10-Q

Table of Contents

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 December 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: 000-24248

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

Delaware	87-03261799
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

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.  X  YES       NO

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 8, 2005.

Common Stock, $0.00001 par value	20,208,238
(Class)	(Number of Shares)

AMERICAN TECHNOLOGY CORPORATION
INDEX

Page

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 2004
and September 30, 2004 (unaudited)	3
Statements of Operations for the three months ended
December 31, 2004 and 2003 (unaudited)	4
Statements of Cash Flows for the three months ended
December 31, 2004 and 2003 (unaudited)	5
Notes to Interim Financial Statements (unaudited)	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	31
Item 4. Controls and Procedures	31
PART II. OTHER INFORMATION	32
Item 1. Legal Proceedings	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3. Defaults upon Senior Securities	32
Item 4. Submission of Matters to a Vote of Security Holders	32
Item 5. Other Information	32
Item 6. Exhibits	33
SIGNATURES	34

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

American Technology Corporation
BALANCE SHEETS
(Unaudited)

	December 31, 2004			September 30, 2004 (a)
ASSETS
Current Assets:
Cash	$	3,828,544		$	4,178,968
Trade accounts receivable, less allowance of      $25,000 each period for doubtful accounts		3,601,940			926,747
Inventories, net		922,874			651,095
Prepaid expenses and other		192,306			156,419
Total current assets		8,545,664			5,913,229
Equipment, net		585,465			453,355
Patents, net		1,296,090			1,278,707
Prepaid transaction costs		898,105			-
Total assets	$	11,325,324		$	7,645,291
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,002,738		$	1,300,075
Accrued liabilities:
Payroll and related		632,511			302,706
Deferred revenue		300,000			322,344
Warranty reserve		408,834			331,917
Legal settlements		150,000			150,000
Other		10,409			22,236
Capital lease short-term portion		11,247			10,967
Total current liabilities		3,515,739			2,440,245
Long-Term Liabilities:
8% Unsecured Subordinated Promissory Notes, net of $735,441 debt discount		1,264,559			-
Derivative instrument		1,793,246			-
Capital lease long-term portion		9,212			12,131
Total liabilities		6,582,756			2,452,376
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.00001 par value; 5,000,000 shares authorized:
Series D Convertible Preferred stock 250,000 shares designated: 50,000     issued and outstanding each period, respectively. Liquidation     preference of $580,000 and $572,500, respectively		-			-
Series E Convertible Preferred stock 350,000 shares designated: 233,250     issued and outstanding each period. Liquidation preference     of $2,592,000 and $2,556,000, respectively		3			3
Common stock, $0.00001 par value; 50,000,000 shares authorized;   19,851,319 and 19,808,819 shares issued and outstanding respectively		199			198
Additional paid-in capital		48,596,709			47,520,207
Accumulated deficit		(43,854,343	)		(42,327,493	)
Total stockholders’ equity		4,742,568			5,192,915
Total liabilities and stockholders’ equity	$	11,325,324		$	7,645,291

See accompanying notes to interim financial statements.
(a) Derived from the audited financial statements as of September 30, 2004.

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American Technology Corporation
STATEMENTS OF OPERATIONS
(Unaudited)

	For the three months ended December 31,
	2004			2003
Revenues:
Product sales	$	4,346,913		$	618,584
Contract and license		62,000			156,194
Total revenues		4,408,913			774,778
Cost of revenues		1,527,703			408,478
Gross profit		2,881,210			366,300
Operating expenses:
Selling, general and administrative		1,995,915			1,072,314
Research and development		1,460,615			448,971
Total operating expenses		3,456,530			1,521,285
Loss from operations		(575,320	)		(1,154,985	)
Other income (expense):
Interest income		10,941			19,374
Interest expense		(12,330	)		(816	)
Unrealized loss on derivative revaluation		(950,141	)		-
Total other income (expense)		(951,530	)		18,558
Net loss		(1,526,850	)		(1,136,427	)
Dividend requirements on convertible preferred stock		277,775			293,705
Net loss available to common stockholders	$	(1,804,625	)	$	(1,430,132	)
Net loss per share of common stock - basic and diluted	$	(0.09	)	$	(0.07	)
Average weighted number of common shares outstanding		19,812,515			19,376,717

See accompanying notes to interim financial statements.

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American Technology Corporation
STATEMENTS OF CASH FLOWS
(Unaudited)

	For the three months ended December 31,
	2004			2003
Increase (Decrease) in Cash
Operating Activities:
Net loss	$	(1,526,850	)	$	(1,136,427	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		111,401			54,196
Warranty provision		82,163			(4,500	)
Options granted for compensation		268,503			-
Unrealized loss on derivative valuation		950,141			-
Amortization of debt discount		8,059			-
Changes in assets and liabilities:
Trade accounts receivable		(2,675,193	)		(505,220	)
Inventories		(271,779	)		(148,694	)
Prepaid expenses and other		(35,887	)		(35,111	)
Accounts payable		627,163			(95,188	)
Warranty payments		(5,246	)
Accrued liabilities		295,634			(158,260	)
Net cash used in operating activities		(2,171,891	)		(2,029,204	)
Investing Activities:
Purchase of equipment		(190,026	)		(36,308	)
Patent costs paid		(70,868	)		(115,360	)
Net cash used in investing activities		(260,894	)		(151,668	)
Financing Activities:
Payments on capital lease		(2,639	)		(2,386	)
Proceeds from issuance of unsecured promissory notes		2,000,000			-
Proceeds from exercise of common stock warrants		85,000			50,000
Proceeds from exercise of stock options		-			258,525
Net cash provided by financing activities		2,082,361			306,139
Net decrease in cash		(350,424	)		(1,874,733	)
Cash, beginning of period		4,178,968			9,850,358
Cash, end of period	$	3,828,544		$	7,975,625
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	563		$	816
Cash paid for taxes	$	-		$	-
Non-cash financing activities:
Warrants issued for offering costs	$	843,105		$	-
Warrants issued for debt financing	$	723,000		$	-

See accompanying notes to interim financial statements.

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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 other sound technologies.

The Company’s operations are organized into two segments by the end-user markets they serve. The Business Products and Licensing Group (Business Group) markets and licenses HSS and NeoPlanar products to companies that employ audio in consumer, commercial and professional applications. The Government and Force Protection Systems Group (Government Group) markets LRAD, NeoPlanar, SoundCluster™ and HSS products to government and military customers and to the expanding force protection and commercial security markets.

The Company’s principal markets for its proprietary sound reproduction technologies and products are in North America, Europe and Asia.

The Company continues to be subject to certain risks, including history of net losses and expectation to continue to incur net losses; need for additional capital; potential dilutive impact on its stockholders of the Committed Equity Financing Facility (CEFF) described in Note 11 below; dependence on a limited number of customers; reliance on third party suppliers and manufacturers; competition; the uncertainty of the market for new sound products; limited manufacturing, marketing and sales experience; uncertainty regarding future warranty costs; and the substantial uncertainty of ability to achieve profitability and positive cash flow.

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 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, 2004 included in the Company’s annual report on Form 10-K.

Other than cash of $3,828,544 at December 31, 2004, accounts receivable collections and possible proceeds from the CEFF described in Note 11 below, the Company has no other material unused sources of liquidity at this time. The Company has financed its operations primarily through cash generated from product sales and from financing activities. Management expects to incur additional operating losses during the balance of fiscal 2005 as a result of expenditures for research and development and marketing costs for proprietary sound products. The timing and amounts of these expenditures and the extent of the Company’s operating losses will depend on future product sales levels and other factors, some of which are beyond management’s control. Based on the Company’s cash position, and assuming currently planned expenditures and level of operations, management believes the Company will have sufficient capital resources for the next twelve months. Management believes increased product sales will provide additional operating funds. If required, management has significant flexibility to adjust the level of research and development and selling and administrative expenses based on the availability of resources.

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 accreted dividends, by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’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 or convertible into 5,739,577 shares of common stock were outstanding at December 31, 2004 and stock options, warrants and convertible preferred stock and notes exercisable or convertible into 5,097,143 shares of common stock were outstanding at December 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.

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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:

	For the three months ended December 31,
	2004			2003
Net loss	$	(1,526,850	)	$	(1,136,427	)
Imputed deemed dividends on Series D and E   warrants issued with preferred stock		(101,280	)		(100,839	)
Imputed deemed dividends on Series D and E   preferred stock		(133,063	)		(145,878	)
Accretion on preferred stock at 6% stated rate:
Series D preferred stock		(7,667	)		(7,500	)
Series E preferred stock		(35,765	)		(39,488	)
Net loss available to common stockholders	$	(1,804,625	)	$	(1,430,132	)

On January 18, 2005, the Company gave notice to all holders of Series D and Series E Preferred Stock that it had elected to convert the shares of Series D and Series E Preferred Stock to common stock. The designations, rights and preferences of the Series D and Series E Preferred Stock permitted the Company to exercise this conversion option if the market price of its common stock exceeded $9.50 for ten consecutive trading days and certain other conditions were satisfied. The price condition was satisfied on January 6, 2005. The notice of conversion was effective immediately for the Series D Preferred Stock, and resulted in all 50,000 issued and outstanding shares of Series D Preferred Stock converting into an aggregate of 129,259 shares of common stock. The notice of conversion for the Series E Preferred Stock was effective on February 1, 2005, and resulted in all 233,250 issued and outstanding shares of Series E Preferred Stock converting into an aggregate of 801,306 shares of common stock.

As all the Series D and Series E Preferred Stock was called for conversion as described above, $1,504,711 will be accreted in the second fiscal quarter and will increase the net loss available to common stockholders.

4.  STOCK-BASED COMPENSATION

The Company accounts for employee stock-based compensation using the intrinsic value method. In most cases, the Company does not recognize compensation expense for its employee stock option grants, as they have been granted at the fair market value of the underlying Common Stock at the grant date. Had compensation expense for the Company’s employee stock option grants been determined based on the fair value at the grant date for awards through December 31, 2004 consistent with the provisions of Statement of Financial Accounting Standards No. 123, its after-tax net income and after-tax net income per share would have been reduced to the pro forma amounts indicated below (in thousands, except net income per share):

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	For the three months ended December 31,
	2004			2003
Net loss available to common shareholders	$	(1,804,625	)	$	(1,430,132	)
Plus:  Stock-based employee compensation       expense included in reported net loss		268,503			-
Less:  Total stock-based employee compensation       expense determined using fair value based method		(559,242	)		(245,289	)
Pro forma net loss available to common stockholders	$	(2,095,364	)	$	(1,675,421	)
Net loss per common share - basic   and diluted - pro forma	$	(0.11	)	$	(0.09	)
Net loss per common share - basic   and diluted - as reported	$	(0.09	)	$	(0.07	)

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 each period; expected volatility of 56 percent in 2005 and 75 percent in 2004; risk-free interest rates of 2.97 to 1.84 percent; and expected lives of 2.5 years. The estimated fair value of the options so determined is then amortized to expense over the options’ vesting periods.

5.  RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) 123(R), “Share Based Payment”, Statement 123(R) is effective for public companies at the beginning of the first interim or annual period after June 15, 2005. This statement eliminates the ability to account for share-based compensation using the intrinsic value-based method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Statement 123(R) would require the Company to calculate equity-based compensation expense for stock options and employee stock purchase plan rights granted to employees based on the fair value of the equity instrument at the time of grant. Currently, the Company discloses the pro forma net income (loss) and the related pro forma income (loss) per share information in accordance with FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Costs-Transition and Disclosure.” The Company has not evaluated the impact that Statement 123(R) will have on its financial position and results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs * an amendment of ARB 43, Chapter 4.” SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the financial statement impact of the implementation of SFAS No. 151.

6.  INVENTORIES

Inventory is stated at the lower of cost, which approximates actual costs on a first-in first-out (FIFO) basis, or market. At December 31, 2004 $431,515 of net inventory value was located at the Company’s contract manufacturer in San Jose, California.

Inventories consisted of the following:

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	December 31, 2004			September 30, 2004
Finished goods	$	424,433		$	342,647
Work in process		3,147			-
Raw materials		605,294			418,448
		1,032,874			761,095
Reserve for obsolescence		(110,000	)		(110,000	)
	$	922,874		$	651,095

7.  CUSTOMER CONCENTRATION

For the three months ended December 31, 2004 sales to one customer in the Government Group accounted for 75% of total revenues and sales to another customer and its affiliates in the Government Group accounted for 15% of total revenues. At December 31, 2004 the accounts receivable from these two customers and their respective affiliates accounted for 88% and 5% of accounts receivable, respectively, and no other customer accounted for more than 10% of accounts receivable. For the three months ended December 31, 2003 sales to one customer and its affiliate in the Government Group accounted for 76% of total revenues. Of the accounts receivable balance of $3,601,940 at December 31, 2004, $3,341,627 was collected in January of 2005.

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 consisted of the following:

	December 31, 2004			September 30, 2004
Cost		1,654,145		$	1,578,578
Accumulated amortization		(358,055	)		(299,871	)
Net patent	$	1,296,090		$	1,278,707

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 months ended December 31, 2004 and 2003 were as follows:

	Three Months Ended December 31,
	2004			2003
Beginning balance	$	331,917		$	319,500
Warranty provision		82,163			(4,500	)
Warranty payments		(5,246	)		-
Ending balance	$	408,834		$	315,000

 

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10.  UNSECURED SUBORDINATED PROMISSORY NOTES

In December 2004, the Company sold an aggregate of $2,000,000 of 8% unsecured subordinated promissory notes due December 31, 2006. Interest on these notes accrues at the rate of 8% per year and is due and payable quarterly in arrears. The Company is required to use 40% of the net proceeds of any future equity financing to prepay these notes, including any amounts the Company raises pursuant to the CEFF described in Note 11 below. The Company may prepay the notes at its discretion at any time without penalty after June 30, 2005.

In connection with the issuance of these notes, the purchasers were granted warrants to purchase an aggregate of 150,000 shares of its common stock. The exercise price of the warrants was $9.28 per share for purchasers who were directors, officers, employees or consultants of the Company, or affiliates of such persons, and $8.60 per share for other purchasers. Warrants exercisable for 75,000 shares were issued at each such exercise price. The fair value of such warrants, which amounted to $723,000, and closing costs of $20,500 have been recorded as debt discount to be amortized over the term of the notes. The following variables were used to determine the fair value of the warrants under the Black-Scholes option pricing model: volatility of 56%, term of five years, risk free interest of 2.97% and underlying stock price equal to fair market value at the time of grant.

A trust affiliated with an officer, director and significant stockholder of the Company purchased one of the aforementioned promissory notes in the principal amount of $500,000 and received a warrant exercisable for 37,500 shares with an exercise price of $9.28 per share.

11.  STOCKHOLDERS’ EQUITY

Summary
The following table summarizes changes in equity components from transactions during the three months ended December 31, 2004:

	Preferred Stock				Common Stock				Additional Paid-in		Accumulated			Total Stockholders’ Equity
	Shares		Amount		Shares		Amount		Capital		Deficit
Balance, October 1, 2004		283,250	$	3		19,808,819	$	198	$	47,520,207	$	(42,327,493	)	$	5,192,915
Stock issued upon exercise of warrants		-		-		42,500		1		84,999		-			85,000
Value assigned to extension of time to exercise 92,675 options		-		-		-		-		266,963		-			266,963
Debt discount for 150,000 warrants granted on 8% unsecured subordinated promissory notes		-		-		-		-		723,000		-			723,000
Issuance of stock options and warrants for services		-		-		-		-		1,540		-			1,540
Deemed dividends and accretion on convertible preferred stock of $277,775		-		-		-		-		-		-			-
Net loss for the period		-		-		-		-		-		(1,526,850	)		(1,526,850	)
Balance, December 31, 2004		283,250	$	3		19,851,319	$	199	$	48,596,709	$	(43,854,343	)	$	4,742,568

At December 31, 2004 the Company’s 50,000 outstanding shares of Series D Preferred Stock were convertible into 128,925 shares of common stock and the 233,250 outstanding shares of Series E Preferred Stock were convertible into 797,477 shares of common stock. As described in Note 3 above, subsequent to December 31, 2004 the Company converted all outstanding shares of Series D and Series E Preferred stock into an aggregate of 930,565 shares of common stock.

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Committed Equity Financing Facility
In December 2004, the Company entered into a $25 million Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Limited, a firm specializing in financing small to medium sized technology-based companies. The CEFF allows the Company to sell to Kingsbridge, subject to certain significant limiting conditions, a maximum of 3,684,782 shares of its common stock at a price between 88% and 92% of the volume weighted average price during 15 day purchase periods.

As part of the arrangement, the Company issued a warrant to Kingsbridge to purchase 275,000 shares of its common stock at a price of $8.60 per share. The warrant is exercisable beginning six months after the date of issuance and for a period of five years thereafter. The Company also agreed to file a registration statement for the resale of shares acquired under the CEFF, or upon exercise of the warrant, within 45 days after entering into the agreement for the CEFF. In January 2005 the Company filed the required resale registration statement, but the registration statement has not yet been declared effective. The Company has no obligation to draw down all or any portion of the commitment during its 24-month term.

The Company is obligated to use 40% of the proceeds it may receive from the CEFF or other equity financings to prepay any outstanding interest and principal on the notes described in Note 10 above. The Company may also be required to pay liquidated damages of up to $2,500,000 in the event that a registration statement is not available for the resale of securities purchased by Kingsbridge under the CEFF. The Company has also agreed to pay to a consultant, who is an unrelated party, a finder fee equal to 4% of the first $5 million raised under the CEFF, 3% for the second $5 million raised under the CEFF, 2% for the third $5 million raised under the CEFF, and 1.5% for any additional amounts raised.

The fair value of the warrant at the date of issuance, which amounted to $843,105, and closing costs of $55,000, were recorded as prepaid transaction costs. These costs will be reclassified to equity upon the sale of shares to Kingsbridge or will be expensed if no sale is made prior to the expiration of the CEFF. The following variables were used to determine the fair value of the warrant under the Black-Scholes option pricing model: volatility of 56%, term of 5.5 years, risk free interest of 2.97% and underlying stock price equal to fair market value at the time of issuance. The warrant has been accounted for as a derivative instrument in accordance with Emerging Issues Task Force (EITF) 00-19 "Accounting for Derivative Financial Instruments, Indexed to, and Potentially Settled in a Company's Own Stock".  As a derivative, the fair value of the warrant is recorded as a liability at its estimated fair value at each balance sheet date until the effective date of the related registration statement, or upon warrant exercise, when the warrant liability, as may be further revalued, will be reclassified to equity.  Changes in the fair value of the warrant are recorded as other income or expense in the accompanying income statement. For the three months ended December 31, 2004, $950,141 was recorded as derivative expense for the change in valuation of the fair value of the warrant from the date of issuance, December 14, 2004, to December 31, 2004.

Stock Options
During the quarter ended December 31, 2004, the Company recorded non-cash compensation expense of $266,963 for the extension of certain option exercise periods for former employees relating to an aggregate of 92,675 shares of common stock. During the quarter ended December 31, 2004, the Company also recognized $1,540 of non-cash compensation expense for the value of options granted to non-employees. These options were valued in the same manner as described in Note 4 for employee options. There were no non-cash compensation expenses for options in the quarter ended December 31, 2003.

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

	Number of Options		Weighted Average Exercise Price
Outstanding October 1, 2004	1,839,498		$4.68
Granted	294,000		$7.55
Canceled/expired	(55,625	)	$3.53
Exercised	-		$      -
Outstanding December 31, 2004	2,077,873		$5.11
Exercisable December 31, 2004	1,013,114		$4.93

Options outstanding are exercisable at prices ranging from $2.50 to $10.06 and expire over the period from 2005 to 2009 with an average life of 3.3 years. Subsequent to December 31, 2004, the Company received proceeds of $407,267 from the exercise of 124,925 options.

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Stock Purchase Warrants
The following table summarizes information about warrant activity during the three months ended December 31, 2004:

	Number of Warrants		Weighted Average Exercise Price
Outstanding October 1, 2004	2,352,802		$3.74
Issued	425,000		$8.72
Exercised	(42,500	)	$2.00
Canceled/expired	-		$      -
Outstanding December 31, 2004	2,735,302		$4.54

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

Number	Exercise Price	Expiration Date
75,000	$11.00	March 31, 2005
770,000	$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
75,000	$8.60	December 31, 2009
75,000	$9.28	December 31, 2009
275,000	$8.60	June 14, 2010
2,735,302

Subsequent to December 31, 2004, the Company received proceeds of $356,930 from the exercise of 74,360 warrants.

12.  BUSINESS SEGMENT DATA

The Company is engaged in design, development and commercialization of sound, acoustic and other technologies. The Company’s operations are organized 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) markets and licenses HSS and NeoPlanar sound products to companies that employ audio in consumer, commercial and professional applications. The Government and Force Protection Systems Group (Government Group) markets LRAD, NeoPlanar, Sound Cluster and HSS sound products to government and military customers and to the expanding force protection and commercial security markets. The segments are managed separately because each segment requires different selling and marketing strategies as the class of customers within each segment is different.

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The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company does not allocate operating expenses or assets between its two reportable segments. Accordingly the measure of profit for each reportable segment is based on gross profit.

	Three Months Ended December 31,
	2004		2003
Revenues:
Business Group	$	187,349	$	81,939
Government Group		4,221,564		692,839
	$	4,408,913	$	774,778

	Three Months Ended December 31,
	2004			2003
Gross Profit (Loss):
Business Group	$	(204,296	)	$	(3,612	)
Government Group		3,085,506			369,912
	$	2,881,210		$	366,300

13.  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 judgment 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 filed a cross-action in the consolidated action alleging fraud, breach of contract in connection with the ESI License Agreement and the options, breach of the implied covenant of good faith and fair dealing, intentional interference with contract, negligent interference with contract, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, defamation, and violation of California Business and Professions Code §17200. The Company filed its answer to the second amended cross-complaint in August 2004. Discovery is ongoing. Trial has been set for May 2005.

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The Company intends to vigorously pursue its complaint against the defendants in this case and to vigorously challenge the defendant’s cross complaint.

The Company may at times be involved in litigation in the ordinary course of business. The Company will also, from time to time, when appropriate in management’s estimation, record adequate reserves in the Company’s financial statements for pending litigation. Except as set forth above, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

14.  INCOME TAXES

At December 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, 2004 the Company had for federal income tax purposes net operating loss carryforwards of approximately $37,400,000, which expire through 2025 of which certain amounts are subject to significant limitations under the Internal Revenue Code of 1986, as amended.

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

The following discussion should be read in conjunction with the accompanying unaudited interim financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2004.

The following discussion provides an overview of our results of operations for the three months ended December 31, 2004 and 2003. Significant period-to-period variances in the statements of operations are discussed under the caption “Results of Operations.” Our financial condition and cash flows are discussed under the caption “Liquidity and Capital Resources.”

Forward Looking Statements
This Report contains certain statements of a forward-looking nature relating to future events or 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, or HSS, technology is a new method of sound reproduction that creates sound “in the air.”  Sound is generated along an air column using ultrasonic frequencies, which are those above the normal range of hearing. The HSS sound beam is highly directional and maintains sound volume over longer distances than traditional loudspeakers. We believe HyperSonic Sound’s unique features are useful in new sound applications. We believe we are the leader in developing and commercializing parametric loudspeakers.

Our Long Range Acoustic Device, or LRAD, technology produces variable intensity acoustical sound intended for use in long-range delivery of directional and highly intelligible sound information, which is 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, public address and mass notification systems. Our SoundCluster technology is a new multi-transducer, speaker cluster optimized for even sound coverage over large and highly ambient noise areas such as aircraft carrier flight decks.  We have other proprietary sound technologies and products in various stages of development.

Our primary products sold to date have been LRAD and HSS products. These products are currently manufactured for us by Pemstar, Inc., an established contract manufacturer with multiple locations worldwide. Our sales have been highly dependent on large orders from a few customers.  We target our products for sale worldwide, but expect the largest markets to be the U.S., Europe and Asia. To date, our sales have been made in U.S. dollars and we do not expect currency fluctuations to have a material impact on our operations.

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We believe the first quarter ended December 31, 2004 shows positive improvements in operating results. Our revenues for the three months ended December 31, 2004 were $4,408,913, compared to $774,778 for the three months ended December 31, 2003. Our gross profit for the three months ended December 31, 2004 was 65% of revenues, compared to 47% of revenues for the comparable prior year three month period. We accomplished significant improvements in sales and margins, with gross profit of $2,881,210 in the three months ended December 31, 2004 which was $2,514,910 or 687% higher than the gross profit of $366,300 in the three months ended December 31, 2003. This was partially offset by increases in operating expenses of $1,935,245 or 127% from $1,521,285 in the three months ending December 31, 2003 to $3,456,530 in the three month period ending December 31, 2004. However, due to the $950,141 derivative revaluation expense associated with the increase in value of the warrant we issued to Kingsbridge Capital, our net loss increased from $1,136,427 for the three months ended December 31, 2003 to $1,526,850 for the three months ended December 31, 2004.

Management is continuing to focus efforts upon near-term revenue and gross margin improvement from our existing, marketable products. We have filled key management and operations positions and increased personnel in our sales and marketing and engineering departments. While new hires have necessarily resulted in increased expenses, we believe these new hires, and others planned, are important to near-term revenue and gross margin improvements. We are currently focusing our resources primarily on sales, marketing, engineering and production of existing products. We are closely monitoring expenses for our Advanced Development department, charged with development of new products. Our policy is to establish a compelling business case for each Advanced Development initiative.

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. See “Business Risks” below.

Recent Developments

On January 18, 2005, we gave notice to all holders of Series D and Series E Preferred Stock that we had elected to convert the shares of Series D and Series E Preferred Stock to common stock. The designations, rights and preferences of the Series D and Series E Preferred Stock permitted us to exercise this conversion option if the market price of our common stock exceeded $9.50 per share for ten consecutive trading days and certain other conditions were satisfied. The price condition was satisfied on January 6, 2005. The notice of conversion was effective immediately for the Series D Preferred Stock, and resulted in all 50,000 issued and outstanding shares of Series D Preferred Stock converting into an aggregate of 129,259 shares of common stock. The notice of conversion for the Series E Preferred Stock was effective on February 1, 2005, and all 233,250 issued and outstanding shares of Series E Preferred Stock converted into an aggregate of 801,306 shares of common stock. As all the Series D and Series E Preferred Stock was called for conversion as described above, $1,504,711 will be accreted in the second fiscal quarter and will increase the net loss available to common stockholders.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understandings of our results of operations. Our accounting policies are more fully described in our financial statements located in Item 8 of Part II, “Financial Statements and Supplementary Data.”

The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the United States, have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

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

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Valuation of Intangible Assets.  Intangible assets include purchased technology and patents, which are amortized over their estimated useful lives. We must make judgments and estimates regarding the future utility and carrying value of intangible assets. The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than its carrying value.  In fiscal 2004, we reviewed the carrying value of our intangible assets and reduced the carrying value of these assets. Our judgments and estimates regarding carrying value and impairment of intangible assets have an impact on our financial statements.

Warranty Reserve. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. These warranties require us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time. Factors affecting warranty reserve levels include the number of units sold and anticipated cost of warranty repairs and anticipated rates of warranty claims. We evaluate the adequacy of the provision for warranty costs each reporting period. See Note 9 to our financial statements for additional information regarding warranties. The estimates we use have an impact on our financial statements.

Derivative Instruments. We account for the warrant issued in December 2004 in conjunction with the Committed Equity Financing Facility with Kingsbridge Capital Limited, as a derivative financial instrument. As a derivative, the fair value of the warrant is recorded as a liability in the balance sheet and changes in the fair value of the warrant are recognized as other income or expense during each period. The fair value of the warrant is expected to change primarily in response to changes in our stock price. Significant increases in the fair value of our stock could give rise to significant expense in the period of the change. Likewise, a reduction in our stock price could give rise to significant income in the period of the change. The warrant liability will be reclassified to equity as of the effective date of the related registration statement, or upon the exercise of the warrant.

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

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. Congress passed the American Jobs Creation Act of 2004 in October 2004.  The new law contains numerous changes to existing tax laws, including both domestic and foreign tax incentives.  We have not yet determined what impact, if any, this new law may have on our deferred tax asset, or our future results of operations and financial condition.

Legal Proceedings.  We are currently involved in certain legal proceedings.  Although unfavorable outcomes in any of these matters could have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and intend to vigorously defend the actions. We estimate the range of liability relating to pending litigation, where the amount and range of loss can be estimated.  We record our best estimate of a loss when the loss is considered probable.  Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim.  As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. 

Valuation of Inventory. Our inventory is comprised of raw materials, assemblies and finished products that we intend to sell to our customers. We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory.  The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than its carrying value.  In fiscal 2004 we reviewed the carrying value of our inventory and increased the reserve for obsolescence by $90,000 for raw materials that were used on our HSS Generation II products but are not required for our HSS Generation III products.

Results of Operations

Revenues
Revenues increased 469% for the three months ended December 31, 2004 to $4,408,913 compared to $774,778 for the three months ended December 31, 2003. Revenues for the three months ended December 31, 2004 included $4,346,913 of product and component sales and $62,000 of contract and license revenues. The increase in revenues for the three months ended December 31, 2004 was primarily due to LRAD sales.

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Contract and license revenues for the three months ended December 31, 2004 were $62,000 and for the three months ended December 31, 2003 were $156,194. Our focus in the first quarter of fiscal 2005 has been on product and component sales rather than contracted development.

At December 31, 2004, we had $300,000, and at December 31, 2003 we had $387,825 recorded as deferred revenue or deposits for existing contracts, agreements and licenses.

As we have only recently commenced product manufacturing and sales, and we have only a limited record of recurring sales, we do not consider order backlog to be an important index of future performance at this time. Our backlog is affected by the timing of large orders and order deliveries, especially to government customers. Our order backlog was approximately $1,898,000 at December 31, 2004 and $530,000 at December 31, 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.

Our Business Products and Licensing Group, or Business Group, markets and licenses HSS and NeoPlanar products to companies which employ audio in consumer, commercial and professional applications. Our Government and Force Protection Systems Group, or Government Group, markets LRAD, NeoPlanar, SoundCluster and HSS products to government and military customers and to the expanding force protection and commercial security markets.

Presented below is a summary of revenues by business segment:

	For the three months ended December 31,
	2004		2003
Revenues:
Business Group	$	187,349	$	81,939
Government Group		4,221,564		692,839
	$	4,408,913	$	774,778

Business Group revenues for the three months ended December 31, 2004 consisted of HSS and Neoplanar product sales.

Government Group revenues for the three months ended December 31, 2004 included sales of $4,159,564 of LRAD and NeoPlanar products and $62,000 of revenues from engineering and contract work. These revenues are derived primarily from a limited number of large orders and the timing of follow-on orders, if any, is difficult to predict. Government Group revenues for the three months ended December 31, 2003 included sales of $536,645 of LRAD and NeoPlanar products and $156,194 of revenues from engineering and contract work.

For the three months ended December 31, 2004 sales to two customers accounted for 75% and 15%, respectively, of total revenues. For the three months ended December 31, 2003 sales to one customer and its affiliate accounted for 76% of revenues.

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

	For the three months ended December 31,
	2004			2003
Gross Profit (Loss):
Business Group	$	(204,296	)	$	(3,612	)
Government Group		3,085,506			369,912
	$	2,881,210		$	366,300

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The overall gross profit for the three months ended December 31, 2004 was 65% of revenues, a significant improvement from the gross profit of 47% of revenues reported for the comparable three-month period of the prior year.

We experienced a gross loss on Business Group operations for the three months ended December 31, 2004 of $204,296 as limited sales were not sufficient to absorb fixed manufacturing overhead costs. For the three months ended December 31, 2003, we had a gross loss in Business Group operations primarily as a result of limited sales compared to fixed overhead and warranty costs. During fiscal year 2003 and fiscal 2004 we changed our HSS Generation I emitter design to eliminate the requirement for a vacuum in the emitter, and we improved film quality. During fiscal 2004, we made further raw material improvements in the electronics and the manner in which the film and emitters are produced. We believe that our improved HSS Generation III product is more reliable. We expect that warranty costs will decrease in fiscal 2005, and that as HSS product sales grow, we will produce positive gross margins.

Gross profit for our Government Group was $3,085,506 for the three months ended December 31, 2004, or 73% of revenue compared to 53% of revenue for the three months ended December 31, 2003. Gross profit percentage continues to be highly dependent on sales prices, volumes, purchasing costs and overhead allocations. Our various sound products have different margins, so product sales mix will materially affect gross profits. In addition, we continue to make model updates and changes including raw material and component changes, which change product costs. We therefore do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.

Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were 45% for the three months ended December 31, 2004 compared to 138% for the three months ended December 31, 2003. These costs in the three months ended December 31, 2004 totaled $1,995,915, an increase of $923,601 from the $1,072,314 incurred in the three months ended December 31, 2003.

The increase included the following:

• A $338,817 increase in personnel and related expense due to increases in headcount in sales and administration.

• A $204,659 increase in commissions expense resulting from increased sales for the three month period ended December 31, 2004.

• A $64,814 increase in legal expense due to activity related to pending litigation.

• A $55,562 increase in advertising expense.

• A $47,714 increase in travel and entertainment expense as a result of increased sales efforts.

• A $32,405 increase in audit and related expense.

We expect to expend additional resources on growing our management team and in marketing our proprietary sound technologies in future periods, which we expect will increase selling, general and administrative expenses. We also expect to incur additional costs in fiscal 2005 to comply with various sections of the Sarbanes-Oxley Act, particularly those related to Section 404 concerning management assessment of internal controls. We do not currently have an estimate of these increased costs, but they are expected to include increased staffing, outside consultants and increased legal and audit costs.

Research and Development Expenses
Research and development expenses increased significantly in dollar amounts from the three months ended December 31, 2003 to the three months ended December 31, 2004. Research and development expenses as a percentage of sales were 33% for the three months ended December 31, 2004 compared to 58% for the three months ended December 31, 2003. These costs in the three months ended December 31, 2004 totaled $1,460,615, an increase of $1,011,644 from the $448,971 incurred in the three months ended December 31, 2003. The increase included an increase in personnel and related costs of $516,856 resulting from an increase in headcount in our engineering department, a $245,183 non-cash expense associated with the extension of time to expense stock options and an increase of $217,685 for prototypes and other expensed parts relating to our effort to design and develop new and more reliable products.

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 2005 research and development costs to be somewhat higher than fiscal 2004 levels based on current plans and staffing.

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Loss From Operations
Total operating expenses were $3,456,530 for the three months ended December 31, 2004, compared to $1,521,285 for the three months ended December 31, 2003. Our loss from operations was $575,320 for the three months ended December 31, 2004 representing a significant reduction compared to $1,154,985 for the three months ended December 31, 2003. We expect increased product sales and margin contributions in fiscal 2005 to continue to reduce the loss from operations from fiscal 2004 levels. The reduced loss from operations resulted primarily from a $2,514,910 improvement in gross margin contribution, offset by an increase of $1,935,245 in total operating expenses.

Other Income (Expense)
We had $951,530 of other expense for the three months ended December 31, 2004, compared with $18,558 of other income for the same period last year. A $950,141 non-cash derivative revaluation expense related to the increase in the fair value of the warrant issued to Kingsbrige and measured from the issuance date of December 14, 2004 to December 31, 2004, was recorded as other expense for the three months ended December 31, 2004. We also incurred interest expense of $12,330 and recognized $10,941 of interest income from invested cash balances during such three month period. During the three months ended December 31, 2003 we recorded interest expense of $816, and we recorded $19,374 in interest income from invested cash balances.

Net Loss
Net loss for three months ended December 31, 2004 was $1,526,850 compared to net loss of $1,136,427 for the three months ended December 31, 2003. The $390,423 increase in net loss resulted primarily from non-cash derivative revaluation expense partially offset by increased revenues and margins.

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 $277,775 in the three months ended December 31, 2004 and $293,705 in the three months ended December 31, 2003. Accordingly, the net loss available to common stockholders was $1,804,625 in the three months ended December 31, 2004 and $1,430,132 in the three months ended December 31, 2003.

On January 18, 2005, we gave notice to all holders of Series D and Series E Preferred Stock that we had elected to convert the shares of Series D and Series E Preferred Stock to common stock. All 50,000 issued and outstanding shares of Series D Preferred Stock converted into an aggregate of 129,259 shares of common stock on the date of notice, and all 233,250 issued and outstanding shares of Series E Preferred Stock converted into an aggregate of 801,306 shares of common stock on February 1, 2005. As all the Series D and Series E Preferred Stock was called for conversion as described above, $1,504,711 will be accreted in the second fiscal quarter and will increase the net loss available to common stockholders.

Liquidity and Capital Resources

We have experienced significant negative cash flow from operating activities including developing and introducing our proprietary sound technologies. Our net cash used in operating activities was $2,171,891 for the three months ended December 31, 2004 compared to $2,029,204 for the three months ended December 31, 2003. As of December 31, 2004, the net loss of $1,526,850 included certain expenses not requiring the use of cash totaling $1,420,267. In addition, cash was used in operating activities through an increase of $2,675,193 in accounts receivable, an increase of $271,779 in inventory and an increase of $35,887 in prepaid expenses. Cash was provided by an increase of $922,797 in accounts payable and accrued liabilities.

At December 31, 2004, we had accounts receivable of $3,601,940 as compared to $926,747 at September 30, 2004. Of the accounts receivable balance at December 31, 2004, $3,341,627 was collected in January of 2005. The balance at December 31, 2004 represented approximately 40 days of revenues. Terms with individual customers vary greatly. We typically require pre-payment or a maximum of thirty-day terms for our proprietary 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 three months ended December 31, 2004, we used $190,026 for the purchase of equipment and software and made a $70,868 investment in patents and new patent applications. We anticipate a continued investment in patents for the balance of fiscal 2005. Dollar amounts to be invested on these patents are not currently estimable by management.

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At December 31, 2004, we had working capital of $5,029,925 compared to working capital of $3,472,984 at September 30, 2004.

In December 2004, we sold for cash in a private offering an aggregate of $2,000,000 of unsecured subordinated promissory notes due December 31, 2006. In connection with the financing, we also issued five-year warrants to purchase an aggregate of 150,000 shares, 75,000 of which have an exercise price of $9.28 per share, and 75,000 of which have an exercise price of $8.60 per share. A trust affiliated with Elwood G. Norris, our Chairman and the beneficial owner of 19.5% of our common stock before the financing, purchased a note in the principal amount of $500,000 and received a warrant exercisable for 37,500 shares with an exercise price of $9.28 per share.

In December 2004, we entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Limited, pursuant to which Kingsbridge committed, subject to certain significant limiting conditions, to purchase up to $25 million of our common stock to support future growth. As part of the arrangement, we issued a warrant to Kingsbridge to purchase 275,000 shares of our common stock at a price of $8.60 per share. The warrant is exercisable beginning six months after the date of grant and for a period of five years thereafter. Subject to certain conditions and limitations, from time to time under the CEFF, we may require Kingsbridge to purchase newly-issued shares of our common stock at a price that is between 88% and 92% of the volume weighted average price during a 15 day purchase period, and thereby raise capital as required, at the time, price and in the amounts deemed suitable to us. For each election to sell shares to Kingsbridge, we select the lowest threshold price at which our stock may be sold, but the threshold price cannot be lower than $3.00 per share. Our agreement with Kingsbridge permits Kingsbridge to terminate the CEFF if Kingsbridge determines that a material and adverse event has occurred affecting the business, operations, properties or financial condition of our company, or if any situation occurs that would interfere with our ability to perform any of our obligations under the agreement.

The CEFF requires us to have a resale registration statement filed within 45 days of entering into the CEFF, and to use commercially reasonable efforts to have such registration statement declared effective by the Securities and Exchange Commission (SEC) within 45 days or 120 days of filing, depending on whether the SEC elects to review the registration statement. The required registration statement was filed in January 2005, and has not yet been declared effective. We cannot make any draws until the registration statement is effective.

In certain instances, we may be required to pay liquidated damages or other amounts resulting from the unavailability of a registration statement. For further details, see “Business Risks” below.

Based on such factors as market conditions, financing needs and the time required for the SEC to declare the resale registration statement effective, we currently expect that we may begin to utilize the CEFF during fiscal 2005, in order to fund working capital requirements. However, the timing and extent of our ability to utilize the CEFF is uncertain. We are obligated to use 40% of the proceeds we may receive from the CEFF to prepay any outstanding interest and principal on the notes sold in December 2004. Under the rules of the Nasdaq Stock Market, the maximum number of shares we may sell to Kingsbridge without approval of our stockholders is 3,684,782 (exclusive of the warrant shares), which may further limit the amount of proceeds we are able to obtain from the CEFF. We agreed to pay to a consultant a finder fee equal to 4% of the first $5 million raised under the CEFF, 3% for the second $5 million raised under the CEFF, 2% for the third $5 million raised under the CEFF, and 1.5% for any additional amounts raised under the CEFF. See “Business Risks” below for a discussion of other risks associated with the CEFF.

Other than cash, cash equivalents and the CEFF, we have no other unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for our sound products and technologies. The timing and amounts of these expenditures and the extent of our operating losses will depend on many factors, some of which are beyond our control. Principal factors that could affect the availability of our internally generated funds include:

• government spending levels;

• introduction of competing technologies;

• failure of sales from our Government Group and Business Group to meet planned projections;

• product mix and effect on margins; and

• product acceptance in new markets.

Principal factors that could affect the availability to obtain cash from external sources include:

• inability to have the registration statement required by the CEFF declared effective by the SEC;

• decrease in the market price of our common stock, which may render the CEFF unavailable (if the purchase price to CEFF would be less than $3.00 per share), or which may make the CEFF a less attractive funding source.;

• our failure to satisfy other required conditions for use of the CEFF;

• the trading volume of public trading of our common stock; and

• overall market conditions.

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Based on our cash position, and assuming currently planned expenditures and level of operations, we believe we will have sufficient cash for operations for the next twelve months. We believe increased sales of LRAD, HSS and, to a lesser extent, NeoPlanar products will continue to contribute cash in fiscal 2005. We believe that any investment capital we may require will be available to us, but there can be no guarantee that we will be able to raise funds on terms acceptable to us, or at all. We have flexibility to adjust the level of research and development and selling and administrative expenses based on the availability of resources. However, reductions in expenditures could delay development and adversely affect our ability to generate future revenues.

Contractual Commitments and Commercial Commitments

The following table summarizes our contractual obligations at December 31, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Contractual Obligations	Total	Less than 1 Year	1-3 Years	4-5 Years	After 5 Years
Capital leases	$22,411	$12,806	$9,605	-	-
Operating leases	417,086	245,833	170,357	896	-
8% Unsecured Subordinated Promissory Notes	2,000,000		2,000,000
Total contractual cash obligations	$2,439,497	$258,639	$2,179,962	$896	-

The Company had no material purchase obligations at December 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 Note 5).

Business Risks

An investment in our company involves a high degree of risk.  In addition to the other information included in this report, you should carefully consider the following risk factors in evaluating an investment in our company.  You should consider these matters in conjunction with the other information included or incorporated by reference in this report. Our results of operations or financial condition could be seriously harmed, and the trading price of our common stock may decline due to any of these or other risks.

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 2005. At December 31, 2004, we had an accumulated deficit of $43,854,343. In addition, for the fiscal quarter ended December 31, 2004, we incurred a net loss of $1,526,850. 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 may need additional capital for growth.  

Our current plans indicate that depending on sales, we may need additional capital to support our growth.  We may generate a portion of these funds from operations. 

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The actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated.  Principal factors that could affect the availability of our internally generated funds include:

• government spending levels;

• introduction of new competing technologies;

• failure of sales from our Government Group and Business Group to meet planned projections;

• product mix and effect on margins; and

• acceptance of our products in new markets.  

When we require additional funds, general market conditions or the then-current market price of our common stock may not support capital raising transactions.  If we require additional funds and we are unable to obtain them on a timely basis or on terms favorable to us, we may be required to scale back our research and development efforts, sell or license some or all of our technology or assets or curtail or cease operations.  If we raise additional funds by selling additional shares of our capital stock or securities convertible into common stock, the ownership interest of our stockholders will be diluted.

The Committed Equity Financing Facility may have a significant dilutive impact on our stockholders, and the potential unavailability of this facility would negatively affect our financing activities.

We have entered into a Committed Equity Financing Facility, or CEFF, with Kingsbridge Capital Limited. Under the terms of our agreement with Kingsbridge, we may, at our sole discretion, sell to Kingsbridge, and Kingsbridge would be obligated to purchase, shares of our common stock for up to $25 million in proceeds to us. The price at which we may sell shares of common stock under the agreement is based on a discount to the volume weighted average market price of the common stock for 15 trading days following each of our elections to sell shares. For each election to sell shares, we select the lowest threshold price at which our stock may be sold, but the threshold price cannot be lower than $3.00 per share. In the event the market price of our common stock falls below $3.41 per share, which after giving affect to the discount would result in a price per share lower than the $3.00 minimum threshold price, the CEFF will not be an available source of financing. In addition, we are obligated to use 40% of the proceeds we may raise from the CEFF to prepay any outstanding interest and principal on the promissory notes we sold in December 2004 with an aggregate principal amount of $2,000,000. Our agreement with Kingsbridge permits Kingsbridge to terminate the CEFF if Kingsbridge determines that a material and adverse event has occurred affecting the business, operations, properties or financial condition of our company, or if any situation occurs that would interfere with our ability to perform any of our obligations under the agreement.

The issuance of shares under the CEFF will have a dilutive impact on other stockholders and the issuance or even potential issuance of such shares could have a negative effect on the market price of our common stock. In addition, if we draw down the CEFF, we will issue shares to Kingsbridge at a discount ranging from 8% to 12% of the daily volume weighted average prices of our common stock during the 15 day trading period after initiation of each draw down. Issuing shares at such a discount will further dilute the interests of other stockholders.

To the extent that Kingsbridge sells shares of our common stock issued under the CEFF to third parties, our stock price may decrease due to the additional selling pressure in the market. The perceived risk of dilution from sales of stock to or by Kingsbridge may cause holders of our common stock to sell their shares, or it may encourage short sales. This could contribute to a decline in our stock price.

The Committed Equity Financing Facility imposes certain liquidated damages and other payment requirements, and contains limitations on our ability to issue future priced securities. These provisions may significantly impair our liquidity and ability to raise capital.

The terms of the CEFF require us to pay liquidated damages in the event that a registration statement is not available for the resale of securities purchased by Kingsbridge under the CEFF. Except for certain permitted periods of ineffectiveness described below, we are obligated to pay to Kingsbridge an amount, up to $2.5 million, equal to the number of shares purchased under the CEFF and held by Kingsbridge at the date the registration statement becomes unavailable, multiplied by any positive difference in price between the volume weighted average price on the trading day prior to such period of unavailability and the volume weighted average price on the first trading day after the period of unavailability. We may, in lieu of paying such liquidated damages, offer to repurchase the securities held by Kingsbridge for a price equal to the volume weighted average price on the trading day prior to such period of unavailability.

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We are permitted to suspend the availability of the registration statement if there is material undisclosed information then existing or if we intend to file another registration statement. However, if the registration statement is suspended within fifteen trading days following any settlement date for the purchase of our stock under the CEFF, we must pay Kingsbridge a percentage of the decline in value, if any, of shares purchased by Kingsbridge in the most recent draw down and still held by Kingsbridge during the time the availability of the registration statement is suspended as follows: 75% of such decline if such notice of suspension is delivered prior to the fifth trading day after a settlement date, 50% of such decline if such notice of suspension is delivered on or after the fifth and prior to the tenth trading day after a settlement date, and 25% of such decline if such notice of suspension is delivered on or after the tenth and prior to the fifteenth trading day after a settlement date. The amount of such payments for any one period of suspension may not exceed $1.75 million. We may, in lieu of paying such amounts, offer to repurchase the securities held by Kingsbridge for a price equal to the volume weighted average price on the trading day prior to such period of ineffectiveness. We may also elect to pay such amounts in shares of common stock valued at the market value on the first trading day after such permitted suspension ends. The liquidated damages and required payments could severely affect our liquidity, or to the extent we are permitted to pay such damages through the issuance of common stock, cause dilution to our common stockholders.

In addition, during the two-year term of the proposed CEFF, without the prior written consent of Kingsbridge, we are prohibited from issuing securities that are, or may become, convertible or exchangeable into shares of common stock where the purchase, conversion or exchange price for such common stock is determined using a floating or otherwise adjustable discount to the market price of the common stock (including pursuant to an equity line or other financing that is substantially similar to an equity line with an investor other than Kingsbridge). In the past, we met our capital needs through the sale of preferred stock and convertible notes which had floating price features. We may have difficulty raising capital if Kingsbridge does not consent to our use of such securities in the future. If we are unable to raise capital from Kingsbridge or from sources that do not demand a floating price feature, we may have to severely curtail our operations, which could cause a significant decrease in the price of our common stock.

Two customers collectively accounted for approximately 90% of our revenues for the three months ended December 31, 2004 and we continue to be dependent on a few large customers.

ADS, Inc., a prime vendor to the U. S. military, accounted for 75% of net revenues and one other customer accounted for 15% of net revenues for the three months ended December 31, 2004. Both customers have the right to cease doing business with us at any time. If ADS were to cease doing business with us and we could not secure the services of another prime vendor to replace ADS, or the other customer were to cease doing business with us, our net revenues could decline substantially. Any such decline could result in us incurring net losses, increasing our accumulated deficit and causing us to need to raise additional capital to fund our operations.

We must expand our customer base in order to grow our business.

To grow our business, we must fulfill orders from our existing customers, obtain additional orders from our existing customers, develop relationships with new customers and obtain and fulfill orders from new customers. We cannot guarantee that we will be able to increase our customer base. Further, even if we do obtain new customers, we cannot guarantee that those customers will purchase from us enough quantities of our product or at product prices that will enable us to recover our costs in acquiring those customers and fulfilling those orders. Whether we will be able to sell more of our products will depend on a number of factors, including:

• our ability to manufacture reliable products that have the features that are required by our customers; 

• our ability to expand relationships with existing customers and to develop relationships with new customers that will lead to additional orders for our products; 

• our ability to develop and expand new markets for directed sound products; and 

• our ability to develop international product distribution directly or through strategic partners.

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

Although our LRAD products are designed for use by both government and commercial customers, our LRAD products have, to date, been predominantly sold for government use. Within the Government Group, our largest customer is a reseller of our products to end users in various branches of the military such as the U.S. Navy, U.S. Marine Corps, U.S. Army and the Department of Homeland Security. We have only recently achieved significant sales of LRAD products, and the product has not yet been widely accepted in the government market. Furthermore, the force protection and emergency response market is itself an emerging market, which is changing rapidly. If our LRAD product is not widely accepted by the government, military and the developing force protection and emergency response markets, we may not be able to identify other markets, and we may fail to achieve our sales projections.

Perceptions that long range hailing devices are unsafe or may be used in an abusive manner may hurt sales of our LRAD products which could cause our revenues to decline.

Potential customers for our LRAD products, including government, military and force protection and emergency response agencies may be influenced by claims or perceptions that long range hailing devices are unsafe or may be used in an abusive manner. These claims or perceptions could cause our product sales to decline. In addition, if these agencies have these perceptions, it will be difficult for us to grow our customer base beyond these markets. These factors could reduce future revenues, adversely affecting our financial condition and results of operations.

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

Our products have never been produced in quantity, and we may incur significant and unpredictable warranty costs as these products are mass produced.

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

At December 31, 2004, we had a warranty reserve of $408,834. We incurred warranty costs on early versions of our HSS products and have little history to predict future warranty costs.  Future warranty costs could further adversely affect our financial position, results of operations and business prospects. 

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.

We expect our sound proprietary reproduction technologies will be the source of substantially all of our future revenues. Revenues from our sound proprietary reproduction technologies are expected to vary significantly due to a number of factors. Many of these factors are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue expectations. These factors include:

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• 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;

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

• general political conditions in this country and in various other parts of the world that could affect spending for the products that we offer.

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

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

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 value of our stock price, which impacts the income or expense we record each quarter for the warrant issued to Kingsbridge;
 

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

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

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

• the timing of personnel and consultant hiring; and

• the cost of settling legal disagreements.

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.

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

Our competitive position will be seriously damaged if we cannot obtain patent protection for important differentiating aspects of our products or otherwise protect intellectual property rights in our technology.

We rely on a combination of contracts and trademark, patent and trade secret laws to establish and protect our proprietary rights in our technology. However, we may not be able to prevent misappropriation of our intellectual property, our competitors may be able to independently develop and the agreements we enter into may not be enforceable.

Our success, in part, depends on our ability to obtain and enforce intellectual property protection for our technology, particularly our patents.  There is no guarantee any patent will issue on any patent application that we have filed or may file. Claims allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Further, any patent that we may obtain will expire, and it is possible that it may be challenged, invalidated or circumvented. If we do not secure and maintain patent protection for our technology and products, our competitive position will be significantly harmed because it will be much easier for competitors to sell products similar to ours. Alternatively, a competitor may independently develop or patent technologies that are substantially equivalent to or superior to our technology.  For example, patent protection on our LRAD product is limited, and we may not be able to prevent others from introducing products with similar functionality.  If this happens, any patent that we may obtain may not provide protection and our competitive position could be significantly harmed.

As we expand our product line or develop new uses for our products, these products or uses may be outside the protection provided by our current patent applications and other intellectual property rights. In addition, if we develop new products or enhancements to existing products we cannot assure you that we will be able to obtain patents to protect them. Even if we do receive patents for our existing or new products, these patents may not provide meaningful protection. In some countries outside of the United States where our products can be sold or licensed, patent protection is not available. Moreover, some countries that do allow registration of patents do not provide meaningful redress for violations of patents. As a result, protecting intellectual property in these countries is difficult and our competitors may successfully sell products in those countries that have functions and features that infringe on our intellectual property.

We may initiate claims or litigation against third parties in the future for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. These claims could result in costly litigation and divert the efforts of our technical and management personnel. As a result, our operating results could suffer and our financial condition could be harmed.

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Our competitive position will be seriously damaged if our products are found to infringe on the intellectual property rights of others.

Other companies and our competitors may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products. As a result, we may be found to infringe the intellectual property rights of others. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be adversely affected. Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources. An adverse result from intellectual property litigation could force us to do one or more of the following:

• cease selling, incorporating or using products or services that incorporate the challenged intellectual property;

• obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and

• redesign products or services that incorporate the disputed technology.

If we are forced to take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential claims of this type or be adequate to indemnify us for all liability that may be imposed.

In addition, it is possible that our customers or end users may seek indemnity from us in the event that our products are found or alleged to infringe the intellectual property rights of others. Any such claim for indemnity could result in substantial expenses to us that could harm our operating results.

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, for example, the Trading with the Enemy Act of 1917, the Arms Export Control Act of 1976, the Export Administration Act of 1979, or the International Emergency Economic Powers Act, as well as their implementing regulations and executive orders.

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In the case of certain agreements involving equipment or services controlled under the International Traffic in Arms Regulations (ITAR) and sold at specified dollar volumes, the U.S. Department of State must notify Congress at least 15 to 30 days, depending on the intended overseas destination, prior to authorizing these sales. During that time, Congress may take action to block the proposed sale. Based on our current product lines, we do not anticipate the congressional notification requirement to have an immediate impact; however, as our product lines expand, this notification requirement could impact our ability to sell certain controlled products or services in the international market.

The need for export licenses and, when required, Congressional notification, can introduce a period of delay in our ability to consummate international transactions. Because issuance of an export license is wholly within the discretion of the controlling U.S. government agency, it is possible that, in some circumstances, we may not be able to obtain the necessary licenses for some potential transactions.

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

• 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.

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

An important part of our strategy is to establish business relationships with leading participants in various segments of the electronics, government and sound reproduction markets to assist us in producing, distributing, marketing and selling products that include our proprietary sound technologies.

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

We are dependent on third party manufacturers.  

We do not have the capacity to manufacture all of our products internally and we are therefore dependent on third party manufacturers.  At present, we manufacture NeoPlanar and SoundCluster internally only in small quantities and would need to outsource our manufacturing if sales of these products were to increase significantly.  In addition, we established a manufacturing relationship with Pemstar, Inc. in fiscal 2004 to manufacture our LRAD and HSS products.  We do not have a formal written agreement with Pemstar. Pemstar, or any other contract manufacturing partner, may not be able or willing to manufacture products for us in the quantities and at the level of quality that we require. If we need to seek additional third party manufacturers for our products, we may not be able to obtain acceptable replacement manufacturing sources on a timely basis. An extended interruption in the supply of our products could result in a substantial loss of sales. In addition, any actual or perceived degradation of product quality as a result of our reliance on third party manufacturers may have an adverse effect on sales or result in increased product returns and buybacks.  Failure to maintain quality contract manufacturing could reduce future revenues, adversely affecting financial condition and results of operations.

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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 HSS emitters.  If shortages occur, or if we experience quality problems with suppliers, then our production schedules could be significantly delayed or costs significantly increased, which would have a material adverse effect on our business, liquidity, results of operation and financial position.

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

• 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.

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 depends on our continuing ability to identify, hire, train and retain other highly qualified technical, managerial and sales personnel. Competition for such personnel is intense, and we may not be able to attract, assimilate or retain other highly qualified technical, managerial or sales personnel in the future. The inability to attract and retain the necessary technical, managerial or sales personnel could cause our business, operating results or financial condition to suffer.

We may not address successfully the problems encountered in connection with any potential future acquisitions.

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We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including:

• problems assimilating the purchased technologies, products or business operations;

• problems maintaining uniform standards, procedures, controls and policies;  

• unanticipated costs associated with the acquisition;

• diversion of management’s attention from our core business;

• adverse effects on existing business relationships with suppliers and customers;

• risks associated with entering new markets in which we have no or limited prior experience;

• potential loss of key employees of acquired businesses; and

• increased legal and accounting costs as a result of the newly adopted rules and regulations related to the Sarbanes-Oxley Act of 2002.

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our stockholders would be diluted.

We are subject to increased costs as a result of newly adopted accounting and SEC regulations.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management will be required by the end of fiscal 2005 to perform an evaluation of our internal controls over financial reporting and have our independent auditor attest to that evaluation. Compliance with these requirements is expected to be expensive and time consuming. If we fail to timely complete this evaluation, or if our independent registered public accounting firm cannot timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls.

In designing and evaluating our internal controls over financial reporting, we recognize that any internal control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. No system of internal controls can be designed to provide absolute assurance of effectiveness and any material failure of internal controls over financial reporting could materially impact our reported financial results and the market price of our stock could significantly decline. In addition, adverse publicity related to a material failure of internal controls over financial reporting would have a negative impact on our reputation and business.

Changes in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace.

Technology companies in general and our company in particular have a history of depending upon and using broad based employee stock option programs to hire, incentivize and retain employees in a competitive marketplace. Currently, we do not recognize compensation expense for stock options issued to employees or directors, except in limited cases involving modifications of stock options, and we instead disclose in the notes to our financial statements information about what such charges would be if they were expensed. An accounting standard setting body has recently adopted a new accounting standard that will require us to record equity-based compensation expense for stock options and employee stock purchase plan rights granted to employees based on the fair value of the equity instrument at the time of grant. We will be required to record these expenses beginning with our fourth quarter of fiscal 2005. The change in accounting rules will lead to increased reported net loss or, should we become profitable, a decrease in reported earnings. This may negatively impact our future stock price. In addition, this change in accounting rules could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

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 offerings without further action by our stockholders. If we issue additional preferred stock, it could affect your rights or reduce the value of your common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions.

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We may issue additional common stock in the future, including shares under our Committed Equity Financing Facility, and this stock may reduce the value of your common stock.

As a result of the CEFF or other financings, we may issue additional shares of common stock without further action by our stockholders. Moreover, although the issuance of our common stock under the CEFF will have no effect on the rights or privileges of existing holders of common stock, the economic and voting interests of each stockholder will be diluted as a result of such issuances. Although the number of shares of common stock that stockholders presently own will not decrease, such shares will represent a smaller percentage of our total shares that will be outstanding after such events. If we satisfy the conditions that allow us to draw down the entire $25 million available under the CEFF, and we choose to do so, then generally, as the market price of our common stock decreases, the number of shares we will have to issue upon each draw down on the CEFF increases, to a maximum of 3,684,782 shares we may issue without stockholder approval. Drawing down on the CEFF when the price of our common stock is decreasing will have an additional dilutive effect to your ownership percentage and may result in additional downward pressure on the price of our common stock.

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;

• changes in personnel within our company; 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 market risk associated with our issuance of a warrant to Kingsbridge Capital Limited for 275,000 shares. Because this warrant is classified as a liability on our balance sheet, we must calculate the fair value of the warrant at the end of each quarter and record the change in fair value over the quarter to other income or expense until the related registration statement is effective, until the warrant is fully exercised, or until the expiration of the warrant in June 2010. Accordingly, we are incurring risk associated with increases or decreases in the market price of our stock, which will directly impact the fair value calculation and the non-cash charge or credit recorded to our statement of operations for future quarters. For example, if our stock price increases by 20% during the quarter ending March 31, 2005 from its December 31, 2004 value, the registration statement is not effective and all other inputs into the Black-Scholes valuation model remain unchanged from December 31, 2004, we would record approximately $480,000 of other expense for the period ended March 31, 2005. If our stock price decreased by 20% from its December 31, 2004 value, and all other inputs into the Black-Scholes valuation model remain unchanged from December 31, 2004, we would record approximately $518,000 as other income.

We are also exposed to some market risk through interest rates, related to our investment of current cash and cash equivalents of approximately $3.8 million. Based on this balance, a change of one percent in interest rate would cause a change in interest income of $38,000. 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.

We maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

31

(a) As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of management, including our co-principal executive officers and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our co-principal executive officers and principal financial officer concluded, as of the date of such evaluation, that the design and operation of such disclosure controls and procedures were effective, except as set forth below. In February 2005, our independent registered public accounting firm notified our Audit Committee that we had not followed all appropriate period close down procedures for our quarter ended December 31, 2004, referencing deficient procedures for evaluation of the accrual for bonuses for which executive officers were eligible. Our independent registered public accounting firm noted that this constituted a significant deficiency in our internal controls over financial reporting. We have taken steps to rectify this deficiency by accelerating the timing of the Compensation Committee's assessment for executive bonuses earned in the period.

(b) No significant changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations. 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 Note 13 of our Notes to Interim Financial Statements included in Part I, Item 1 of this report for information regarding Legal Proceedings.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

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.

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Item 6. Exhibits

3.1 Restated Bylaws of American Technology Corporation.

10.1 Table of Inducement Grants. Filed as Exhibit 10.25 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.2 Release Agreement with Bruce Ehlers dated October 25, 2004. Filed as Exhibit 10.32 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.3 Common Stock Purchase Agreement dated December 14, 2004 with Kingsbridge Capital Limited. Filed as Exhibit 10.1 on Form 8-K filed December 17, 2004.

10.4 Registration Rights Agreement dated December 14, 2004 with Kingsbridge Capital Limited. Filed as Exhibit 10.2 on Form 8-K filed December 17, 2004.

10.5 Warrant dated December 14, 2004 in favor of Kingsbridge Capital Limited. Filed as Exhibit 4.1 to Form 8-K filed December 17, 2004.

10.6 Promissory Note and Warrant Purchase Agreement dated December 23, 2004 with the purchasers described therein. Filed as Exhibit 10.39 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.7 Form of Unsecured Subordinated Promissory Note. Filed as Exhibit 10.40 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.8 Form of Warrant. Filed as Exhibit 10.41 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

 

10.9 Summary Sheet of Director and Executive Officer Compensation.

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 Michael A. Russell, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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 Michael A. Russell, Principal Financial Officer.

+ Management contract or compensatory plan or arrangement.

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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

By:  /S/ MICHAEL A. RUSSELL

Date: February 11, 2005 Michael A. Russell, Chief Financial Officer
(Principal Financial and Accounting Officer
and duly authorized to sign on behalf of
the Registrant)

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Exhibit Index

3.1 Restated Bylaws of American Technology Corporation.

10.1 Table of Inducement Grants. Filed as Exhibit 10.25 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.2 Release Agreement with Bruce Ehlers dated October 25, 2004. Filed as Exhibit 10.32 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.3 Common Stock Purchase Agreement dated December 14, 2004 with Kingsbridge Capital Limited. Filed as Exhibit 10.1 on Form 8-K filed December 17, 2004.

10.4 Registration Rights Agreement dated December 14, 2004 with Kingsbridge Capital Limited. Filed as Exhibit 10.2 on Form 8-K filed December 17, 2004.

10.5 Warrant dated December 14, 2004 in favor of Kingsbridge Capital Limited. Filed as Exhibit 4.1 to Form 8-K filed December 17, 2004.

10.6 Promissory Note and Warrant Purchase Agreement dated December 23, 2004 with the purchasers described therein. Filed as Exhibit 10.39 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.7 Form of Unsecured Subordinated Promissory Note. Filed as Exhibit 10.40 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

10.8 Form of Warrant. Filed as Exhibit 10.41 on Form 10-K for the year ended September 30, 2004 dated December 28, 2004.

 

10.9 Summary Sheet of Director and Executive Officer Compensation.

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 Michael A. Russell, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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 Michael A. Russell, Principal Financial Officer.

+ Management contract or compensatory plan or arrangement.

35

EX-3.1

EXHIBIT 3.1


                                    RESTATED
                                     BYLAWS
                                       OF
                         AMERICAN TECHNOLOGY CORPORATION
                            (A DELAWARE CORPORATION)
                    (AS AMENDED AND RESTATED 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.

                                      -1-





         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.

         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-





         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.

         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.


                                      -3-





         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
                          MEETINGS OF THE SHAREHOLDERS

         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.


                                      -4-





             (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.


                                      -5-





             (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.

         3.03. 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.

         3.04. 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 9.01 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 3.12 hereof.


                                      -6-





         3.05. 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.

         3.06. 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 3.06 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.


                                      -7-





         3.07. 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.

         3.08. 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.

         3.09. 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.

         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.

         3.10. 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.

         3.11. 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.

                                      -8-





         3.12. 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.

         3.13. 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.


                                      -9-





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

             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.

         3.14. 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 IV
                         DIRECTORS, POWERS AND MEETINGS

         4.01. 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.

         4.02. 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.


                                      -10-





         4.03. 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.

         4.04. 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.

         4.05. 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.

         4.06. 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.

         4.07. 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.

         4.08. 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.


                                      -11-





         4.09. 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.

         4.10. 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.

         4.11. 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.

         4.12. 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.

         4.13. 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.


                                      -12-





         4.14. 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.

         4.15. 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.

         4.16. 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.

         4.17. 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.


                                      -13-





         4.18. 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.

             (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 V
                                    OFFICERS

         5.01. 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.

         5.02. 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.


                                      -14-





         5.03. 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.

         5.04. 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.

         5.05. 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.

         5.06. 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.

         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 CEO. 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.

         5.07. 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 is 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.


                                      -15-





         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.

         5.08. 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.

         5.09. 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.

         5.10. 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.


                                      -16-





         5.11. 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.

         5.12. 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.

         5.13. 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.

         5.14. 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.

         5.15. 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.

         5.16. 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.


                                      -17-





                                   ARTICLE VI
                                 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 VII
                                  MISCELLANEOUS

         7.01. 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.

         7.02. 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.

         7.03. 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".

         7.04. 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 VIII
                              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 IX
                                     NOTICES

         9.01. 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


                                      -18-





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.

         9.02. 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,
amended and restated April 13, 2004.




                                      -19-

EX-10.9

EXHIBIT 10.9

AMERICAN TECHNOLOGY CORPORATION

SUMMARY SHEET

OF

DIRECTOR AND EXECUTIVE OFFICER COMPENSATION

Compensation of Directors

We currently have no standard arrangements pursuant to which our directors are compensated for services provided as a director or committee member, other than in the form of reimbursement of expenses of attending directors’ or committee meetings. Our directors have received in the past, and may receive in the future, stock option grants. During fiscal 2005, the Compensation Committee will be reevaluating our director compensation program.

Compensation of Executive Officers

The executive officers of the Company serve at the discretion of the Board of Directors. From time to time, the Compensation Committee of the Board of Directors reviews and determines the salaries that are paid to the Company's executive officers. The following table sets forth the annual salary rates for the Company’s current executive officers as of the date of this report on Form 10-Q:

Elwood G. Norris, Chairman	$200,000
Kalani Jones, President and Chief Operating Officer	$220,000
Carl Gruenler, Vice President of Government and Force Protection Systems Group	$185,000
Michael A. Russell, Chief Financial Officer	$185,000

Employment Arrangements with Current Executive Officers

The following discussion summarizes the employment arrangements between us and our current executive officers as of the date of this report on Form 10-Q, and any options or bonuses granted since our last fiscal year end of September 30, 2004:

Mr. Elwood G. Norris - Effective September 1, 1997, we entered into a three year employment contract with Mr. Norris, for his services as Chief Technology Officer. The three-year term expired on August 31, 2000, but the agreement remains in effect until one party gives thirty days advance notice of termination to the other. Mr. Norris now serves as Chairman under the term of this agreement. The agreement, as amended by the Compensation Committee, provides for a base salary of $16,667 per month. The agreement provides that Mr. Norris will participate in bonus, benefit and other incentives at the discretion of the Board of Directors. Mr. Norris has agreed not to disclose trade secrets and has agreed to assign certain inventions to us during employment. We are also obligated to pay Mr. Norris certain royalties.

On January 27, 2005, our Compensation Committee granted Mr. Norris an option to purchase 70,000 shares of common stock at an exercise price of $8.96 per share. The option has a five year term and vests quarterly over four years, subject to continued employment and other conditions.

Mr. Kalani Jones - We entered into a letter agreement dated as of August 28, 2003, as amended on October 20, 2003, under which Mr. Jones was employed as our Senior Vice President of Operations. Mr. Jones has since been promoted to President and Chief Operating Officer. The letter agreement provides for an annual base salary of $140,000, and an annual performance bonus of up to 30% of base salary to be determined by the Compensation Committee and the Board of Directors. Mr. Jones' base salary was $200,000 per year at September 30, 2004.

-1-

On January 27, 2005, our Compensation Committee granted Mr. Jones an option to purchase 52,500 shares of common stock at an exercise price of $8.96 per share. The option has a five year term and vests quarterly over four years, subject to continued employment and other conditions. On that date, our Compensation Committee also increased Mr. Jones’ current annual base salary to $220,000, and awarded Mr. Jones a $50,000 bonus. Mr. Jones' employment is terminable at-will by us or by Mr. Jones for any reason, with or without notice.

Mr. Carl Gruenler - We entered into a letter agreement with Mr. Gruenler, which was amended on July 30, 2003, under which Mr. Gruenler was employed as our Vice President of Military Operations. Mr. Gruenler is currently our Vice President of Government and Force Protection Systems Group. The letter agreement provides for an annual base salary of $110,000, and an annual performance bonus of up to 10% of base salary to be determined by the Compensation Committee and the Board of Directors. Mr. Gruenler’s current annual base salary is $185,000. On November 16, 2004, our Compensation Committee granted Mr. Gruenler an option to purchase 75,000 shares of common stock at an exercise price of $6.70 per share. The option has a five year term and vests quarterly over four years, subject to continued employment and other conditions. Mr. Gruenler's employment is terminable at-will by us or by Mr. Gruenler for any reason, with or without notice.

Mr. Michael Russell - We entered into a letter agreement dated June 15, 2004, under which Mr. Russell was employed as our Chief Financial Officer. The letter agreement provides for an annual base salary of $185,000, and an annual performance bonus of up to 25% of base salary to be determined by the Compensation Committee and the Board of Directors. Mr. Russell's employment is terminable at-will by us or by Mr. Russell for any reason, with or without notice.

-2-

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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. 33-2838 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 the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

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 controls over financial reporting.

Date: February 9, 2005

/S/ ELWOOD G. NORRIS

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

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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. 33-2838 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 the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

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 controls over financial reporting.

Date: February 9, 2005

/S/ KALANI JONES

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

EX-31.3

EXHIBIT 31.3

CERTIFICATIONS

I, Michael A. Russell, 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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. 33-2838 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 the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

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 controls over financial reporting.

Date: February 9, 2005

/S/ MICHAEL A. RUSSELL

Michael A. Russell, Chief Financial Officer
(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CO-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 quarter ended December 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: February 9, 2005

/S/ ELWOOD G. NORRIS

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

/S/ KALANI JONES

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

/S/ MICHAEL A. RUSSELL

Michael A. Russell, Chief Financial Officer
(Principal Financial Officer)