of the shareholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by a majority of the
total voting power; PROVIDED, that where an action requires a greater proportion
of the total voting power, then the consent shall be signed by such greater
proportion. No written consent will be effective unless written consents, signed
by a sufficient proportion of shareholders to take action, are delivered to the
Company within sixty (60) days of the date of the earliest such consent. Such
consent shall have the same force and effect as a vote of the shareholders, and
may be stated as such in any document filed with the Secretary of State of
Delaware under the General Corporation Law of Delaware. Prompt notice of such
action by written consent of less than all shareholders entitled to vote shall
be given to all shareholders who have not consented in writing to the action
taken.

         The record date for determining shareholders entitled to consent to
corporate actions in writing without a meeting (the "CONSENT RECORD DATE") shall
not precede, and shall not be more than ten (10) days after, the date upon which
the resolution fixing the record date was adopted. However, if no consent record
date is fixed, the consent record date shall be, respectively, (i) if prior
action by the Board of Directors IS required under the General Corporation Law
of Delaware for the consent to be validly taken, the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action; and (ii) if prior action by the Board of Directors IS NOT so required,
the first date on which a properly signed and dated consent setting forth the
action taken or proposed to be taken is delivered as required above.

         4.13. PRESIDING OFFICERS; ORDER OF BUSINESS.

               (a) Shareholders meetings shall be presided over by the Chairman
of the Board; or if the Chairman (and Vice Chairman) is not present, by the
President; or if the President is not present, by a Vice President; or if a Vice
President is not present, by such person chosen by the Board of Directors; or if
none, by a chairperson to be chosen at the meeting by shareholders present in
person or by proxy who own a majority of the voting power present. The Secretary
of a shareholders meeting shall be the Secretary of the Company; or if the
Secretary is not present, an Assistant Secretary, or if an Assistant Secretary
is not present, such person as may be chosen by the Board of Directors; or if
none, by such person who is chosen by the chairperson at the meeting.

               (b) The following order of business, unless otherwise ordered at
the shareholders meeting by the chairperson thereof, shall be observed as far as
practicable and consistent with the purposes of the meeting:

               1. Calling of the shareholders' meeting to order.

               2. Presentation of proof of mailing of the notice of the meeting
and, if a special meeting the call thereof.

               3. Presentation of proxies.

               4. Determination and announcement that a quorum is present.

               5. Reading and approval (or waiver thereof) of the minutes of the
previous meeting of shareholders.

                                      -7-


               6. Reports, if any, of officers.

               7. Election of directors, if the meeting is an annual meeting or
a meeting called for such purpose.

               8. Consideration of the specific purpose or purposes for which
the meeting has been called, other than election of directors.

               9. Transaction of such other business as may properly come before
the meeting.

               10. Adjournment.

         4.14. ANNUAL REPORT. The President of the Company shall prepare an
annual report which will set forth a statement of affairs of the Company as of
the end of its last fiscal year, including a balance sheet, an income statement
and a statement of changes in financial position, which need not be audited, and
present them at the annual meeting of shareholders. Failure to prepare or
present an annual report shall not affect the validity of any shareholder
meeting. No such report need be prepared or presented for any fiscal year in
which the Company was inactive, beyond a statement reflecting the inactive
status. This Section shall not apply as to any fiscal year if the Company (i)
was at the year end subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, and subsequently furnishes to the
shareholders an annual report or report on Form 10-K under such Act covering
such fiscal year, or (ii) furnishes to shareholders an Information Statement
which conforms to the requirements of Rule 15e2-11 of the Securities and
Exchange Commission.

                                   ARTICLE V
                         DIRECTORS, POWERS AND MEETINGS

         5.01. GENERAL POWERS. All corporate powers shall be exercised, and the
business and affairs of the Company shall be managed, by or under the authority
of its Board of Directors, except as otherwise provided in the General
Corporation Law of Delaware or the Charter.

         5.02. NUMBER, TENURE AND QUALIFICATIONS. The Company's Board of
Directors shall consist of not less than three (3) and not more than seven (7)
Directors, as resolved from time to time by the Board of Directors. If such
number is not so fixed, the Company shall have THREE Directors. Directors shall
be elected at each annual meeting of shareholders, except as otherwise provided
below. Each Director shall hold office until the next annual meeting of
shareholders and thereafter until his successor shall have been elected and duly
qualified. Directors need not be residents of Delaware or shareholders of the
Company. Directors shall be elected by plurality vote. No decrease in the number
of Directors shall shorten the term of any incumbent Director.

         5.03. VACANCIES; RESIGNATION.

               (a) Any vacancy occurring is the Board of Directors, except
resulting from an increase in the number of directors, may be filled by the
affirmative vote of a majority of the remaining Directors, though less than a
quorum, or by a sole remaining Director. A Director elected to fill a vacancy
shall be elected for the unexpired term of his predecessor in office. Any
directorship to be filled by reason of an increase in the number of Directors
shall be filled by the affirmative vote of a majority of the entire board or by
a majority of the total voting power at any annual meeting or at a special
meeting of shareholders called for that purpose, or by means of written
shareholder consents taken in lieu of a meeting. Every director chosen to fill a
vacancy as provided in this Section shall hold office until the next annual
meeting of shareholders or until his successor has been elected and qualified.

               (b) Any Director may resign at any time by giving written notice
to the Board, the Chairman of the Board, the President or the Secretary of the
Company. Unless otherwise specified in such written notice, a resignation shall
take effect upon delivery to the Board or the designated officer. A resignation
need not be accepted in order for it to be effective.

                                      -8-


         5.04. REMOVAL OF DIRECTORS. Any Director may be removed only by the
shareholders in the manner provided in the Company's Charter and, if no such
provision appears therein, then as provided by law. Such action may be taken at
any special meeting called for that purpose or by means of written shareholder
consents. In case any vacancy so treated shall not be filled by the shareholders
at such meeting or in the written consent effecting removal, such vacancy may be
filled by a majority of the Board of Directors.

         5.05. PLACE OF MEETINGS. The Board of Directors may hold both regular
and special meetings either within or without the State of Delaware, at such
place as the Board of Directors from time to time deems advisable.

         5.06. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than these Bylaws immediately after and at
the same place as the annual meeting of shareholders. The Board of Directors may
provide by resolution the time and place for the holding of additional regular
meetings without other notice than such resolution; PROVIDED, that any Director
not present when any such resolution is passed is given notice of the
resolution.

         5.07. SPECIAL MEETINGS. A special meeting of the Board of Directors
shall be held without other notice than these Bylaws immediately after and at
the same place as every special meeting of shareholders. Special meetings of the
Board of Directors also may be called by or at the request of the Chairman of
the Board, the President, or any two Directors upon two days' notice to each
director if such notice is delivered personally or sent by telegram, or upon
five days' notice if sent by mail.

         5.08. TELEPHONIC MEETINGS. One or more members of the Board of
Directors or any committee designated by the Board may participate in a meeting
of the Board of Directors or committee by means of conference telephone or
similar communications equipment by which all persons participating in the
meeting can hear one another at the same time. Such participation shall
constitute presence in person at the meeting. All participants in any meeting of
Directors, by virtue of their participation and without further action on their
part shall be deemed to have consented to the recording of such meeting by
electronic device or otherwise, and to the making of a written transcript
thereof, in order that minutes thereof shall be available for the Company's
records.

         5.09. NOTICE. Except as otherwise provided above, notice of the time,
date and place, of every special meeting of Directors or any committee thereof
shall be given. Any Director may waive notice of any meeting. The attendance of
a Director at a meeting shall constitute a waiver of notice of such meeting,
except where a Director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.

         5.10. QUORUM; ADJOURNMENTS. A majority of the number of directors then
in office, present in person or by means of conference telephone or similar
equipment, shall constitute a quorum for the transaction of business at every
Board meeting, and the act of the majority of the Directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors, except
as may otherwise specifically be provided by law, the Charter or these Bylaws.
If a quorum is not present at any Board meeting, the directors present may
adjourn the meeting, from time to time, without notice other than announcement
of the meeting, until a quorum is present.

         5.11. COMPENSATION. Directors shall be entitled to such compensation
for their services as directors as from time to time may be fixed by the Board
and shall be entitled to reimbursement of all reasonable expenses incurred by
them in attending Board meetings. A director may waive compensation for any
Board meeting. No director who receives compensation as a director shall be
barred from serving the Company in any other capacity or from receiving
compensation and reimbursement of reasonable expenses for any or all such other
services.

         5.12. PRESUMPTION OF ASSENT. A Director of the Company who is present
at a meeting of the Board of Directors at which action on any corporate matter
is taken shall be presumed to have assented to the action taken unless his
dissent shall be entered in the minutes of the meeting or unless he shall file
his written dissent to such action with the person acting as the Secretary of
the meeting before the adjournment thereof, or shall forward such dissent by
registered or certified mail, first class, postage prepaid, to the Secretary of
the Company, provided such mailing is postmarked within ten calendar days after
the adjournment of the meeting. Such right to dissent shall not apply to a
Director who voted in favor of such action.


                                      -9-


         5.13. ACTION BY DIRECTORS WITHOUT MEETING. Any action required to be
taken at a meeting of the Directors of the Company or of a committee of
Directors or any action which may be taken at such a meeting, may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the Directors entitled to vote with respect to the
subject matter thereof. A consent shall be sufficient for this Section if it is
executed in counterparts, in which event all of such counterparts, when taken
together, shall constitute one and the same consent.

         5.14. BANK ACCOUNTS, ETC. Anything herein to the contrary
notwithstanding, the Board of Directors may, except as may otherwise be required
by law, authorize any officer or officers, agent or agents, in the name of and
on behalf of the Company, to sign checks, drafts, or other orders for the
payment of money or notes or other evidences of indebtedness, to endorse for
deposit, deposit to the credit of the Company at any bank or trust company or
banking institution in which the Company may maintain an account or to cash
checks, notes, drafts, or other bankable securities or instruments, and such
authority may be general or confined to specific instances, as the Board of
Directors may elect.

         5.15. INSPECTION OF RECORDS. Every Director shall have the absolute
right at any reasonable time to inspect all books, records, documents of every
kind, and the physical properties of the Company and of its subsidiaries. Such
inspection may be made personally or by an agent and includes the right to make
copies and extracts.

         5.16. EXECUTIVE COMMITTEE.

               (a) The Board of Directors may, by resolution adopted by a
majority of the whole Board, appoint two or more of its members to constitute an
Executive Committee. One of such directors shall be designated as Chairman of
the Executive Committee. Each member of the Executive Committee shall continue
as a member thereof until the expiration of his term as a director, or until his
earlier resignation from the Executive Committee, in either case unless sooner
removed as a director or member of the Executive Committee by any means
authorized by the Charter or herein.

               (b) The Executive Committee shall have and may exercise, to the
extent provided in such resolution and except as prohibited by law, all of the
rights, power and authority of the Board of Directors.

               (c) The Executive Committee shall fix its own rules of procedure
and shall meet at such times and at such place or places as may be provided by
its rules. The Chairman of the Executive Committee, or in the absence of the
Chairman, a member of the Executive Committee chosen by a majority of the
members present, shall preside at all meetings of the Executive Committee, and
another member thereof chosen by the Executive Committee shall act as Secretary.
A majority of the Executive Committee shall constitute a quorum for the
transaction of business, and the affirmative vote of a majority of the members
thereof shall be required for any action of the Executive Committee. The
Executive Committee shall keep minutes of its meetings and deliver such minutes
to the Board of Directors.

         5.17. OTHER COMMITTEES. The Board of Directors may, by resolution duly
adopted by a majority of directors at a meeting at which a quorum is present,
appoint an audit committee, compensation committee, and such other committee or
committees as it shall deem advisable and with such limited authority as the
Board of Directors shall from time to time determine.

         5.18. OTHER PROVISIONS REGARDING COMMITTEES.

               (a) The Board of Directors shall have the power at any time to
fill vacancies in, change the membership of, or discharge any Committee. The
members of any committee present at any meeting of a committee, whether or not
they constitute a quorum, may appoint a director to act in the place of as
absent member.

               (b) Members of any committee shall be entitled to such
compensation for their services as such as from time to time may be fixed by the
Board of Directors and in any event shall be entitled to reimbursement of all
reasonable expenses incurred in attending committee meetings. Any member of a
committee may waive compensation for any meeting. No member of a committee who
receives compensation as a member of one or more committees shall be barred from
serving the Company in any other capacity or from receiving compensation and
reimbursement of reasonable expenses for any or all such other services.


                                      -10-


               (c) Unless otherwise prohibited by law, the provisions above
concerning action by written consent of directors and meetings of directors by
telephonic or similar means shall apply to all committees from time to time,
created by the Board of Directors.

                                   ARTICLE VI
                                    OFFICERS

         6.01. POSITIONS. The Company's officers generally shall be chosen by
the Board of Directors and shall consist of a Chairman of the Board, a
President, one or more Vice Presidents if desired, a Secretary and a Treasurer.
The Board of Directors may appoint one or more other officers, assistant
officers and agents as it from time to time deems necessary or appropriate, who
shall be chosen in such manner and hold their offices for such terms and have
such authority and duties as from time to time may be determined by the Board of
Directors. The Board may delegate to the Chairman of the Board the authority to
appoint any officer or agent of the Company and to fill a vacancy other than the
Chairman of the Board or President. Any two or more offices may be held by the
same person, except that no person may simultaneously hold the offices of
President and Secretary and of President and Vice President. In all cases where
the duties of any officer, agent or employee are not prescribed by these bylaws
or by the Board of Directors, such officer, agent or employee shall follow the
orders and instructions of the President.

         6.02. TERM OF OFFICE; REMOVAL. Each officer of the Company shall hold
office at the pleasure of the Board and any officer may be removed, with or
without cause, at any time by the affirmative vote of a majority of the
directors then office; PROVIDED, that any officer appointed by the Chairman of
the Board pursuant to authority delegated by the Board may be removed, with or
without cause, at any time by the Chairman whenever the Chairman in his or her
absolute discretion shall consider that the Company's best interests shall be
served by such removal. Removal of an officer by the Board (or the Chairman, as
the case may be) shall not prejudice the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent shall not in itself
create contract rights.

         6.03. VACANCIES. A vacancy in any office, however occurring; may be
filled by the Board or the Executive Committee, for the unexpired portion of the
term by majority vote of its members, or by the Chairman of the Board in the
case of a vacancy occurring in an office to which the Chairman has been
delegated authority to make appointments.

         6.04. COMPENSATION. The salaries of all officers of the Company shall
be fixed from time to time by the Board, and no officer shall be prevented from
receiving a salary by reason of the fact that he also receives compensation from
the Company in any other capacity.

         6.05. CHAIRMAN OF THE BOARD. The Chairman of the Board ("CHAIRMAN"), if
such officer shall be chosen by the Board of Directors, shall preside at all
meetings of the Board of Directors and meetings of shareholders at which he is
present and shall exercise general supervision and direction over the
implementation of Board policy affecting the affairs of the Company. Any act
which may be performed by the Chief Executive Officer or President may be
performed by the Chairman.

         6.06. CHIEF EXECUTIVE OFFICER, CHIEF OPERATING OFFICER. The Chairman of
the Board shall, unless the Board determines otherwise, serve as the Chief
Executive Officer ("CEO") of the Company. If the Chairman is not designated the
CEO, then the President shall serve as CEO. The Board may, from time to time,
designate from among the executive officers of the Company an officer to serve
as Chief Operating Officer ("COO") of the Company. If the Chairman serves as the
CEO, then the President shall serve as COO. If the President is designated CEO,
then the Executive Vice President (or if there is none, then the next most
senior Vice President) shall serve is COO. A person designated to serve in the
capacity of CEO or COO shall serve at the pleasure of the Board.


                                      -11-


         A person designated Chief Executive Officer (CEO) shall have primary
responsibility for and active charge of the management and supervision of the
Company's business and affairs. The CEO may execute in the name of the Company
authorized corporate obligations and other instruments, shall perform such other
duties as may be prescribed by the Board (or Chairman, as the case may be) from
time to time and, in the absence or disability of the President, shall exercise
all of the duties and powers of the President. In the event that the President
is not the CEO, then the CEO shall supervise the performance of the President
and shall be responsible for the execution of the policies and directives of the
Board. The CEO shall report directly to the Board. The CEO shall perform such
other duties as may be assigned by the Board (or Chairman, as the case may be).
The CEO may perform any act which, might be performed by the President.

         A person designated Chief Operating Officer (COO) shall be responsible
for the day-to-day management of the Company's operations, subject to the
authority of the COO. The COO shall report directly to the CEO of the Company
and shall consult with the CEO on all matters of corporate policy and material
business activities of the Company. The COO shall perform such other duties as
may be assigned by the Board or the CEO.

         6.07. PRESIDENT. The President shall have general active management of
the business of the Company, subject to the authority of the Chief Executive
Officer if the President it not designated as such, and general supervision of
its officers, agents and employees. In the absence of the Chairman and Chief
Executive Officer, he shall preside at all meetings of the shareholders and of
the Board. In the absence of a designated Chief Executive Officer he shall see
that all policies and directives of the Board are carried into effect.

         He shall, unless otherwise directed by the Board of Directors, attend
in person or by substitute appointed by him, or shall execute in behalf of the
Company written instruments appointing a proxy or proxies to represent the
Company, at all meetings of the stockholders of any other company in which the
Company shall hold any stock. He may, on behalf of the Company, in person or by
substitute or by proxy, execute written waivers of notice and consents with
respect to any such meetings. At all such meetings and otherwise, the President,
in person or by substitute or proxy as aforesaid, may vote the stock so held by
the Company and may execute written consent and other instruments and power
incident to the ownership of said stock, subject however to the instructions, if
any, of the Chairman or the Board of Directors. The President shall have custody
of the Treasurer's bond, if any.

         6.08. EXECUTIVE VICE PRESIDENT. The Executive Vice President shall
assist the President in the discharge of supervisory, managerial and executive
duties and functions. In the absence of the President or in the event of his
death, or inability or refusal to act, the Executive Vice President shall
perform the duties of the President and when so acting shall have the duties and
powers of the President. He shall perform such ether duties as from time to time
may be assigned to him by the President, Chairman or Board of directors.

         6.09. VICE PRESIDENTS. The Vice Presidents, if any, shall assist the
President and Executive Vice President and shall perform such duties as may be
prescribed by the Board, the Chairman or the President. Vice Presidents in the
order of their seniority shall, in the absence or disability of the Chairman and
President, exercise all of the duties and powers of such officers. The Executive
Vice president, if any, shall be the most senior of Vice Presidents, and the
Senior Vice President, if any, shall be the next most senior of Vice President.
In regard to other Vice Presidents, they shall have the respective ranks
designated by the Board of Directors, or if none has been so designated, as
designated by the Chairman, or if none has been so designated by the Chairman,
they shall rank is the order of their respective elections to such office. The
execution of any instrument on the Company's behalf by a Vice President shall be
conclusive evidence, as to third parties, of his authority to act in the stead
of the President and Executive Vice President.

         6.10. SECRETARY. The Secretary shall: (i) keep the minutes of the
proceedings of the shareholders and the Board of Directors and record all votes
and proceedings thereof in a book kept for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these Bylaws or as
required by law; (iii) be custodian of the corporate records and of the seal of
the Company and affix the seal to all documents when authorized by the Board of
Directors; (iv) keep at its registered office or principal place of business
within or outside Delaware a record containing the names and addresses of all
shareholders and the number and class of shares held by each, unless such a
record shall be kept at the office of the Company's transfer agent or registrar,
(v) sign with the President, or a Vice President, certificates for shares of the
Company, the issuance of which shall have been authorized by resolution of the
Board of Directors; (vi) have general charge of the stock transfer books of the
Company, unless the Company has a transfer agent; and (vii) in general, perform
all duties incident to the office of Secretary and such other duties as from
time to time may be assigned to him by the President or the Board of Directors.
The Board of Directors may give general authority to officers other than the
Secretary or any Assistant Secretary to affix the Company's seal and to attest
the fixing thereof by his or her signature.


                                      -12-


         6.11. ASSISTANT SECRETARY. The Assistant Secretary, if any (or if there
is more than one, the Assistant Secretaries in the order designated, or in the
absence of any designation, in the order of their appointment), in the absence
or disability of the Secretary, shall perform the duties and exercise the powers
of the Secretary. The Assistant Secretary(ies) shall perform such other duties
and have such other powers as from time to time may be prescribed by the Board,
the Chairman or the Chief Executive Officer. The Chairman may appoint one or
more Assistant Secretary(ies) to office.

         6.12. TREASURER. The Treasurer shall, unless the Board otherwise
resolves, be the principal financial officer and principal accounting officer of
the Company and shall have the care and custody of all funds, securities,
evidence of indebtedness and other valuable effects of the Company, shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the Company and shall deposit all money and other valuable effects of the
Company in the name and to the credit of the Company in such depositories as
from time to time may be designated by the Board. The Treasurer shall disburse
the funds of the Company in such manner as may be ordered by the Board from time
to time and shall render to the Chairman of the Board, the President and the
Board; at regular Board meetings or whenever any of them may so require, an
account of all transactions and of the Company's financial condition.

         6.13. ASSISTANT TREASURER. The Assistant Treasurer, if any (or if there
is more than one, the Assistant Treasurers in the order designated, or in the
absence of any designation, in the order of their appointment), in the absence
or disability of the Treasurer, shall perform the duties and exercise the powers
of the Treasurer. The Assistant Treasurer(s) shall perform such other duties and
have such other powers as from time to time may be prescribed by the Board, the
Chairman or the Chief Executive Officer. The Chairman may appoint one or more
Assistant Treasurer(s) to office.

         6.14. RESIGNATIONS. Any officer may resign at my time by giving written
notice to the Board or to the Chairman. Such resignation shall take effect at
the time specified therein and, unless specified therein, no acceptance of the
resignation shall be required for the resignation to be effective.

         6.15. DELEGATION OF DUTIES. In the event of the absence or disability
of any officer of the Company, or for any other reason the Board shall deem
sufficient, the Board may temporarily designate the powers and duties, or
particular powers and duties, of such officer to any other officer, or to any
director.

         6.16. FIDELITY BONDS. The Board of Directors shall have the power, to
the extent permitted by law, to require any officer, agent or employee of the
Company to give bond for the faithful discharge of his duties in such form and
with such surety or sureties as the Board deems advisable.

                                  ARTICLE VII
                                 INDEMNIFICATION

         Every Director, officer, employee and agent of the Company, and every
person serving at the Company's request as a director, officer (or in a position
functionally equivalent to that of officer or director), employee or agent of
another corporation, partnership, joint venture, trust or other entity, shall be
indemnified to the extent and in the manner provided by the Company's Charter,
as it may be amended, and if no such provision appears therein, then in
accordance with the laws of the State of Delaware.

                                  ARTICLE VIII
                                  MISCELLANEOUS

         8.01. DECLARATION OF DIVIDENDS. The Board of Directors at any regular
or special meeting may declare dividends payable, whenever in the exercise of
its discretion it may deem such declaration advisable and such is permitted by
law. Such dividends may be paid in cash property, or shares of the Company.


                                      -13-


         8.02. BENEFIT PROGRAMS. Directors shall have the power to install and
authorize any pension, profit sharing, stock option, insurance, welfare,
educational, bonus, health and accident or other benefit program which the Board
deems to be in the interest of the Company, at the expense of the Company, and
to amend or revoke any plan so adopted.

         8.03. SEAL. The corporate seal of the Company shall be circular in form
and shall contain the name of the Company, the year of its incorporation and the
words "Seal, Delaware".

         8.04. FISCAL YEAR. The Board of Directors may fix; and from time to
time change, the fiscal year of the Company. Any such adoption of or change in a
fiscal year shall not constitute or require an amendment to these Bylaws.

                                   ARTICLE IX
                              AMENDMENTS TO BYLAWS

         These Bylaws may be amended or repealed in the manner provided for in
the Charter, or if none is there provided by majority vote of the Board of
Directors, taken at any meeting or by written consent, subject to the
shareholders' right to change or repeal any Bylaws so made or adopt new Bylaws
by vote of at least two thirds (2/3) of the total voting power. Bylaws
amendments may be proposed by any Director or shareholder. Any action, duly
taken by the Board or the shareholders which conflicts or is inconsistent with
these Bylaws (as they may be amended) shall constitute an amendment of the
Bylaws, if the action was taken by such number of directors or shares voting as
would be sufficient for amendment of the Bylaws.

                                   ARTICLE X
                                     NOTICES

         10.01. GIVING OF NOTICE. Except as otherwise provide by the General
Corporation Law of Delaware, these Bylaws, the Charter, or resolution of the
Board of Directors, every meeting notice or other notice, demand, bill,
statement or other communication (collectively, "NOTICE") to or from the Company
from or to a Director, Officer or shareholder shall be duly given if it is
written or printed and is (i) sent by first class or express mail, postage
prepaid, (ii) sent by any commercial overnight air courier service, such as DHL,
Federal Express, Emery, Airborne, UPS or similar service, (iii) sent by
telegraph, cablegram, telex, telecopier or other facsimile transmission, (iv)
delivered by any commercial messenger service which regularly retains its
receipts, or (v) personally delivered, provided a receipt is obtained reflecting
the date of delivery. Notice shall not be duly given unless all delivery,
postage, or other charges are prepaid. Notice shall be given to an addressee's
most recent address as it appears on the Company's records or to such other
address as has been provided in writing to the Secretary. A Notice shall be
deemed "given" when dispatched for delivery, when personally delivered, when
transmitted electronically, or if mailed, on the date postmarked. This Section
shall not have the effect of shortening any notice period provided for in these
Bylaws.

         10.02. WAIVER OF NOTICE. Any Notice required or permitted by the
General Corporation Law of Delaware, the Charter or these Bylaws may be waived
in writing at any time by the person entitled to the Notice, and such waiver
shall be equivalent to the giving of notice. Notice of any shareholder meeting
shall be waived by attendance, in person or by proxy, at the meeting, unless any
question of lack of or defect in a Notice is raised prior to conclusion of a
meeting. No waiver of notice of a meeting need specify the purpose of the
meeting or the business to be transacted thereat.

         APPROVED AND ADOPTED by the board of Directors as of March 9, 1992 and
amended April 13, 2004.



                                      -14-

EX-10.1

                                                                    EXHIBIT 10.1


                                 FIRST AMENDMENT
                                       TO
                     AMENDED AND RESTATED SUBLEASE AGREEMENT


          THIS FIRST AMENDMENT TO AMENDED AND RESTATED SUBLEASE AGREEMENT (this
"AMENDMENT") is made as of January 1, 2004, by and between SMITHS AEROSPACE,
INC., a Delaware corporation, f/k/a Smiths Industries Aerospace & Defense
Systems, Inc., a Delaware corporation ("SUBLANDLORD"), and AMERICAN TECHNOLOGY
CORPORATION, a Delaware corporation ("SUBTENANT").

                                 R E C I T A L S
                                 ---------------

         A. Sublandlord and Subtenant entered into that certain Amended and
Restated Sublease Agreement dated as of September 1, 2000 (the "SUBLEASE") for
space in that certain building located at 13112 Evening Creek Drive South, San
Diego, California 92128, which space is more particularly described in the
Sublease and contains 12,107 square feet (the "ORIGINAL PREMISES").

         B. Subtenant has requested that Sublandlord expand the Original
Premises by 11,441 square feet (the "EXPANSION SPACE"). The Original Premises is
depicted in Exhibit A attached hereto, and the Expansion Space and Original
Premises are both depicted in Exhibit B attached hereto.

         C. The Term of the Sublease expired on July 31, 2003 (the "ORIGINAL
SUBLEASE EXPIRATION DATE"), but Subtenant has continued to occupy the Original
Premises subject to the terms of the Sublease. Subtenant has requested that
Sublandlord extend the Term to July 31, 2006.

         D. The Parties desire to amend the Sublease to, among other things, add
the Expansion Space to the Original Premises and extend the Term, as set forth
in this Amendment.

         NOW, THEREFORE, in reliance upon the foregoing and for good and
valuable consideration, the receipt of which is hereby acknowledged, Sublandlord
and Subtenant (together, the "PARTIES" and each sometimes a "PARTY") agree and
hereby amend the Sublease as follows:

                                A G R E E M E N T
                                -----------------

         1. DEFINITIONS. Any term which is defined in the Sublease, and not
otherwise defined or modified in this Amendment, shall have the meaning ascribed
to it in the Sublease wherever capitalized herein. Each term defined in this
Amendment shall have its defined meaning wherever capitalized herein.

         2. EFFECTIVE DATE. This Amendment shall be effective as of the
Effective Date (however, certain provisions of this Amendment shall be
retroactive to the Original Sublease Expiration Date as expressly set forth in
this Amendment). The "EFFECTIVE DATE" is the date upon which Landlord consents
to this Amendment (SEE Section 18 below).

         3. DEMISE OF ORIGINAL PREMISES AND EXPANSION SPACE. Effective as of the
Effective Date, but retroactive to the Original Sublease Expiration Date,
Sublandlord hereby demises and subleases to Subtenant, and Subtenant hereby
accepts and subleases from Sublandlord, the Original Premises subject to all the
terms and conditions of the Sublease except as expressly modified herein. In
addition, effective as of the Effective Date, Sublandlord hereby demises and
subleases to Subtenant, and Subtenant hereby accepts and subleases from
Sublandlord, the Expansion Space.




         4. EXPANSION SPACE. The Expansion Space shall be subject to all the
terms and conditions of the Sublease except as expressly modified herein .
Subtenant has inspected the Expansion Space and agrees to accept the same "AS
IS, WHERE IS" and with all faults and defects and without any (i)
representations or warranties on the part of Sublandlord with respect to the
condition of the Expansion Space, (ii) agreements, understandings or obligations
on the part of Landlord to perform or pay for any alteration, repairs,
replacements or improvements, or (iii) allowances, abatements, credits or other
concessions or inducements granted with respect to the Original Premises.

         5. EXPANDED PREMISES AND NEW PREMISES AREA. Effective as of the
Effective Date, the Premises shall be increased to include the Expansion Space.
Consequently, the Premises shall be comprised of the Original Premises and the
Expansion Space, for a total Premises area of 23,548 square feet. The Premises
(including the Expansion Space) is depicted in Exhibit B attached hereto and is
not subject to verification or re-measurement.

         6. EXTENSION OF TERM. Effective as of the Effective Date, but
retroactive to the Original Sublease Expiration Date, the Term of the Sublease
shall be extended by 36 months. The extended Term shall expire on July 31, 2006
(the "EXPIRATION DATE"), unless sooner terminated in accordance with the express
provisions of the Sublease.

         7. BASE RENT. Effective as of the Effective Date, but retroactive to
the Original Sublease Expiration Date, Sublandlord shall pay to Subtenant Base
Rent as follows:


- -------------------------------- ----------------------- -------------------------- --------------------------------
                                      ANNUAL RATE
           TIME PERIOD              PER SQUARE FOOT          ANNUAL BASE RENT              MONTHLY BASE RENT
- -------------------------------- ----------------------- -------------------------- --------------------------------
                                                                                     
From August 1, 2003 to the               $15.85                 $191,895.96                   $15,991.33
Effective Date
- -------------------------------- ----------------------- -------------------------- --------------------------------

From Effective Date to the               $14.40                 $339.091.20                   $28,257.60
Expiration Date
- -------------------------------- ----------------------- -------------------------- --------------------------------


         8. SUBTENANT'S PROPORTIONATE SHARE OF OPERATING EXPENSES. Effective as
of the Effective Date, but retroactive to the Original Sublease Expiration Date,
Subtenant shall pay to Sublandlord Subtenant's Proportionate Share of Operating
Expenses pursuant to Section 4.2 of the Sublease; provided however, upon the
Effective Date, Subtenant's Proportionate Share shall be increased to 21.45% to
take the Expansion Space into account.

         9. SECURITY DEPOSIT. Effective as of the Effective Date, the Security
Deposit shall be increased to $28,257.60. Subtenant has already deposited, in
cash, with Sublandlord the sum of $14,770.54. Therefore, within three days
following the Effective Date, Subtenant shall deposit $13,487.06, in cash, with
Sublandlord.

         10. SUBTENANT'S WORK. After the Effective Date, Subtenant, at its sole
cost and expense, shall make the improvements described in Exhibit C attached
hereto ("SUBTENANT'S WORK"), which improvements shall include a new demising
wall that separates the Original Premises and Expansion Space from the space
that will be occupied by e.Digital Corporation ("e.Digital") after the reduction
of e.Digital's premises pursuant to that certain First Amendment to Amended and
Restated Sublease Agreement of even date herewith between Sublandlord and
e.Digital. Subtenant's Work shall be (i) completed within a reasonable period
not to exceed 90 days after the Effective Date, (ii) deemed Subtenant
Alterations and (iii) shall be subject to the terms of the Sublease and Master
Lease. Upon completion of the Subtenant's Work, Subtenant shall deliver to
Sublandlord copies of all lien releases, copies of paid invoices, and final
as-built plans. Subtenant shall hold harmless, indemnify and defend Sublandlord
from and against any claim by or liability to the Subtenant's contractor, the
Landlord or any third party, and related expenses (including attorneys' fees
actually and reasonably incurred), arising from or related to the Subtenant's
Work.

                                       2


         11. RENT CREDIT. After the Effective Date, Subtenant shall be entitled
to a "RENT CREDIT" equal to the reasonable third party costs actually paid by
Subtenant for the Subtenant's Work, but in no event shall the Rent Credit exceed
$48,334.04. The Rent Credit shall be applied to the first installments of Base
Rent that are due after the Effective Date. Notwithstanding the foregoing,
Subtenant shall not be entitled to receive the Rent Credit (or the then
unapplied portion thereof) if Subtenant is then in Default under this Sublease;
provided however, if Subtenant cures such Default to Sublandlord's reasonable
satisfaction, Sublandlord shall then apply the Rent Credit (or the then
unapplied portion thereof) to the next installments of Base Rent pursuant to
this Section 11.

         12. ONSITE PARKING. Effective as of the Effective Date, Subtenant shall
have the right to use 78 unreserved parking stalls located in the open parking
lot within the Master Premises, subject to the terms and conditions of the
Sublease, including, without limitation, Section 7 of the Sublease.

         13. BROKERAGE COMMISSIONS. The Parties acknowledge that no realtor,
broker, agent or finder was involved in connection with this Amendment other
than CB Richard Ellis (Attention: Brent H. Wright), representing Subtenant, and
CB Richard Ellis (Attention: Jerry Keeney), representing Sublandlord
(collectively, the "BROKERS") and, therefore, that no brokerage commissions or
other fees are due to any realtor, broker, agent or finder other than the
Brokers. Tenant shall hold harmless, indemnify and defend Landlord against any
claim made in connection with this Amendment by any realtor, broker, agent or
finder other than the Brokers based on an alleged act on the part of Tenant or
any of Tenant's agents or employees. Sublandlord and Subtenant acknowledge that
CB Richard Ellis, Inc. represents both Parties. Sublandlord and Subtenant
confirm that they were timely advised of such dual representation and that they
consented to the same, and that they do not expect the Brokers to disclose to
either of them confidential information of the other Party.

         14. DELETION OF CERTAIN PROVISIONS. Sections 5 (Option to Extend Term)
and 6 (Right of First Offer) are hereby deleted from the Sublease, and such
Sections shall be of no further force and effect. Subtenant acknowledges and
agrees that, because the term of the Master Lease expires on August 31, 2006,
Sublandlord shall not (i) extend the Term of the Sublease or renew the Sublease
or (ii) consent to a holdover by Subtenant or any delay in Subtenant's surrender
of the Premises.

         15. NO FURTHER AMENDMENT. Except as modified by this Amendment, the
Sublease remains in full force and effect, and unchanged.

         16. ENTIRE AGREEMENT. This Amendment contains the entire agreement and
understanding of the Parties with respect to the subject matter of this
Amendment and supersedes and replaces entirely all previous oral and written
understandings or proposals.

         17. COUNTERPARTS. This Amendment may be executed in multiple
counterparts, and by each Party on separate counterparts, each of which shall be
deemed an original and all of which shall constitute one and the same
instrument.

         18. CONSENT TO SUBLEASE BY LANDLORD. This Amendment shall be contingent
upon and shall not become operative unless and until the Landlord has given its
prior written consent to this Amendment. Sublandlord shall not be responsible
for the failure of Landlord to consent to this Amendment or the failure or
refusal of Landlord to grant any consent of Landlord required by this Amendment,
the Sublease or the Master Lease. Should the Landlord not grant its consent to
this Amendment within 30 days from the date hereof, either Party may terminate
this Amendment upon 15 days prior written notice to the other Party, and this
Amendment shall terminate at the end of such 15-day period unless Landlord
consents to this Amendment before the end of such 15-day period. If this
Amendment is terminated pursuant to the preceding sentence, Sublandlord and
Subtenant shall be released from all obligations with respect to this Amendment
and neither shall have any further rights at law or in equity with respect to
this Amendment. The Parties hereby acknowledge that Landlord's consent to this
Amendment shall not make Landlord a party to this Amendment, shall not create
any contractual liability or duty on the part of Landlord and shall not in any
manner increase, decrease or otherwise affect the rights and obligations of
Landlord, Sublandlord and Subtenant with respect to the Master Premises, the
Premises and the Sublease.


                                       3


         19. REDUCTION OPTION. Subtenant shall have the option to exclude from
the Premises and return to Sublandlord the 8,551 square feet of space that is
depicted on Exhibit D attached hereto) (the "REDUCTION SPACE") effective as of a
date (the "REDUCTION DATE") that is at least 60 days after Subtenant's written
exercise notice to Sublandlord, but in no event shall the Reduction Date be
prior to July 31, 2004. As a condition to the effectiveness of such reduction of
the Premises, Subtenant, at its sole cost and expense, shall (i)remove any
improvements and alterations to the Reduction Space made by or on behalf of
Subtenant, and (ii) comply with all of the terms and conditions of the Sublease
applicable upon the expiration of the Sublease Term or the termination of the
Sublease, including, without limitation, those relating to the surrender of the
Reduction Space, the removal of Subtenant's property from the Reduction Space
and the completion of any repairs to, and restoration of, the Reduction Space.
Upon Subtenant's satisfying the foregoing conditions to Sublandlord's reasonable
satisfaction, the square footage of the Premises shall be reduced by the number
of square feet in the Reduction Space, Sublandlord shall recompute the Base Rent
and Subtenant's Proportionate Share based on the remaining number of square feet
in the Premises, and the Parties shall execute an amendment to the Sublease that
sets forth the new square footage of the Premises and re-computed Base Rent and
Subtenant's Proportionate Share.

         20. SIGNERS' WARRANTY. Each individual executing or delivering this
Amendment on behalf of a Party hereby represents and warrants to the other Party
that he or she has been duly authorized and empowered to do so.

                                      * * *







          IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first set forth above.



"SUBLANDLORD"                                "SUBTENANT"

SMITHS AEROSPACE, INC.,                      AMERICAN TECHNOLOGY CORPORATION,
a Delaware corporation                       a Delaware corporation

By:                                          By: /s/ KALANI JONES
    -------------------------------              -------------------------------
    Name:                                        Name:
    Title:                                       Title: COO


                                             By:
                                                 -------------------------------
                                                 Name:
                                                 Title:

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, Elwood G. Norris, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of American
         Technology Corporation;

2.       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;

3.       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;

4.       The registrant's other certifying officer(s) 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:

         a)       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;

         b)       [paragraph omitted pursuant to SEC Release Nos. 33-8238 and
                  34-47986]

         c)       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

         d)       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 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

5.       The registrant's other certifying officer(s) and I have disclosed,
         based on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         functions):

         a)       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

         b)       Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Dated: May 5, 2004

         /s/ ELWOOD G. NORRIS

         Elwood G. Norris,
         Chairman of the Board
         (Co-Principal Executive Officer)

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Kalani Jones, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of American
         Technology Corporation;

2.       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;

3.       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;

4.       The registrant's other certifying officer(s) 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:

         a)       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 teport is being prepared;

         b)       [paragraph omitted pursuant to SEC Release Nos. 33-8238 and
                  34-47986]

         c)       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

         d)       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 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

5.       The registrant's other certifying officer(s) and I have disclosed,
         based on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         functions):

         a)       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

         b)       Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Dated: May 5, 2004

         /s/ KALANI JONES

         Kalani Jones,
         President and Chief Operating Officer
         (Co-Principal Executive Officer)

EX-31.3

                                                                    EXHIBIT 31.3

                                  CERTIFICATION

I, Carl Gruenler, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of American
         Technology Corporation;

2.       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;

3.       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;

4.       The registrant's other certifying officer(s) 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:

         a)       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;

         b)       [paragraph omitted pursuant to SEC Release Nos. 33-8238 and
                  34-47986]

         c)       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

         d)       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 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

5.       The registrant's other certifying officer(s) and I have disclosed,
         based on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         functions):

         a)       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

         b)       Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.


Dated: May 5, 2004

         /s/ CARL GRUENLER

         Carl Gruenler
         Vice President, Military Operations and Interim Chief Financial Officer
         (Principal Financial Officer)

EX-32.1

                                                                    EXHIBIT 32.1


  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERS AND PRINCIPAL FINANCIAL OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his
capacity as an officer of American Technology Corporation (the "Company"), that,
to his knowledge, the Quarterly Report of the Company on Form 10-Q, for the
fiscal quarter ended March 31, 2004 fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and results of operation of the Company as of the dates and
for the periods presented in the financial statements included in such report.

Dated: May 5, 2004

/s/ ELWOOD G. NORRIS

         Elwood G. Norris,
         Chairman of the Board
         (Co-Principal Executive Officer)

Dated: May 5, 2004

/s/ KALANI JONES

         Kalani Jones,
         President and Chief Operating Officer
         (Co-Principal Executive Officer)

Dated: May 5, 2004

/s/ CARL GRUENLER

         Carl Gruenler
         Vice President, Military Operations and Interim Chief Financial Officer
         (Principal Financial Officer)