ATCO Form 10-K

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

American Technology Corporation:

We have completed an integrated audit of American Technology Corporation’s 2005 financial statements and of its internal control over financial reporting as of September 30, 2005 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinion, based on our audit, is presented below.

Financial Statements and financial statement schedule

In our opinion, the financial statements listed in the index appearing under Item 15 (a)(1) present fairly in all material respects, the financial position of American Technology Corporation as of September 30, 2005 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Internal control over financial reporting

Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under item 9A, that American Technology Corporation did not maintain effective control over financial reporting as of September 30, 2005 because the Company did not maintain sufficient oversight and supervision of financially significant process systems to include the preparation of the financial statements, schedules and related disclosures, did not maintain adequate processes for gathering key financial information to support the achievement of financial reporting objectives, did not maintain adequate processes to determine whether internal control over financial reporting was operating effectively and whether financial reports were reliably and accurately prepared, did not properly and completely maintain inventory costs in accordance with generally accepted accounting principles as of September 30, 2005, did not maintain accurate fixed asset records, did not properly maintain effective control over the accounting for accounts receivable, and did not maintain effective controls over accounts payable to properly record all invoices issued to the Company for the period ended September 30, 2005. The Company’s management is responsible for maintaining effective control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

F-2

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transaction and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

F-3

Oversight of Accounting Processes and Personnel

The Company did not maintain sufficient oversight and supervision of financially significant processes and systems, and did not monitor and oversee the work performed by their operations and accounting personnel. This material weakness was due primarily to a lack of adequate finance department supervision over finance and accounting personnel, and a lack of human resources and insufficiently skilled personnel within the operations and accounting reporting functions. This material weakness resulted in errors in the preparation and review of financial statements, disclosures, schedules and reconciliations supporting certain general ledger account balances, errors not detected in certain accrued liability accounts and accounts payable, proper valuation and costing of inventory, proper tracking and accounting for fixed assets, and accurate valuation of accounts receivables.

Information and Communication

The Company did not maintain adequate processes for gathering key financial information to support achievement of financial reporting objectives. As a

result, management’s ability to monitor internal and external events was compromised. This material weakness resulted from a lack of personnel and adequate supervisory management, primarily in the finance and operations organizations. This material weakness resulted in the unavailability of reliable information concerning inventory, fixed assets, accounts receivable, and accounts payable.

Monitoring

The Company did not maintain adequate processes to determine whether internal control over financial reporting was operating effectively and whether financial reports were reliably and accurately prepared. In particular, the Company lacked an ongoing monitoring process that would have enabled management to determine whether internal control over financial reporting was present and functioning. This material weakness resulted from a lack of skilled personnel and adequate supervisory management, primarily in the finance and operations organizations. This material weakness resulted in various deficiencies relating to inventory valuation, fixed asset accounting, accounts receivable, and accounts payable.

Inventory Valuation

Controls that the Company established for inventory valuation were not properly applied in connection with the financial statement closing process for the year ended September 30, 2005. This failure to apply existing controls relative to inventory valuation resulted both from lack of experienced accounting and operations personnel , the lack of proper supervision of such personnel, and the unexpected departure of personnel responsible for the application of such controls. This material weakness resulted in incorrect valuation and improper pricing of our inventory at the fiscal year ended September 30, 2005.

Fixed Asset Accounting

The Company did not maintain effective control over the accounting for fixed assets. The Company lacked an appropriate policy for reconciling certain recorded assets for which there was incomplete identifying information with assets on hand, and also lacked experienced accounting personnel responsible for maintaining fixed assets. This material weakness resulted in an adjustment to the value of the Company’s fully depreciated fixed assets as well as an adjustment to the valuation of net fixed assets at September 30, 2005.

Accounts Receivable

The Company did not maintain effective control over the accounting for accounts receivable. This failure to apply existing controls relative to accounting for accounts receivables resulted from a lack of experienced accounting personnel and inadequate supervision of the personnel responsible for timely accounts receivables reconciliations. The Company discovered several discrepancies between their accounting records and those of their customers concerning the value of accounts receivable outstanding at September 30, 2005.

Accounts Payable

The Company did not maintain effective controls over the accuracy of their accounts payable and recorded liabilities at September 30, 2005. Specifically, the Company did not account for all invoices that had been issued to them by various vendors for the period ended September 30, 2005.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 financial statements and our opinion regarding the effectiveness of the Company’s internal control does not affect our opinion on those financial statements.

In our opinion, management’s assessment that American Technology Corporation did not maintain effective internal control over financial reporting as of September 30, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by COSO. Also, in our opinion, because of the effects of the material weakness described above on the achievement of the objectives of the control criteria, American Technology Corporation has not maintained effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control - Integrated Framework issued by COSO.

The financial statements of American Technology Corporation as of September 30, 2004 and 2003 were audited by other auditors whose report dated November 10, 2004 except for Note 14 as to which the date is December 23, 2004, and included in this Form 10K, stated the financial statements presented fairly, in all material respects the financial position of American Technology Corporation as of September 30, 2004 and 2003 and for the years then ended.

/s/ Swenson Advisors LLP

Swenson Advisors LLP

San Diego, California

December 27, 2005

F-4

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

American Technology Corporation

San Diego, California

We have audited the accompanying balance sheet of American Technology Corporation as of September 30, 2004, and the related statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years in the period ended September 30, 2004. We have also audited the related fiscal 2004 and 2003 financial statement schedules listed as Schedule II in Item 15. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Technology Corporation at September 30, 2004, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the related fiscal 2004 and 2003 financial statement schedules present fairly, in all material respects, the information set forth therein.

/s/ BDO SEIDMAN, LLP

Costa Mesa, California

November 10, 2004

F-5

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

American Technology Corporation

BALANCE SHEETS

September 30,	2005			2004

ASSETS
Current Assets:
Cash	$	10,347,779		$	4,178,968
Trade accounts receivable, less allowance of
$125,000 and $25,000 for doubtful accounts, respectively		880,276			926,747
Inventories, net of $691,206 and $110,000 reserve for obsolescence		1,799,447			651,095
Prepaid expenses and other		201,339			156,419
Total current assets		13,228,841			5,913,229
Equipment, net		606,871			453,355
Patents, net		1,373,158			1,278,707
Total assets	$	15,208,870		$	7,645,291

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	1,985,353		$	1,300,075
Accrued liabilities:
Payroll and related		476,331			302,706
Deferred revenue		395,833			322,344
Warranty reserve		248,981			331,917
Legal settlements		71,900			150,000
Other		30,003			22,236
Derivative warrant instrument		282,000			-
Capital lease short-term portion		12,131			10,967
Total current liabilities		3,502,532			2,440,245
Long-Term Liabilities:
Derivative warrant instrument		1,564,000			-
Capital lease long-term portion		-			12,131
Total liabilities		5,066,532			2,452,376
Commitments and contingencies

Stockholders' equity
Preferred stock, $0.00001 par value; 5,000,000 shares authorized:
Series D Preferred stock 250,000 shares designated: 0 and 50,000
issued and outstanding, respectively. Liquidation
preference of $0 and $572,500, respectively.		-			-
Series E Preferred stock 350,000 shares designated: 0 and 233,250
issued and outstanding, respectively. Liquidation preference
of $0 and $2,556,000, respectively.		-			3
Common stock, $0.00001 par value; 50,000,000 shares authorized;
24,290,840 and 19,808,819 shares issued and outstanding respectively.		243			198
Additional paid-in capital		61,556,295			47,520,207
Accumulated deficit		(51,414,200	)		(42,327,493	)
Total stockholders' equity		10,142,338			5,192,915
Total liabilities and stockholders' equity	$	15,208,870		$	7,645,291

See accompanying notes to financial statements

F-6

Table of Contents

American Technology Corporation

STATEMENTS OF OPERATIONS

Years Ended September 30,	2005			2004			2003

Revenues:
Product sales	$	10,013,215		$	5,581,936		$	1,070,645
Contract and license		182,331			170,613			244,781
Total revenues		10,195,546			5,752,549			1,315,426
Cost of revenues		5,624,361			3,469,821			1,544,077
Gross profit		4,571,185			2,282,728			(228,651	)


Operating expenses:
Selling, general and administrative		9,333,436			5,309,547			4,839,198
Research and development		4,621,532			2,988,784			2,493,351
Total operating expenses		13,954,968			8,298,331			7,332,549

Loss from operations		(9,383,783	)		(6,015,603	)		(7,561,200	)

Other income (expense):
Interest income		84,510			58,056			23,293
Interest expense		(837,434	)		(2,889	)		(686,639	)
Unrealized gain on derivative revaluation		1,233,259			-			-
Warrant impairment expense		(183,259	)		-			-
Other		-			-			(2,467	)
Total other income (expense)		297,076			55,167			(665,813	)

Net loss		(9,086,707	)		(5,960,436	)		(8,227,013	)
Dividend requirements on convertible preferred stock		1,796,426			1,365,349			2,409,228
Net loss available to common stockholders	$	(10,883,133	)	$	(7,325,785	)	$	(10,636,241	)
Net loss per share of common stock - basic and diluted	$	(0.50	)	$	(0.37	)	$	(0.67	)
Average weighted number of common shares outstanding		21,570,002			19,603,265			15,857,569

See accompanying notes to financial statements

F-7

Table of Contents

American Technology Corporation

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Years Ended September 30, 2005, 2004 and 2003
					Convertible Preferred Stock
	Series B				Series C					Series D						Series E
	Shares		Amount		Shares			Amount		Shares			Amount			Shares			Amount
Balance, September 30, 2002		-	$	-		10,000		$	-		235,400		$	2			-		$	-
Issuance of Series E preferred stock, net of offering costs of $176,225		-		-		-			-		-			-			343,250			3
Issuance of common stock:
Upon exercise of stock options		-		-		-			-		-			-			-			-
For compensation and services		-		-		-			-		-			-			-			-
For cash at $5.50 per share, net of offering costs of $545,000		-		-		-			-		-			-			-			-
Conversion of Series C preferred stock		-		-		(10,000	)		-		-			-			-			-
Conversion of Series D preferred stock		-		-		-			-		(185,400	)		(2	)		-			-
Conversion of Series E preferred stock		-		-		-			-		-			-			(80,000	)		-
Exercise of warrants		-		-		-			-		-			-			-			-
Legal settlement at $5.85 per share		-		-		-			-		-			-			-			-
Conversion of 12% convertible subordinated notes		-		-		-			-		-			-			-			-
Issuance of stock options and warrants for services		-		-		-			-		-			-			-			-
Deemed dividends and accretion on convertible preferred stock of $2,409,228		-		-		-			-		-			-			-			-
Net loss for the year		-		-		-			-		-			-			-			-
Balance, September 30, 2003		-	$	-		-		$	-		50,000		$	-			263,250		$	3
Issuance of common stock:
Upon exercise of stock options		-		-		-			-		-			-			-			-
Legal settlement and royalty buyout at $4.96 per share		-		-		-			-		-			-			-			-
Conversion of Series E preferred stock		-		-		-			-		-			-			(30,000	)		-
Exercise of warrants		-		-		-			-		-			-			-			-
Value assigned to 28,438 options issued on termination		-		-		-			-		-			-			-			-
Deemed dividends and accretion on convertible preferred stock of $1,365,349		-		-		-			-		-			-			-			-
Net loss for the year		-		-		-			-		-			-			-			-
Balance, September 30, 2004		-	$	-		-		$	-		50,000		$	-			233,250		$	3
Issuance of common stock:
Upon exercise of stock options		-		-		-			-		-			-			-			-
For cash at $4.88 per share, net of offering costs of $828,176		-		-		-			-		-			-			-			-
Value assigned to warrants						-			-		-			-			-			-
Conversion of Series D preferred stock		-		-		-			-		(50,000	)		-			-			(1	)
Conversion of Series E preferred stock		-		-		-			-		-			-			(233,250	)		(2	)
Exercise of warrants		-		-		-			-		-			-			-			-
Cashless exercise of 25,000 warrants		-		-		-			-		-			-			-			-
Legal settlement at $8.01 per share		-		-		-			-		-			-			-			-
Value assigned to extension of time to exercise 92,675 options		-		-		-			-		-			-			-			-
Debt discount for 150,000 warrants granted on 8% unsecured subordinated promissory notes		-		-		-			-		-			-			-			-
Issuance of stock options and warrants for services		-		-		-			-		-			-			-			-
Deemed dividends and accretion on convertible preferred stock of $1,796,426		-		-		-			-		-			-			-			-
Net loss for the year		-		-		-			-		-			-			-			-
Balance, September 30, 2005		-	$	-		-		$	-		-		$	-			-		$	-

See accompanying notes to financial statements.

F-8

Table of Contents

American Technology Corporation

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Years Ended September 30, 2005, 2004 and 2003

	Common Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity (Deficit)
Balance, September 30, 2002		14,351,476	$	144	$	27,255,016		$	(28,140,044	)	$	(884,882	)
Issuance of Series E preferred stock, net of offering costs of $176,225		-		-		3,256,272			-			3,256,275
Issuance of common stock:
Upon exercise of stock options		408,951		4		1,614,223			-			1,614,227
For compensation and services		109,844		1		410,815			-			410,816
For cash at $5.50 per share, net of offering costs of $545,000		1,818,180		18		9,454,982			-			9,455,000
Conversion of Series C preferred stock		41,130		-		-			-			-
Conversion of Series D preferred stock		695,266		7		(5	)		-			-
Conversion of Series E preferred stock		253,294		3		(3	)		-			-
Exercise of warrants		347,000		3		903,718			-			903,721
Legal settlement at $5.85 per share		100,000		1		584,999			-			585,000
Conversion of 12% convertible subordinated notes		1,217,516		12		2,435,020			-			2,435,032
Issuance of stock options and warrants for services		-		-		179,995			-			179,995
Deemed dividends and accretion on convertible preferred stock of $2,409,228		-		-		-			-			-
Net loss for the year		-		-		-			(8,227,013	)		(8,227,013	)
Balance, September 30, 2003		19,342,657	$	193	$	46,095,032		$	(36,367,057	)	$	9,728,171
Issuance of common stock:
Upon exercise of stock options		292,573		3		1,061,314			-			1,061,317
Legal settlement and royalty buyout at $4.96 per share		50,000		1		247,999			-			248,000
Conversion of Series E preferred stock		98,589		1		(1	)		-			-
Exercise of warrants		25,000		-		50,000			-			50,000
Value assigned to 28,438 options issued on termination		-		-		65,863			-			65,863
Deemed dividends and accretion on convertible preferred stock of $1,365,349		-		-		-			-			-
Net loss for the year		-		-		-			(5,960,436	)		(5,960,436	)
Balance, September 30, 2004		19,808,819	$	198	$	47,520,207		$	(42,327,493	)	$	5,192,915
Issuance of common stock:
Upon exercise of stock options		237,612		3		830,111			-			830,114
For cash at $4.88 per share, net of offering costs of $828,176		2,868,851		29		13,171,795			-			13,171,824
Value assigned to warrants		-		-		(2,896,000	)		-			(2,896,000	)
Conversion of Series D preferred stock		129,259		1		-			-			-
Conversion of Series E preferred stock		801,306		8		(6	)		-			-
Exercise of warrants		407,068		4		1,736,271			-			1,736,275
Cashless exercise of 25,000 warrants		20,425		-		-			-			-
Legal settlement at $8.01 per share		17,500		-		140,175			-			140,175
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		-		-		63,779			-			63,779
Deemed dividends and accretion on convertible preferred stock of $1,796,426		-		-		-			-			-
Net loss for the year		-		-		-			(9,086,707	)		(9,086,707	)
Balance, September 30, 2005		24,290,840	$	243	$	61,556,295		$	(51,414,200	)	$	10,142,338

See accompanying notes to financial statements.

F-9

Table of Contents

American Technology Corporation

STATEMENTS OF CASH FLOWS

Years ended September 30,	2005			2004			2003
Increase (Decrease) in Cash
Operating Activities:
Net loss	$	(9,086,707	)	$	(5,960,436	)	$	(8,227,013	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		444,566			239,948			549,612
Allowance for doubtful accounts		102,492			-			4,809
Warranty provision		71,731			101,671			313,187
Provision for obsolete inventory		784,150			90,000			-
Loss on disposition of asset		23,064			-			-
Common stock issued for services and compensation		-			-			410,816
Options and warrants granted for services		6,160			-			179,995
Options granted for compensation		324,582			65,863			-
Common stock issued for legal settlement		-			-			585,000
Write-off of abandoned patents		40,916			37,798			-
Amortization of debt discount		723,000			-			405,000
Unrealized gain on derivative revaluation		(1,233,259	)		-			-
Warrant impairment expense		183,259			-			-

Changes in assets and liabilities:
Trade accounts receivable		(56,021	)		(742,585	)		(77,485	)
Inventories		(1,932,502	)		(332,151	)		(272,063	)
Prepaid expenses and other		(44,920	)		(122,570	)		(13,719	)
Accounts payable		685,278			695,732			(12,188	)
Warranty reserve		(154,667	)		(89,254	)		-
Accrued liabilities		316,956			(14,059	)		696,680
Net cash used in operating activities		(8,801,922	)		(6,030,043	)		(5,457,369	)

Investing Activities:
Purchase of equipment		(480,926	)		(395,932	)		(108,246	)
Patent costs paid		(275,587	)		(346,818	)		(112,007	)
Net cash used in investing activities		(756,513	)		(742,750	)		(220,253	)

Financing Activities:
Offering Costs Paid		(828,176	)		-			(721,225	)
Proceeds from issuance of preferred stock		-			-			2,432,500
Proceeds from issuance of common stock		14,000,000			-			10,000,000
Payments on capital lease		(10,967	)		(9,914	)		(8,963	)
Proceeds from issuance of unsecured promissory notes		2,000,000			-			-
Payments on unsecured promissory notes		(2,000,000	)		-			-
Payments on senior secured promissory notes		-			-			(318,155	)
Proceeds from exercise of common stock warrants		1,736,275			50,000			221,876
Proceeds from issuance of senior secured promissory notes		-			-			500,000
Proceeds from exercise of stock options		830,114			1,061,317			1,614,227
Net cash provided by financing activities		15,727,246			1,101,403			13,720,260
Net increase/(decrease) in cash		6,168,811			(5,671,390	)		8,042,638
Cash, beginning of period		4,178,968			9,850,358			1,807,720
Cash, end of period	$	10,347,779		$	4,178,968		$	9,850,358

See accompanying notes to financial statements

F-10

Table of Contents

American Technology Corporation
Summary of Accounting Policies

ORGANIZATION AND BUSINESS

American Technology Corporation (the “Company”), a Delaware corporation, 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 principal markets for its proprietary sound reproduction technologies and products are in North America, Europe and Asia.

LIQUIDITY AND MANAGEMENT’S PLAN

The Company incurred net losses of $9,086,707, $5,960,436, and $8,227,013 and negative cash flow from operations of $8,801,922, $6,030,043 and $5,457,369 in the years ended September 30, 2005, 2004 and 2003, respectively. The Company had working capital of $9,726,309 and cash on hand of $10,347,779 at September 30, 2005. The Company historically has financed its operations primarily through the sale of capital stock, exercise of stock options, sale of notes, proceeds from the sale of investment securities and margins from product sales and licensing. Management expects to incur additional operating losses in fiscal 2006 as a result of expenditures for research and development and marketing costs for sound products. The timing and amounts of these expenditures and the extent of the Company’s operating losses will depend on future product sales levels and other factors, some of which are beyond management’s control. 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’s operating plans are based on the Company continuing to increase revenues and generate positive cash flows from operations. 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.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions (e.g. reserves for accounts receivable and inventory, patent realizability and warranty reserves) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable.

The Company’s cash is placed in quality money market accounts with major financial institutions. This investment policy limits the Company’s exposure to concentrations of credit risk. Such deposit accounts at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Concentration of credit risk with respect to the trade accounts receivable are limited due to the wide variety of customers and markets that comprise the Company’s customer base, as well as their dispersion across many different geographic areas. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that the trade accounts receivable credit risk exposure is limited. Generally, the Company does not require collateral or other security to support customer receivables.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities approximate fair values due to the short-term maturities of these instruments.

F-11

Table of Contents

American Technology Corporation

Summary of Accounting Policies

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection of a fee is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. If the Company has no previous experience with the customer, the Company may obtain reports from various credit organizations to ensure that the customer has a history of paying its creditors. The Company may also request financial information, including financial statements or other documents (e.g., bank statements) to ensure that the customer has the means of making payment. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. The Company determines delinquency on a case by case basis.

CONTRACT MANUFACTURERS

The Company employs contract manufacturers for production of HSS and LRAD components, sub-assemblies and products. The Company may provide parts and components to such parties from time to time but recognizes no revenue or markup on such transactions. During fiscal 2005 the Company used various contract manufacturers and is currently assessing alternative providers of contract manufacturing services. At September 30, 2005 and 2004, one contract manufacturer owed the Company $-0- and $393,636, respectively, for materials provided to the manufacturer without markup. As of September 30, 2004, this amount was netted against the payable to the contract manufacturer of $530,970, and the net amount was included in accounts payable.

INVENTORIES

Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Our inventory is comprised of raw materials, assemblies and finished products that we intend to sell to our customers. The Company periodically makes 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. The Company has inventory reserves for estimated obsolescence or unmarketable inventory which is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. For the period ended September 30, 2005, the Company increased its inventory reserve to $691,206.

EQUIPMENT AND DEPRECIATION

Equipment is stated at cost. Depreciation on machinery and equipment and office furniture and equipment is computed over the estimated useful lives of three to five years using the straight-line method. Leasehold improvements are amortized over the life of the lease. Upon retirement or disposition of equipment, the related cost and accumulated depreciation or amortization are removed and the gain or loss is recorded.

INTANGIBLES

Purchased technology is carried at cost, and was amortized over three years. Patents are carried at cost and, when granted, are amortized over their estimated useful lives, which have been estimated to be 15 years. 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. The Company wrote off $40,916, $37,798 and $-0- of previously capitalized patent costs during the years ended September 30, 2005, 2004 and 2003, respectively.

LEASES

Leases entered into are classified as either capital or operating leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation to reflect the purchase and financing. At September 30, 2005, the Company had recorded $12,131 in short-term and $-0- in long-term capital lease obligations.

LEGAL SETTLEMENTS

Liabilities relating to pending litigation are estimated, where the amount and range of loss can be reasonably determined. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the minimum estimated liability related to the claim is recorded. As additional information becomes available, the potential liability related to the pending litigation is assessed and estimates are revised. As of September 30, 2005 and 2004, the Company recorded accruals of $71,900 and $150,000 for contingent liability associated with legal proceedings.

GUARANTEES AND INDEMNIFICATIONS

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of the Company's agreements determined to be within the scope of FIN No. 45:

The Company provides a one-year warranty for most of its products. See “Warranty Reserves.”

Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a directors and officers’ liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of September 30, 2005.

F-12

Table of Contents

American Technology Corporation

Summary of Accounting Policies

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, customers and landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2005.

REVENUE RECOGNITION

The Company derives its revenue primarily from two sources: (i) component and product sale revenues and associated engineering and installation ,and (ii) contract and license fee revenue.

Component and product 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 on the part of the Company. Revenues from associated engineering and installation contracts are recognized based on milestones or completion of the contracted services.

The Company provides research and development services and licenses its technology to third parties. Revenues from up-front license and other fees and annual license fees are evaluated for multiple elements but are generally recognized ratably over the specified term of the particular license or agreement. Revenues from ongoing per unit license fees are earned based on units shipped incorporating the Company’s patented proprietary technologies and are recognized in the period when the ultimate customer accepts the product and collectibility is reasonably assured.

Deferred revenue balances of $395,833 and $322,344 at September 30, 2005 and 2004, respectively, represent amounts received or billed in connection with contract development and license agreements. During fiscal 2005, the Company entered into a technology license agreement and recorded $54,167 of revenue and $95,833 of deferred revenue.

SHIPPING AND HANDLING COSTS

Amounts invoiced to customers for shipping and handling are included in product revenues. Actual shipping and handling costs are included in product cost of revenues. Shipping and handling costs were $130,763, $211,502 and $62,810 for the fiscal years ended September 30, 2005, 2004 and 2003, respectively.

ADVERTISING

Advertising costs are charged to expenses as incurred. The Company expensed $67,964, $69,893 and $8,695 for the years ended September 2005, 2004 and 2003, respectively.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred.

WARRANTY RESERVES

The Company warrants its products to be free from defects in materials and workmanship for a period of one year from the date of purchase, depending on the product. The warranty is generally a limited warranty, and in some instances imposes certain shipping costs on the customer. The Company currently provides direct warranty service. Some agreements with OEM customers from time to time may require that certain quantities of product be made available for use as warranty replacements. International market warranties are generally similar to the U.S. market.

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. See Note 9 for additional information regarding warranties.

INTEREST EXPENSE

Interest expense includes interest expense, redemption premiums and non-cash amortization of debt discount.

F-13

Table of Contents

American Technology Corporation

Summary of Accounting Policies

INCOME TAXES

The Company accounts for income taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. A valuation allowance is recorded by the Company to the extent it is more likely than not that a deferred tax asset will not be realized.

COMPREHENSIVE INCOME

The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. There were no differences between net loss and comprehensive loss for any of the periods presented.

DERIVATIVE FINANCIAL INSTRUMENTS

In December 2004, the Company entered into a common stock purchase agreement, registration rights agreement and warrant as part of a Committed Equity Financing Facility (CEFF) (Note 6). As part of the arrangement, the Company issued a warrant to purchase 275,000 shares of its common stock at a price of $8.60 per share. As the warrant was initially unregistered, and did not specify how it would be settled prior to registration, the warrant was initially reported as a liability of $843,103 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.” 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 value was recorded as prepaid transaction costs. The warrants were revalued each period as non-cash income or expense pending registration and transfer to permanent equity. However, the CEFF and the warrant were cancelled in July 2005 and there was an unrealized gain of $183,259 for the change in value of the warrant from issuance to cancellation. There was a corresponding warrant impairment expense of $183,259 at termination.

In July 2005, the Company entered into a common stock purchase agreement, registration rights agreement and warrants in connection with an equity financing (Note 6). In connection with the financing, the Company issued warrants to purchase an aggregate of 1,581,919 shares of common stock. The Company accounted for the value of the warrants as a deemed liability in accordance with the interpretive guidance in EITF Issue No. 05-4. The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock’. The consensus of EITF Issue No. 05-4 has not been finalized. The aggregate liability at issuance was $2,896,000 using the following variables under the Black-Scholes option pricing model: volatility of 59%, term of each warrant, risk free interest rate of 3.53% and 3.95% and underlying stock price equal to fair market value at the time of issuance. EITF Issue 00-19 also requires the Company to revalue the warrants as a derivative instrument periodically in connection with changes in the underlying stock price and other assumptions, with the change in value recorded as non-cash income or expense. At September 30, 2005, there was an unrealized gain of $1,050,000 to reflect the change in value of the warrants since issuance.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset or if changes in facts and circumstances indicate, an impairment loss is recognized and measured using the asset’s fair value.

SEGMENT INFORMATION

In the fourth quarter of fiscal 2003, the Company organized operations into two segments by the end-user markets they serve. The Commercial Products and Licensing Group (Commercial Group) licenses and markets 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 and HSS sound products to government and military customers and to the growing force protection and commercial security markets. See Note 13.

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 reflect the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the years presented cause the inclusion of potential common stock instruments outstanding to be anti-dilutive. Stock options and warrants exercisable into 5,648,463 shares of common stock were outstanding at September 30, 2005. Stock options, warrants and convertible preferred stock exercisable into 5,197,557 shares of common stock were outstanding at September 30, 2004. Stock options, warrants and convertible preferred stock and notes exercisable into 4,999,522 shares of common stock were outstanding at September 30, 2003. These securities were not included in the computation of diluted earnings (loss) per share because of the losses but could potentially dilute earnings (loss) per share in future periods.

F-14

Table of Contents

American Technology Corporation

Summary of Accounting Policies

Net loss available to common stockholders was increased during fiscal 2005, 2004 and 2003 in computing net loss per share by imputed deemed dividends based on the value of warrants issued and the computed beneficial conversion amount of convertible preferred stock (see Note 6). Such non-cash imputed deemed dividends are not included in the Company’s stockholders’ equity as the Company has an accumulated deficit and therefore were reflected as an increase and a related decrease to additional paid in capital. 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.

The provisions of each of the Company’s series of preferred stock also provided for a 6% per annum accretion in the conversion value (similar to a dividend). Such accretions are not included in the Company's stockholders' equity as the Company has an accumulated deficit and therefore they were reflected as an increase and a related decrease to additional paid in capital. These non-cash amounts also increased the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:

Years Ended September 30,	2005			2004			2003

Net loss	$	(9,086,707	)	$	(5,960,436	)	$	(8,227,013	)
Imputed deemed dividends on Series D and E
warrants issued with preferred stock [note 5]		(592,137	)		(448,572	)		(538,070	)
Imputed deemed dividends on Series D and E
preferred stock [note 5]		(1,146,917	)		(736,449	)		(1,683,500	)
Accretion on preferred stock at 6% stated rate [note 6]:
Series C preferred stock		-			-			(6,000	)
Series D preferred stock		(9,167	)		(30,171	)		(65,844	)
Series E preferred stock		(48,205	)		(150,157	)		(115,814	)
Net loss available to common stockholders	$	(10,883,133	)	$	(7,325,785	)	$	(10,636,241	)

STOCK-BASED COMPENSATION

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

The Company 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.

F-15

Table of Contents

American Technology Corporation

Summary of Accounting Policies

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 September 30, 2005 consistent with the provisions of Statement of Financial Accounting Standards No. 123, its after-tax net income and after-tax net income per share would have been reduced to the pro forma amounts indicated below:

Years Ended September 30,	2005			2004			2003

Net loss available to common stockholders	$	(10,883,133	)	$	(7,325,785	)	$	(10,636,241	)
Deduct: Stock-based employee compensation
expense included in reported net loss		266,963			65,863			-
Add: Total stock-based employee compensation expense
determined using fair value based method		(1,279,441	)		(940,111	)		(972,896	)
Pro forma net loss available to common stockholders	$	(11,895,611	)	$	(8,200,033	)	$	(11,609,137	)

Net loss per common share - basic
and diluted - pro forma	$	(0.55	)	$	(0.42	)	$	(0.73	)
Net loss per common share - basic
and diluted - as reported	$	(0.50	)	$	(0.37	)	$	(0.67	)

The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2005, 2004 and 2003, respectively: dividend yield of zero percent for all years; expected volatility of 53 to 61 percent in 2005, 57 to 75 percent in 2004 and 68 to 84 percent in 2003; risk-free interest rates of 1.83 to 6.72 percent; and expected lives of 2.21 to 5 years.

COMMON STOCK ISSUED FOR SERVICES

The Company records compensation expense for common stock issued for services based on the estimated fair market value. Estimated fair market value is determined based on the quoted closing stock price on the day prior to the date of issuance.

STATEMENT OF CASH FLOWS

For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less, when purchased, to be cash equivalents. The Company had no cash equivalents at September 30, 2005 and 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and Error Corrections”, applying to all voluntary accounting principle changes as well as the accounting for and reporting of such changes. SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect SFAS No. 154 to affect the Company’s financial condition or results of operations.

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect FIN 47 to affect the Company’s financial condition or results of operations.

F-16

Table of Contents

American Technology Corporation

Summary of Accounting Policies

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29”, which is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS No. 153 amends APB Opinion No. 29, “Accounting for Non-monetary Transactions” to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company does not expect SFAS No. 153 to affect the Company’s financial condition or results of operations.

In December 2004, the FASB finalized SFAS No. 123R Share-Based Payment, amending SFAS No. 123, effective beginning our first quarter of fiscal 2006. SFAS 123R requires the Company to expense stock options based on grant date fair value in its financial statements. Further, SFAS 123R requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. In March 2005, the U.S. Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107, which expresses views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations, and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company is considering the guidance of this SAB in the adoption of SFAS 123R. The effect of expensing stock options on results of operations using a Black-Scholes option-pricing model is presented in these financial statements above under Stock Based Compensation. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. The Company expects to utilize the prospective method which requires that compensation expense begin being recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R. The Company is evaluating the requirements of SFAS 123R and expects the adoption of SFAS 123R will have a material impact on results of operations and earnings (loss) per share. The Company has not determined whether the adoption will result in amounts similar to the current pro-forma disclosures under SFAS 123.

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.

RECLASSIFICATIONS

Where necessary, the prior year’s information has been reclassified to conform with the fiscal 2005 statement presentation.

F-17

Table of Contents

American Technology Corporation

Notes to the Financial Statements

1. INVENTORIES

Inventories consisted of the following at September 30,	2005			2004
Finished goods	$	790,707		$	342,647
Work in process		-			-
Raw materials		1,699,946			418,448
		2,490,653			761,095
Reserve for obsolescence		(691,206	)		(110,000	)
	$	1,799,447		$	651,095

At September 30, 2005, $148,826 of raw materials and $-0- of finished goods were located at contract manufacturing locations. At September 30, 2004, $79,036 of raw materials and $355,879 of finished goods were located at a contract manufacturing location.

The Company is reliant on one supplier for film for its HSS product and is making efforts to obtain alternative suppliers to reduce its reliance thereon. The Company could be materially impacted if it loses its current film supplier and is unable to find an alternative supplier.

2. EQUIPMENT

Equipment consisted of the following at September 30,	2005			2004
Machinery and equipment	$	321,198		$	604,994
Office furniture and equipment		963,005			816,714
Leasehold improvements		202,987			225,178
		1,487,190			1,646,886
Accumulated depreciation		(880,319	)		(1,193,531	)
Net equipment	$	606,871		$	453,355

Included in office furniture and equipment for the years ended September 30, 2005 and 2004, respectively are $472,277 and $335,691 for purchased software, which is amortized over three years. The unamortized portion of software for the years ended September 30, 2005 and 2004, are $206,639 and $177,930, respectively.

Depreciation expense, excluding amortization of software, was $192,347, $96,164 and $130,916 for the years ended September 30, 2005, 2004 and 2003, respectively. Amortization of purchased software was $111,999, $46,675 and $26,488 for the years ended September 30, 2005, 2004 and 2003, respectively.

3. INTANGIBLES

Purchased Technology

In April 2000, the Company acquired all rights to certain loudspeaker technology for cash and common stock valued at an aggregate of $1,262,500. During fiscal 2002 the Company issued 50,000 shares of the contingent common stock, which was issuable contingent upon the achievement of certain performance milestones, recording compensation expense of $210,000 at an estimated fair market value of $4.20 per share, and during fiscal 2003 issued 109,844 shares of the contingent common stock, recording compensation expense of $410,816. The purchase price was fully amortized at September 30, 2003.

F-18

Table of Contents

American Technology Corporation

Notes to the Financial Statements

Patents

Patents consisted of the following at September 30, 2005 and 2004:

At September 30,	2005			2004
Cost	$	1,792,619		$	1,578,578
Accumulated amortization		(419,461	)		(299,871	)
Net patent	$	1,373,158		$	1,278,707

Aggregate amortization expense for the Company’s intangible assets is summarized as follows:

Years Ended September 30,	2005		2004		2003
Purchased technology	$	-	$	-	$	315,636
Patents		140,220		97,109		79,544
	$	140,220	$	97,109	$	395,180

In addition to amortization, the Company wrote off $40,916, $37,798 and $-0- of patent costs during the years ended September 30, 2005, 2004 and 2003, respectively.

Estimated Amortization Expense Years Ended September 30,
2006	$	119,508
2007	$	119,508
2008	$	119,508
2009	$	119,508
2010	$	119,508
Thereafter	$	775,618

F-19

Table of Contents

American Technology Corporation

Notes to the Financial Statements

4. INCOME TAXES

Income taxes consisted of the following:
Years Ended September 30,	2005			2004			2003
Deferred (benefit)
Federal	$	(3,311,000	)	$	(2,033,000	)	$	(2,801,000	)
State		(584,000	)		(359,000	)		(494,000	)
		(3,895,000	)		(2,392,000	)		(3,295,000	)
Change in valuation allowance		3,895,000			2,392,000			3,295,000
	$	-		$	-		$	-

A reconciliation of income taxes at the federal statutory rate of 34% to the effective tax rate is as follows:

Years Ended September 30,	2005			2004			2003
Income taxes (benefit) computed at the
federal stautory rate	$	(3,089,000	)	$	(2,027,000	)	$	(2,797,000	)
Tax effect of change in valuation allowance		3,895,000			2,392,000			3,019,000
Nondeductible compensation,
interest expense and other		15,000			30,000			306,000
State income taxes (benefit), net of federal tax benefit		(545,000	)		(358,000	)		(494,000	)
Other		(276,000	)		(37,000	)		(34,000	)
	$	-		$	-		$	-

The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset (liability) at September 30, 2005 and 2004 are as follows:

	At September 30,
Deferred tax assets:	2005			2004
Net operating loss carryforwards	$	18,789,000		$	14,982,000
Research and development credit		350,000			228,000
Equipment		111,000			75,000
Patents		119,000			59,000
Purchased technology		-			75,000
Accruals and other		540,000			365,000
Allowances		326,000			46,000
Gross deferred tax asset		20,235,000			15,830,000
Less valuation allowance		(20,235,000	)		(15,830,000	)
	$	-		$	-

The utilization of the net operating loss carry-forwards and research and experimental credits could be substantially limited due to restrictions imposed under federal and state laws upon a change of ownership. The amount of the limitation, if any, has not been determined at this time.

A valuation allowance has been recorded to offset the net deferred tax asset as management has been unable to determine that it is more likely than not that the deferred tax asset will be realized.

F-20

Table of Contents

American Technology Corporation

Notes to the Financial Statements

At September 30, 2005, the Company, for federal income tax purposes, has net operating loss carry-forwards of approximately $46,972,000, which expire through 2026, of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended.

5. UNSECURED SUBORDINATED PROMISSORY NOTES AND RELATED PARTY TRANSACTIONS

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 accrued at the rate of 8% per year and was due and payable quarterly. The Company was required to use 40% of the net proceeds of any future equity financing to prepay these notes, and accordingly the notes and accrued interest were retired in July 2005 (see Note 6).

In connection with the issuance of the notes, the purchasers were granted warrants to purchase an aggregate of 150,000 shares of common stock. The exercise price of the warrants was $9.28 per share for purchasers who were directors, officers, employees or consultants of the Company, or affiliates of such persons, and $8.60 per share for other purchasers. Warrants exercisable for 75,000 shares were issued at each such exercise price. The fair value of such warrants, which amounted to $723,000, and closing costs of $20,977 were recorded as debt discount and amortized over the term of the notes and fully amortized at repayment. 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.

The Company is also obligated to pay Elwood G. Norris, our Chairman, a 2% royalty on net sales from certain of our technologies, of which only HSS is a current offering of our company. The royalty obligation continues until at least March 1, 2007, and for any longer period during which we sell products or license technologies subject to any patent assigned to us by Mr. Norris. No royalties were paid or recorded under this agreement in the fiscal years ended September 30, 2005, 2004, or 2003, as these royalties were immaterial and were waived by Mr. Norris.

6. CAPITAL STOCK

Common Stock

In July 2003, the Company obtained gross proceeds of $10,000,000 from an offering of common stock and warrants. The offering included 1,818,180 shares of common stock at a purchase price of $5.50 per share and warrants to purchase 454,547 shares of common stock with an exercise price of $6.75 per share. The warrants are exercisable until July 10, 2007. The warrants contain certain antidilution rights if the Company sells common stock equivalents, as defined, for less than $6.75 and were repriced to $6.55 as a result of the July 2005 financing described below. Offering costs were $545,000.

In July 2005, the Company obtained gross proceeds of $14,000,000 from an offering of common stock and warrants. The offering included 2,868,851 shares of common stock at a purchase price of $4.88 per share and warrants in two series to purchase 1,581,919 shares of common stock. Offering costs were $828,176 and an additional $2,896,000 was allocated as the deemed value of the warrants as described below. The “A” Warrants are exercisable for an aggregate of 717,213 shares of common stock at an exercise price of $6.36 per share until July 18, 2009. The “B” Warrants are exercisable for an aggregate of 864,706 shares of common stock at an exercise price of $7.23 per share and are exercisable until March 28, 2006. The warrants contain certain antidilution rights adjusting the price and number of shares if the Company sells common stock equivalents or for certain other specified transactions, for less than the exercise price of the warrants. The Company has the right to redeem the “B” Warrants if the closing price of the shares of its common stock is $10.00 or greater for 15 consecutive trading days and the holder does not exercise within 20 days after the Company gives notice of redemption. The registration statement for these securities was declared effective in September 2005.

F-21

Table of Contents

American Technology Corporation

Notes to the Financial Statements

Although the Company can deliver unregistered shares on exercise of the warrants and is not obligated to cash settle the warrants, the Company may be required to pay a monthly penalty to the purchasers of up to $140,000 (maximum of $70,000 per month through December 2005), with no contractual maximum, should the registration statement not remain effective for the securities. The Company has determined this penalty does not represent a reasonable difference between the value of registered and unregistered shares, that the events to deliver registered shares are not entirely controlled by the Company and that settling with unregistered shares is not an economically reasonable alternative. Accordingly, following the interpretive guidance in EITF Issue No. 05-4, ‘The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock’, the Company allocated $2,896,000 of the offering proceeds as a deemed liability for the value of the warrants at the time of issuance. The consensus of EITF Issue No. 05-4 has not been finalized.

EITF Issue 00-19 also requires the Company to revalue the warrants as a derivative instrument periodically to compute the value in connection with changes in the underlying stock price and other assumptions, with the change in value recorded as non-cash income or expense. From the issuance date to September 30, 2005, non-cash income of $1,050,000 was recorded as unrealized gain on derivative revaluation to reflect the change in value of the warrants. Upon the earlier of warrant exercise, expiration or the warrants no longer being subject to penalties, the corresponding warrant liability will be reclassified into warrant stockholders’ equity. At September 30, 2005, the “B” Warrants have a six-month term and therefore the related derivative liability of $282,000 is included in current liabilities. The “A” Warrant derivative liability of $1,564,000 is treated as a long-term liability.

Preferred Stock

The Company is authorized to issue 5,000,000 shares of preferred stock, $0.00001 par value, without any action by the stockholders. The board of directors has the authority to divide any and all shares of preferred stock into series and to fix and determine the relative rights and preferences of the preferred stock, such as the designation of series and the number of shares constituting such series, dividend rights, redemption and sinking fund provisions, liquidation and dissolution preferences, conversion or exchange rights and voting rights, if any. Issuance of preferred stock by the board of directors could result in such shares having dividend and or liquidation preferences senior to the rights of the holders of common stock and could dilute the voting rights of the holders of common stock.

In accordance with the terms of the Series D and E preferred stock, in January 2005, the Company gave notice of mandatory conversion and all remaining shares of preferred stock were converted to common stock. Accordingly, no shares of preferred stock were outstanding at September 30, 2005. The following is a summary of the terms of previous preferred stock series outstanding during the last three fiscal years.

F-22

Table of Contents

American Technology Corporation

Notes to the Financial Statements

			Number of
			Shares
Preferred	Issuance	Aggregate	Authorized/
Series	Date	Purchase Price	Originally Issued	Terms
6% Series C issued at $20.00 per share	March 2000	$6,000,000	300,000/300,000	Purchase price plus 6% accretion convertible at lower of $8.00 per share or 92% of market but not less than $5.75 per share. Callable at market price of $20.00 per share. Automatic conversion to common stock on March 31, 2003.
6% Series D issued at $10.00 per share	May 2002	$2,354,000	250,000/235,400	Purchase price plus 6% accretion convertible at lower of $4.50 per share or 90% of market but not less than $2.00 per share, subject to antidilution adjustment. Callable at market price of $9.50 per share. Automatic conversion to common stock on March 31, 2007
6% Series E issued at $10.00 per share	March 2003	$3,432,500	350,000/343,250	Purchase price plus 6% accretion convertible at lower of $3.25 per share or 90% of market but not less than $2.00 per share, subject to antidilution adjustment. Callable at market price of $9.50 per share. Automatic conversion to common stock on December 31, 2007

The above preferred shares were sold for cash except that $1,000,000 of the Series E Stock purchase price resulted from the conversion of senior notes payable. In connection with the Series C preferred stock financing, the Company issued a warrant to purchase 75,000 shares of common stock at $11.00 per share until March 31, 2005 as a placement fee. The value assigned to the warrant was $468,783.

The Company granted warrants to the purchasers with each issuance of preferred stock. In accordance with the provisions of EITF Issue No. 98-5, “Accounting for Convertible Securities with the Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments,” the cash proceeds of the preferred stock were allocated prorata between the relative fair values of the preferred stock and warrants at issuance using the Black-Scholes valuation model for valuing the warrants. After allocating the proceeds between the preferred stock and warrant, an effective conversion price was calculated for the convertible preferred stock to determine the beneficial conversion discount for each share. The value of the beneficial conversion discount and the value of the warrants was recorded as a deemed dividend and accreted over the conversion period of the preferred stock or upon exercise of the related warrant, if earlier. The following table summarizes values assigned as a deemed dividend for the value of the warrants, the beneficial conversion feature on each preferred stock issuance and the accretion included to compute the net loss available to common stockholders in each of the three fiscal years ended September 30, 2005.


					Deemed Dividend
					Value	Value Of
			Warrant	Warrant	Assigned	Beneficial	Accretion
Preferred	Issuance	Number	Exercise	Expiration	To	Conversion	Fiscal Year Ended September 30,
Series	Date	Of Warrants	Price	Date	Warrants	Discount	2005	2004	2003
6% Series C	March 2000	300,000	$11.00	3/31/2003	$ 1,478,000	$ 2,509,000	$ -	$ -	$ -
6% Series D	May 2002	517,880	$3.01	3/31/2007	$ 1,029,519	$ 994,310	$ 363,527	$ 322,555	$ 1,027,063
6% Series E	March 2003	514,875	$3.25	12/31/2007	$ 755,500	$ 2,677,000	$ 1,375,527	$ 862,466	$ 1,194,507

The Series D warrants were originally exercisable at $4.50 per common share and valued at $871,000. The Series E financing resulted in a repricing of the Series D Warrants to $3.01 per common share and an additional $158,519 was assigned to the warrant value. The Series D Warrants were valued using the Black-Scholes model with a dividend yield of zero percent; expected volatility of 78 percent; risk free interest rate of 4.94 percent; and an expected life of five years. The Series E Warrants were valued using the Black-Scholes model with a dividend yield of zero percent; expected volatility of 76.5 percent; risk free interest rate of 4.0 percent; and an expected life of five years.

F-23

Table of Contents

American Technology Corporation

Notes to the Financial Statements

Stock Purchase Warrants

A summary of the status of outstanding purchase warrants outstanding as of September 30, 2003, 2004 and 2005 and the changes during the years then ended is presented below:

				Average
				Purchase
	Number			Price
Shares purchasable under outstanding warrants at October 1, 2002		2,105,380		$	4.85
Stock purchase warrants issued		1,019,422		$	4.83
Stock purchase warrants exercised		(347,000	)	$	2.60
Stock purchase warrants expired		(350,000	)	$	11.71
Shares purchasable under outstanding warrants at September 30, 2003		2,427,802		$	3.85
Stock purchase warrants exercised		(25,000	)	$	2.00
Stock purchase warrants expired		(50,000	)	$	10.00
Shares purchasable under outstanding warrants at September 30, 2004		2,352,802		$	3.74
Stock purchase warrants issued		2,006,919		$	7.23
Stock purchase warrants exercised		(432,068	)	$	4.13
Stock purchase warrants expired		(350,000	)	$	9.11
Shares purchasable under outstanding warrants at September 30, 2005		3,577,653		$	5.11

At September 30, 2005, the following stock purchase warrants were outstanding arising from offerings and other transactions, each exercisable into one common share:

	Exercise	Expiration
Number	Price	Date

864,706	$7.23	March 28, 2006
617,500	$2.00	September 30, 2006
451,880	$3.01	March 31, 2007
272,729	$6.55	July 10, 2007
100,000	$4.25	September 30, 2007
353,625	$3.25	December 31, 2007
50,000	$3.63	April 8, 2008
717,213	$6.36	July 18, 2009
75,000	$8.60	December 31, 2009
75,000	$9.28	December 31, 2009
3,577,653

The $3.01 warrants, the $3.25 warrants, the $6.36 warrants, the $6.55 warrants and the $7.23 warrants contain certain antidilution rights if the Company sells securities for less than the exercise price.

7. BENEFIT PLANS

Stock Option Plans

The 2005 Equity Incentive Plan (“2005 Equity Plan”) became effective in April 2005, and authorizes for issuance as stock options, stock appreciation rights, or stock awards an aggregate of 1,500,000 new shares of common stock to employees, directors or consultants. The reserve under the 2005 Equity Plan will include any shares subject to options under the Company’s prior plans that expire or become unexercisable for any reason without having been exercised in full. As a result of the effectiveness of the 2005 Equity Plan, the 2002 Plan is no longer available for new option grants.

F-24

Table of Contents

American Technology Corporation

Notes to the Financial Statements

At the effective date of the 2005 Equity Plan, approximately 1,660,811 shares were subject to option under prior plans. The total plan reserve, including the new shares and shares currently reserved under prior plans, allows for the issuance of up to 3,312,501 shares. At September 30, 2005, there were options outstanding covering 250,000 shares of common stock and 1,500,228 shares available for future option grants under the 2005 Equity Plan.

The 2002 Plan reserved for issuance 2,350,000 shares of common stock. The 2002 Plan was terminated with respect to new grants in April 2005 but remains in effect for grants prior to that time. At September 30, 2005, there were options outstanding covering 1,151,810 shares of common stock under the 2002 Plan. The Company’s 1997 Stock Option Plan (“1997 Plan”) reserved for issuance 1,000,000 shares of common stock. The 1997 Plan was terminated with respect to new grants in August 2002, but remains in effect for grants prior to that time.

Shares subject to options under the 1997 Plan or the 2002 Plan that expire, are cancelled or are terminated without being exercised, become available for future grants under the 2005 Equity Plan. At September 30, 2005, there were options outstanding covering 292,000 shares of common stock under the 1997 plan.

Other Employee Stock Options

The Company has granted options outside the above plans as inducements to employment to new employees. During the fiscal years ended September 30, 2005 and 2004, options to purchase 281,500 and 147,000 shares of common stock, respectively, were granted exercisable at prices ranging from $6.21 to $10.06 per share in 2005 and $5.92 to $6.14 per share in 2004. At September 30, 2005, there were options outstanding covering 377,000 shares of common stock from grants outside the stock option plans.

Non-Cash Compensation Expense

During the fiscal years ended September 30, 2005 and 2004, the Company recorded non-cash compensation expense of $266,963 and $65,863, respectively, for the extension of time to exercise stock options for former employees relating to an aggregate of 92,675 and 28,438 shares of common stock, respectively, and in the fiscal year ended September 30, 2005, the Company recorded $57,619 for option expense relating to options for 68,125 shares held by an officer of the Company, who transitioned from employee to consultant. For the fiscal year ended September 30, 2005, the Company also recorded $6,160 of non-cash compensation expense for the value of 10,000 options granted to non-employees, which were valued in the same manner as described in “Summary of Accounting Policies” for employee options. For the fiscal year ended September 30, 2003, the Company recorded non-cash compensation expense of $25,597 for the granting of options to purchase 13,000 shares of common stock under its stock options plans to non-employees.

In October 2001, the Company granted options to purchase a total of 110,000 shares of common stock to a consultant under the 1997 Plan in conjunction with related development and manufacturing agreements. The stock options include options to purchase 65,000 shares of common stock which vest upon completion of certain project milestones. The Company has estimated the period required to complete the specified milestones each reporting period and recorded consulting expense based on the market price of the Company’s stock and the estimated percentage of the work completed. Consulting expense was adjusted each reporting period until vesting occurs. The Company recorded consulting expense of $87,179 for the Black-Scholes value of milestone options for 30,000 shares vested in fiscal year 2002 and consulting expense of $47,782 for the Black-Scholes value of 10,000 milestone options vested in fiscal year 2003. As of September 30, 2005 and 2004, there remained stock options to purchase 25,000 shares that were non-vested due to unmet project milestones. In addition, there remained options to purchase 45,000 shares of common stock that vested based on the consultant meeting certain performance criteria. The Company records consulting expense at each vesting date. The Company recorded consulting expense of $96,655 for the Black-Scholes value of performance options for 45,000 shares vested during the year ended September 30, 2002.

On April 8, 2003, the Company granted a warrant exercisable for 50,000 common shares at $3.63 per share to a consultant for consulting services. The Company recorded non-cash consulting expense of $106,616 for the value of this warrant.

Stock Option Summary Information

A summary of activity for the Company’s stock option plans as well as options granted outside the plans as of September 30, 2005, 2004 and 2003, is presented below:

F-25

Table of Contents

American Technology Corporation

Notes to the Financial Statements

				Weighted
				Average
				Exercise
	Number			Price
Fiscal 2003:
Outstanding October 1, 2002		1,459,175		$	3.97
Granted		979,000		$	3.96
Canceled/expired		(416,950	)	$	3.86
Exercised		(408,951	)	$	3.95
Outstanding September 30, 2003		1,612,274		$	4.00
Exercisable at September 30, 2003		998,722		$	3.79

Weighted average fair value of options granted during the year				$	1.78

Fiscal 2004:
Outstanding October 1, 2003		1,612,274		$	4.00
Granted		1,073,500		$	5.80
Canceled/expired		(553,703	)	$	3.63
Exercised		(292,573	)	$	5.49
Outstanding September 30, 2004		1,839,498		$	4.68
Exercisable at September 30, 2004		916,884		$	3.60

Weighted average fair value of options granted during the year				$	2.37

Fiscal 2005:
Outstanding October 1, 2004		1,839,498		$	4.68
Granted		847,500		$	7.49
Canceled/expired		(378,576	)	$	6.21
Exercised		(237,612	)	$	3.49
Outstanding September 30, 2005		2,070,810		$	5.68
Exercisable at September 30, 2005		1,026,690		$	4.43

Weighted average fair value of options granted during the year				$	2.74

The following table summarizes information about stock options outstanding at September 30, 2005:

		Weighted Average	Weighted		Weighted
Range of		Remaining	Average		Average
Exercise	Number	Contractual	Exercise	Number	Exercise
Prices	Outstanding	Life	Price	Exercisable	Price
$2.50-$4.00	565,561	1.39	$ 3.12	530,561	$ 3.16
$4.01-$5.50	341,249	3.05	$ 4.91	237,896	$ 4.83
$5.51-$7.00	742,250	4.01	$ 6.31	176,668	$ 6.39
$7.01-$8.50	121,250	3.34	$ 7.45	66,252	$ 7.23
$8.51-$10.10	300,500	4.37	$ 9.14	15,313	$ 8.96
$2.50-$10.10	2,070,810	3.15	$ 5.69	1,026,690	$ 4.45

Employee Benefit - 401K Plan

On January 1, 1998, the Company established a 401(k) plan covering its employees. The plan originated service effectively in June 1998. Matching contributions are made on behalf of all participants at the discretion of the Board of Directors. During the fiscal years ended September 30, 2005, 2004 and 2003, the Company made matching contributions of $41,793, $28,385 and $18,675 respectively.

F-26

Table of Contents

American Technology Corporation

Notes to the Financial Statements

8. COMMITMENTS AND CONTINGENCIES

Facility Leases

The Company’s executive offices, research and development and operational facilities in San Diego, California, are occupied under a sublease agreement that commenced in January 2004 and was to expire in July 2006. The Company currently occupies approximately 23,500 square feet of office, laboratory, production and warehouse space with aggregate monthly payments of approximately $28,000, exclusive of utilities and costs. In August 2005, the sublease was terminated and the Company entered into an attornment agreement providing for a facility lease through December 31, 2005 with an option to continue on a month-to-month basis after that date with the consent of the landlord. In November 2005 the Company entered into an amendment to the attornment agreement providing for an extension of the lease until January 31, 2006.

On December 20, 2005, the Company entered into a sublease agreement with Anacomp, Inc., as sublandlord, to sublease approximately 23,698 square feet of office, warehousing, product assembly, and research and development space. The sublease is for a term commencing January 1, 2006 and expiring May 31, 2011, with monthly payments of approximately $29,623 per month plus certain costs and charges specified in the sublease, including the Company’s proportionate share of the building operating expenses and real estate taxes.

The Company rents on a monthly basis space utilized for development and production of its NeoPlanar technology in Carson City, Nevada. The Company occupies approximately 2,200 square feet with a monthly payment of approximately $1,200 excluding utilities. The Company leases sales office space in Topsham, Maine consisting of approximately 1,700 square feet with a monthly payment of $2,592, excluding utilities. The lease expires on December 31, 2005 and the Company is negotiating the renewal of the lease.

Other Operating Leases

In addition to the facility lease, the Company has one automobile lease obligation expiring in May 2006. The Company also has three business equipment leases expiring from November 2006 to December 2008. These leases are reported as operating leases.

Total operating lease expense, including facilities, automobile and business equipment leases, recorded by the Company for the years ended September 30, 2005, 2004 and 2003 was $368,219, $345,330 and $206,084, respectively.

The obligations under all operating leases are as follows:

Year ending September 30:
2006	$	254,751
2007	$	367,943
2008	$	362,544
2009	$	356,584
2010	$	355,470

Employment Agreements

The Company entered into an employment agreement in October, 2005 with its president and chief operating officer that provides for severance benefits in the form of up to a maximum of six months of salary and health benefit continuation if his employment is terminated without cause or he resigns for good reason (Note 14). There are no other employment agreements with executive officers or other employees providing future benefits or severance arrangements. The Company has an agreement with an officer that provides for a royalty if the Company uses his technology. The terms of that agreement are currently under renegotiation.

Commission and Bonus Plans

The Company has established a sales commission plan, approved by the Compensation Committee of the Board of Directors, providing cash incentives to certain of the Company’s sales employees based on revenues recognized or amounts invoiced. In fiscal 2005 and 2004, the Company recorded $315,822 and $95,500 of commission expense, respectively.

Purchase Committments

The Company has a non-cancelable purchase agreement of $304,250 at September 30, 2005, for the purchase of raw materials used in the production of LRAD finished goods. The Company expects to fulfill this committment within the next year. For the year ended September 30, 2005, the Company incurred a cancellation fee of $195,200 relating to a prior purchase committment.

F-27

Table of Contents

American Technology Corporation

Notes to the Financial Statements

Certain of the Company’s employees, in accordance with their terms of employment, may earn cash bonuses based on the overall financial performance of the Company. In fiscal 2005 and 2004, $170,456 and $-0- of bonuses were paid or accrued for payment.

Litigation

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., (“ESI”, and, together with Endsley, Paschall, the “ESI Parties”), which purported to assume the contractual obligations of eSoundIdeas.

In April 2005, the Company and the ESI Parties entered into a Settlement Agreement and Mutual Release. As part of the settlement, the Company agreed to pay $150,000, which was previously accrued and recorded as a general and administrative expense, and to issue 17,500 shares of common stock to the ESI Parties. The fair market value of the 17,500 shares as of April 27, 2005 of $140,175, was recorded in the quarter ended March 31, 2005 as a general and administrative expense. In addition the ESI Parties will be entitled to receive an aggregate commission equal to 1% of net sales from April 1, 2005 to September 28, 2007, of the Company’s HSS products specifically targeted for use in North America in the point of sale/purchase, kiosk, display, event, trade show and exhibit markets, subject to a maximum aggregate commission of $500,000.

Related to the Company’s April 2000 purchase of the NeoPlanar speaker technology, the Company was in dispute with a predecessor owner of the technology regarding a minimum film royalty. In March 2004, the Company settled this matter for a payment of $25,000 and the issuance of 50,000 shares of common stock, which included a buyout of all future royalties.

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

In August 2003, the Company reached an agreement and in September 2003, the Company settled litigation related to the termination of an outside contract manufacturer, Horizon Sports Technologies, Inc. d/b/a HST. As part of the settlement the Company acquired raw materials and equipment for production valued at approximately $145,000. The Company paid settlement costs of $313,000 and recorded additional settlement costs for the $585,000 value assigned to 100,000 shares of common stock issued to HST. As part of the settlement, HST also entered into a nonexclusive royalty-bearing license to manufacture and sell speakers based on the Company’s Stratified Field technology and PureBass subwoofer technology and the Company transferred to HST tooling valued at approximately $43,000.

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.

Royalties

The Company is obligated to pay a $2.50 per unit royalty on one electronic component for its HSS product. The Company is also obligated to pay an officer and director a 2% royalty on net sales from certain of its technologies, of which only HSS is a current offering of the Company. The royalty obligation continues until at least March 1, 2007, and for any longer period during which the Company sells products or licenses technologies subject to any patent assigned to it by the officer/director. No royalties were paid under this agreement in the fiscal years ended September 30, 2005, 2004 and 2003, as such royalties were waived by the officer and director. The Company may owe royalties in future periods based on actual sales or technology revenues.

F-28

Table of Contents

American Technology Corporation

Notes to the Financial Statements

Liquidated Damages

In connection with the registration rights agreement entered into in connection with the sale of common stock in July 2005 (Note 6), the Company may be obligated to pay liquidated damages if it fails to maintain the effectiveness of the registration statement declared effective in September 2005. The maximum obligation, assuming all holders retained all their shares, would be $140,000 per month (maximum of $70,000 per month through December 2005) computed daily for any period a registration statement is not effective. The Company believes any such obligation will cease or substantially reduce in July 2007 when most if not all registrable securities may be sold under Rule 144(k) without registration.

9. WARRANTY RESERVE

Details of the estimated warranty liability are as follows:

Years Ended September 30:	2005			2004
Beginning balance	$	331,917		$	319,500
Warranty provision		71,731			101,671
Warranty deductions		(154,667	)		(89,254	)
Ending balance	$	248,981		$	331,917

10. EQUIPMENT UNDER CAPITAL LEASE

On October 1, 2001, the Company entered into a capital lease obligation for the purchase of a phone system. The lease expires September 11, 2006 and bears interest at 10.1%, with monthly principal and interest payments of $1,067. Future minimum lease payments and the present value of the minimum lease payments under the noncancelable lease obligation as of September 30, 2005 are as follows:

Year ending September 30:
2006	$	12,806
Total:	$	12,806

Total future minimum lease payments	$	12,806
Less amounts representing interest		(675	)
Present value of minimum lease payments		12,131
Less current maturities		(12,131	)
Total long-term obligations	$	-

At September 30, 2005, there was property and equipment under capital lease obligations with a total cost of $50,612 and accumulated amortization of $50,612.

11. MAJOR CUSTOMERS

For the fiscal year ended September 30, 2005, revenues from one customer in the Government Group accounted for 69% of revenues with no other single customer accounting for more than 10% of revenues. For the fiscal year ended September 30, 2004, revenues from two customers, both in the Government Group, accounted for 47% and 11% of revenues with no other single customer accounting for more than 10% of revenues. For the fiscal year ended September 30, 2003, revenues from one customer in the Government Group accounted for 24% of total revenue.

F-29

Table of Contents

American Technology Corporation

Notes to the Financial Statements

At September 30, 2005, accounts receivable from two customers accounted for 18% and 14% of total accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance. At September 30, 2004, accounts receivable from three customers accounted for 52%, 19% and 13% of total accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance.

12. SUPPLIER AGREEMENTS

The Company is reliant on contract manufacturers for production of certain HSS and LRAD components, sub-assemblies and products. The Company currently coordinates and manages production of its products with these suppliers but has in the past and may in the future arrange for turnkey production.

13. BUSINESS SEGMENT DATA

The Company is engaged in design, development and commercialization of sound, acoustic and other technologies. In the fourth quarter of fiscal 2003, the Company organized operations into two segments by the end-user markets they serve. The Company’s reportable segments are strategic business units that sell the Company’s products to distinct distribution channels. The Commercial Products Group (Commercial Group) licenses and markets HSS, LRAD, NeoPlanar and other sound products to companies that employ audio in consumer, commercial and professional applications. The Government & Military Group (Government Group) markets LRAD, NeoPlanar, and other 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.

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. Although the segments became separately managed only in the last quarter of fiscal 2003, the Company has segmented historical operations for comparable customers for comparison.

Years Ended September 30,	2005			2004			2003
Revenues:
Commercial Group	$	891,745		$	933,373		$	861,091
Government Group		9,303,801			4,819,176			454,335
	$	10,195,546		$	5,752,549		$	1,315,426
Gross Profit (Loss):
Commercial Group	$	(924,018	)	$	(534,174	)	$	(501,748	)
Government Group		5,495,204			2,816,902			273,097
	$	4,571,186		$	2,282,728		$	(228,651	)

The following table summarizes revenues by geographic region. Revenues are attributed to countries based on location of customer.

Years Ended September 30,	2005		2004		2003
Revenues:
United States	$	9,866,583	$	5,675,088	$	1,167,120
Other		328,963		77,461		148,306
	$	10,195,546	$	5,752,549	$	1,315,426

F-30

Table of Contents

American Technology Corporation

Notes to the Financial Statements

14. SUBSEQUENT EVENTS

In October 2005, the Company entered into a letter agreement with John R. Zavoli as President and Chief Operating Officer, effective November 1, 2005. The letter agreement provides for an annual base salary of $250,000 and eligibility for an annual bonus. Mr. Zavoli was granted an option to purchase 100,000 shares of common stock exercisable at $4.78 per share vesting over four years. Mr. Zavoli is entitled to severance benefits in the form of up to a maximum of six months of salary and health benefit continuation if employment is terminated without cause or he resigns for good reason.

In October 2005, the Company entered into a separation and release agreement with its former president and chief operating officer. The agreement provided that the Company would make a one-time payment of $82,500 and would pay health benefit premiums for a period not to extend beyond February 28, 2006. The Company also extended until February 15, 2006 the period of time for which the vested portion of his stock options may be exercised.

Michael A. Russell, the Company’s Chief Financial Officer, resigned from his employment on December 16, 2005. On December 16, 2005, the board of directors appointed John R. Zavoli as the Interim Chief Financial Officer to replace Mr. Michael A. Russell. Mr. Zavoli's employment terms did not change as a result of this appointment.

On December 16, 2005, Karen Jordan was appointed as Chief Accounting Officer. Ms. Jordan, joined the Company in November 2005 as Director of Finance.

On December 20, 2005, the Company entered into a sublease agreement with Anacomp, Inc., as sublandlord, to sublease approximately 23,698 square feet of office, warehousing, product assembly, and research space located at 15378 Avenue of Science, San Diego, California 92118. The sublease is for a term commencing January 1, 2006 and expiring May 31, 2011. The agreement provides for a monthly expense of $29,622.50 (i.e., $1.25 per rentable square foot) during the term. In addition to the monthly base rental expense, we will be responsible for certain costs and charges specified in the sublease, including the Company’s proportionate share of the building operating expenses and real estate taxes.

In addition, the sublease provides that the Company has a right of first refusal on additional space in the building, which contains a total of 68,910 square feet including our premises. Anacomp will also provide a $10,000 tenant improvement allowance towards the completion of lobby improvements and a $50,000 letter of credit in the Company’s favor which we may draw upon to the extent necessary to offset any increase in our rent or relocation costs that is incurred due to Anacomp's failure to maintain the lease with the master landlord for the building.

F-31

Table of Contents

American Technology Corporation

Notes to the Financial Statements

15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Years Ended September 30,	2005		2004		2003
Supplemental Information:
Cash paid for interest	$	93,457	$	2,889	$	111,886
Cash paid for taxes	$	11,076	$	14,537	$	2,467

Non-cash financing activities:
Senior notes applied to warrant exercise	$	-	$	-	$	681,845
Senior notes applied to purchase of Series E stock	$	-	$	-	$	1,000,000
12% subordinated notes and interest
converted to common stock	$	-	$	-	$	2,435,032
Sale of equipment for accounts payable	$	-	$	-	$	117,000
Warrants issued for offering costs	$	2,896,000	$	-	$	-
Warrants issued for debt financing	$	723,000	$	-	$	-
Common stock issued on conversion of Series C stock	$	-	$	-	$	236,498
Common stock issued on conversion of Series D stock	$	581,666	$	-	$	1,935,559
Common stock issued on conversion of Series E stock	$	2,604,238	$	320,414	$	823,208
Common stock issued for legal settlement	$	140,175	$	248,000	$	-

16. SUMMARIZED QUARTERLY RESULTS (unaudited)

The following table presents unaudited operating results for each quarter within the two most recent years. The Company believes that all necessary adjustments consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the following quarterly results when read in conjunction with the financial statements included elsewhere in this report. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full fiscal year.

	First			Second			Third			Fourth			Total
	Quarter			Quarter			Quarter			Quarter			Year
Fiscal 2005
Revenues	$	4,408,913		$	2,817,393		$	1,393,798		$	1,575,442		$	10,195,546
Gross profit (loss) (1)	$	2,881,210		$	1,363,427		$	402,006		$	(75,458	)	$	4,571,185
Net loss	$	(1,526,850	)	$	(1,613,016	)	$	(3,592,769	)	$	(2,354,072	)	$	(9,086,707	)
Loss per Share (2)	$	(0.09	)	$	(0.15	)	$	(0.17	)	$	(0.09	)	$	(0.50	)

		First			Second			Third			Fourth			Total
		Quarter			Quarter			Quarter			Quarter			Year
Fiscal 2004
Revenues	$	774,778		$	1,493,250		$	2,107,281		$	1,377,240		$	5,752,549
Gross profit (loss) (1)	$	366,300		$	548,026		$	1,100,962		$	267,440		$	2,282,728
Net loss	$	(1,136,427	)	$	(1,165,196	)	$	(1,390,411	)	$	(2,268,402	)	$	(5,960,436	)
Loss per Share (2)	$	(0.07	)	$	(0.08	)	$	(0.09	)	$	(0.11	)	$	(0.37	)

(1)

Gross profit is calculated by subtracting cost of revenues from total revenues.

(2)

Loss per share is computed independently for each quarter and the full year based on respective average shares outstanding. Therefore the sum of the quarterly net loss per share amounts may not equal the annual amounts reported.

F-32

Table of Contents

Schedule II - Valuation and Qualifying Accounts

ALLOWANCE FOR DOUBTFUL ACCOUNTS

	Balance at		Charged to				Balance
	Beginning		Cost and				at End of
Description	of Period		Expenses		Deductions		Period
Year ended September 30, 2005	$	25,000	$	102,492	$	2,492	$	125,000

Year ended September 30, 2004	$	25,000	$	-	$	-	$	25,000

Year ended September 30, 2003	$	20,191	$	4,809	$	-	$	25,000


RESERVE FOR OBSOLESCENCE

		Balance at		Charged to				Balance
		Beginning		Cost and				at End of
Description		of Period		Expenses		Deductions		Period
Year ended September 30, 2005	$	110,000	$	784,150	$	202,944	$	691,206

Year ended September 30, 2004	$	20,000	$	90,000	$	-	$	110,000

Year ended September 30, 2003	$	20,000	$	-	$	-	$	20,000


WARRANTY RESERVE

		Balance at		Charged to				Balance
		Beginning		Cost and				at End of
Description		of Period		Expenses		Deductions		Period
Year ended September 30, 2005	$	331,917	$	71,731	$	154,667	$	248,981

Year ended September 30, 2004	$	319,500	$	101,671	$	89,254	$	331,917

Year ended September 30, 2003	$	6,313	$	313,187	$	-	$	319,500

F-33

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 December 29, 2005

	By:	/s/ ELWOOD G. NORRIS
		Elwood G. Norris Chairman of the Board

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Elwood G. Norris and John R. Zavoli, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant in the capacities and on the dates indicated.

Date: December 29, 2005	By:	/s/ ELWOOD G. NORRIS
		Elwood G. Norris
		Chairman of the Board and Director
		(Co-Principal Executive Officer)

Date: December 29, 2005	By:	/s/ JOHN R. ZAVOLI
		John R. Zavoli
		President, Chief Operating Officer and Director
		Interim Chief Financial Officer
		(Co-Principal Executive Officer and Principal Financial Officer)

Date: December 29, 2005	By:	/s/ KAREN JORDAN
		Karen Jordan,
		Chief Accounting Officer
		(Principal Accounting Officer)

Date: December 29, 2005	By:	/s/ RICHARD M. WAGNER
		Richard M. Wagner
		Director

Date: December 29, 2005	By:	/s/ DAVID J. CARTER
		David J. Carter
		Director

Date: December 29, 2005	By:	/s/ DANIEL HUNTER
		Daniel Hunter
		Director

Table of Contents

DELAWARE		87-0361799
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

13114 Evening Creek Drive South, San Diego, California		92128
(Address of principal executive offices)		(Zip Code)

	TABLE OF CONTENTS
		Page
PART I
ITEM 1.	Business	1
	Overview	1
	Recent Customers and Partners	2
	Operating Segment Reporting	2
	Our Technology and Products	4
	Strategy	5
	Manufacturing and Suppliers	6
	Selling, Marketing and Customers	6
	Warranties	6
	Competition	7
	Seasonality	7
	Government Regulation and Environmental Matters	7
	Intellectual Property Rights and Proprietary Information	9
	Research and Development	11
	Executive Officers	11
	Employees	12
ITEM 2.	Properties	13
ITEM 3.	Legal Proceedings	13
ITEM 4.	Submission of Matters to a Vote of Security Holders	13

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related
	Stockholder Matters and Issuer Purchases of Equity Securities	13
ITEM 6.	Selected Financial Data	14
ITEM 7.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations	14
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
ITEM 8.	Financial Statements and Supplementary Data	36
ITEM 9.	Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure	36
ITEM 9A.	Controls and Procedures	36
ITEM 9B.	Other Information	39

PART III
ITEM 10.	Directors and Executive Officers of the Registrant	40
ITEM 11.	Executive Compensation	40
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters	40
ITEM 13.	Certain Relationships and Related Transactions	40
ITEM 14.	Principal Accounting Fees and Services	40

PART IV
ITEM 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	41
	Financial Statements and Financial Statement Schedules	F-1
Signatures
Exhibit Index


Key Patent and Patent Application Titles		Coverage
Acoustic Heterodyne Device and Method		Virtual loudspeaker projection, controlling virtual projection attributes and direction with a computer driver and in ear applications for HSS
Piezoelectric Film Sonic Emitter		Piezoelectric film based emitters
Parametric Loudspeaker w/ Electro-Acoustical One stage Diaphragm Transducer		All film type transducers for HSS
Modulator Processing for a Parametric Loudspeaker		Advanced distortion correction
Parametric Loudspeaker with Improved Phase Characteristics		Ideal tuning of parametric carriers for maximum efficiency
Power Amplification for Parametric Loudspeakers		All high efficiency switch-mode power amplifiers for HSS
Modulator-Amplifier		Specialized integration of very high efficiency power amplification and modulation electronics for HSS
Parametric Virtual Speaker and Surround Sound System		HSS for virtual surround sound
Pre-encoded Signals for Playback though a Parametric Loudspeaker System		Pre recorded HSS processing for reduced processing cost and hardware
Dynamic Carrier System for Parametric Arrays		Reduced power consumption and increased efficiency in HSS


Key Patent Title		Coverage
A High Intensity Directional Electro-acoustic Sound Generating System for Communications Targeting		High Intensity Directional Acoustic Array Long Range Acoustic Device - LRAD™
Single End Planar Magnetic Speaker		a) Single Ended, Planar Magnetic loudspeaker w/high energy magnets b) High speed/low cost planar film diaphragm production c) Specialized film for use in planar magnetic loudspeakers
Improved Sing-Ended Planar Magnetic Speaker		Single ended planar magnetic loudspeaker with high energy magnetics
Planar Magnetic Speakers with Secondary Magnetic structure		Higher output, high fidelity planar magnetic transducer
Acoustically Asymmetric Band-Pass Loudspeaker with Multiple Acoustic Filters		a) Low distortion/High Powered Subwoofer b) Increased bandwidth subwoofer
Dynamic Power Sharing in a Multi-Channel Sound System		Power/cost savings, increased output in surround sound/home theater systems

	Bid Quotations
	High	Low
Fiscal Year Ending September 30, 2004
First Quarter	$6.19	$4.01
Second Quarter	$6.07	$4.05
Third Quarter	$7.77	$5.50
Fourth Quarter	$6.70	$4.38
Fiscal Year Ending September 30, 2005
First Quarter	$11.38	$5.50
Second Quarter	$11.55	$7.75
Third Quarter	$9.28	$5.36
Fourth Quarter	$6.75	$4.96

For the fiscal years ended September 30,

	2005			2004			2003			2002			2001
Statement of Operations:
Net revenues	$	10,195,546		$	5,752,549		$	1,315,426		$	1,010,752		$	855,342
Gross profit (loss)	$	4,571,185		$	2,282,728		$	(228,651	)	$	326,908		$	277,066
Net loss	$	(9,086,707	)	$	(5,960,436	)	$	(8,227,013	)	$	(8,220,132	)	$	(5,046,219	)
Net loss available to common stockholders	$	(10,883,133	)	$	(7,325,785	)	$	(10,636,241	)	$	(8,503,044	)	$	(5,166,941	)
Net loss per share-basic and diluted	$	(0.50	)	$	(0.37	)	$	(0.67	)	$	(0.60	)	$	(0.38	)
Weighted average number of shares-basic and diluted		21,570,002			19,603,265			15,857,569			14,193,508			13,563,101

As of September 30,
		2005			2004			2003			2002			2001
Working capital	$	9,726,309		$	3,472,984		$	8,484,210		$	554,713		$	892,040
Total assets	$	15,208,870		$	7,645,291		$	11,744,371		$	3,789,634		$	3,837,284
Long-term obligations	$	1,564,000		$	12,131		$	23,097		$	3,153,012		$	-
Total stockholders' equity (deficit)	$	10,142,338		$	5,192,915		$	9,728,171		$	(884,882	)	$	2,993,495

Contractual Obilgations	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Capital leases	$	12,806	$	12,806	$	-	$	-	$	-
Operating leases	$	2,082,417	$	491,737	$	730,500	$	712,065	$	148,115
Purchase committments	$	304,250	$	304,250	$	-	$	-	$	-
Total contractual cash obligations	$	2,399,473	$	808,793	$	730,500	$	712,065	$	148,115

3. Articles of Incorporation and Bylaws

	3.1	Certificate of Incorporation of American Technology Corporation (Delaware) dated March 1, 1992. Filed as Exhibit 2.1 on Form 10-SB effective August 1, 1994.

	3.1.1	Amendment to Certificate of Incorporation of American Technology Corporation dated March 24, 1997 and filed with Delaware on April 22, 1997. Filed as Exhibit 3.1.1 on Form 10-QSB for the quarter ended March 31, 1997, dated May 13, 1997.

	3.1.2	Corrected Certificate of Designations of Series A Convertible Preferred Stock dated and filed with Delaware on August 25, 1997. Filed as Exhibit 3.1.3 on Form 8-K dated August 29, 1997.

	3.1.3	Corrected Certificate of Designations of Series B Convertible Preferred Stock filed with Delaware on December 23, 1998. Filed as Exhibit 3.1.4 on Form 10-KSB for the year ended September 30, 1998, dated December 29, 1998.

	3.1.4	Corrected Certificate of Designation of Series C Preferred Stock filed with Delaware on April 19, 2000. Filed as Exhibit 3.1.5 on Form 8-K dated April 19, 2000.

	3.1.5	Certificate of Designation of Series D Preferred Stock filed with Delaware on May 3, 2002. Filed as Exhibit 3.1 on Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002.

	3.1.6	Certificate of Amendment to Certificate of Incorporation filed with Delaware on September 26, 2002. Filed as Exhibit 3.1.6 on Form 10-K for the year ended September 30, 2002, dated December 23, 2002.

	3.1.7	Certificate of Designation of Series E Preferred Stock filed with Delaware on February 28, 2003. Filed as Exhibit 4.2 on Form 8-K dated March 6, 2003.

	3.2		Amended and Restated Bylaws of American Technology Corporation. Filed as Exhibit 3.1 on Form 10-Q for the quarter ended March 31, 2004, dated May 5, 2004.

	3.3		Restated Bylaws of American Technology Corporation. Filed as Exhibit 3.1 on Form 10-Q for the quarter ended December 31, 2004, dated February 11, 2005.

10. Material Contracts

	10.1	Royalty Agreement between ATC and Elwood G. Norris dated September 3, 1985. Filed as Exhibit 6.2 on Form 10-SB effective August 1, 1994.+

	10.2	Assignment of Technology Agreement between ATC and Elwood G. Norris dated March 2, 1992. Filed as Exhibit 6.3 on Form 10-SB effective August 1, 1994.+

	10.2.1	Addendum Agreement to Assignment of Technology Agreement between ATC and Elwood G. Norris dated December 2, 1996. Filed as Exhibit 10.3.1 on Form 10-KSB for year ended September 30, 1996, dated December 13, 1996.+

	10.3	Amended and Restated Sublease Agreement between ATC and Smiths Industries Aerospace & Defense Systems, Inc. as amended, dated September 1, 2000. Filed as Exhibit 10.6.1 on Form 10-K for the year ended September 30, 2000, dated October 29, 2000.

	10.3.1	First Amendment to Amended and Restated Sublease Agreement, dated January 1, 2004. Filed as Exhibit 10.1 on Form 10-Q for the quarter ended March 31, 2004, dated May 5, 2004.

	10.3.2	Attornment Agreement between ATC and LBA Realty Fund-Holding Co. I, LLC dated August 1, 2005.*

	10.3.3	First Amendment to Attornment Agreement between ATC and LBA Realty Fund-Holding Co. I, LLC dated November 15, 2005.*

	10.4	Employment Agreement dated as of September 1, 1997 between ATC and Elwood G. Norris filed as Exhibit 10.16 on Form 10-KSB for year ended September 30, 1997, dated December 1, 1997.+

	10.5	1997 Stock Option Plan as adopted on January 23, 1998 filed as Exhibit 10.1 on Form S-8 dated July 27, 1998.+

	10.5.1	Form of Incentive Stock Option Agreement under 1997 Stock Option Plan. Filed as Exhibit 10.5.1 on Form 10-K for the year ended September 30, 2004, dated December 28, 2004.+

	10.5.2	Form of Non-Statutory Stock Option Agreement under 1997 Stock Option Plan. Filed as Exhibit 10.5.2 on Form 10-K for the year ended September 30, 2004, dated December 28, 2004.+

	10.6	2002 Stock Option Plan. Filed as Exhibit 99.1 on Form S-8 dated November 18, 2002.+

	10.6.1	Form of Stock Option Grant Notice and Stock Option Agreement under 2002 Stock Option Plan. Filed as Exhibit 10.6.1 on Form 10-K for the year ended September 30, 2004, dated December 28, 2004.+

	10.7	Form of Stock Purchase Warrant exercisable until September 30, 2006 granted to accredited investors for an aggregate of 1,012,500 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 4.12 on Form 8-K dated October 12, 2001.

	10.8	Form of Stock Purchase Warrant exercisable until March 31, 2007 granted to investors for an aggregate of 517,880 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 10.2 on Form 10-Q for the quarter ended March 31, 2002, dated May 15, 2002.

	10.9	Form of Stock Purchase Warrant exercisable until December 31, 2007 granted to accredited investors for an aggregate of 514,875 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 4.3 on Form 8-K dated March 6, 2003.

	10.10	Securities Purchase Agreement dated July 11, 2003. Filed as Exhibit 4.1 on Form 8-K dated July 17, 2003.

	10.11		Registration Rights Agreement dated July 11, 2003. Filed as Exhibit 4.2 on Form 8-K dated July 17, 2003.

	10.12		Form of Common Stock Warrant exercisable until July 10, 2007 granted to accredited investors for an aggregate of 454,547 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 4.3 on Form 8-K dated July 17, 2003.

	10.13		Employment Agreement of Kalani Jones dated August 28, 2003, as amended. Filed as Exhibit 10.29 on Form 10-K for the year ended September 30, 2003, dated December 29, 2003.+

	10.13.1		Separation and Release Agreement with Kalani Jones dated October 20, 2005.+*

	10.14		Employment Agreement of Carl Gruenler, as amended. Filed as Exhibit 10.30 on Form 10-K for the year ended September 30, 2003, dated December 29, 2003.+

	10.14.1		Separation and Release Agreement with Carl Gruenler dated June 15, 2005. Filed as Exhibit 99.1 on Form 8-K filed June 17, 2005.+

	10.14.2		Consulting Agreement with Carl Gruenler dated June 15, 2005. Filed as Exhibit 99.2 on Form 8-K filed June 17, 2005.+

	10.15		Form of Inducement Grant Notice and Inducement Stock Option Agreement. Filed as Exhibit 4.1 on Form 8-K dated September 28, 2004.+

	10.16		Table of Inducement Grants.+*

	10.17		Form of Special Stock Option. Filed as Exhibit 99.2 on Form S-8 dated November 18, 2002.+

	10.18		Employment Agreement of Michael Russell. Filed as Exhibit 10.1 on Form 10-Q for the quarter ended June 30, 2004, dated August 4, 2004.+

	10.19		Inducement Grant Notice and Inducement Stock Option Agreement of Michael Russell. Filed as Exhibit 10.28 on Form 10-K for the year ended September 30, 2004, dated December 28, 2004.+

	10.20		Employment Agreement of Joseph A. Zerucha. Filed as Exhibit 10.2 on Form 10-Q for the quarter ended December 31, 2003, dated February 12, 2004.+

	10.21		Separation Agreement of Joseph A. Zerucha. Filed as Exhibit 10.2 on Form 10-Q for the Form 10-Q for the quarter ended June 30, 2004, dated August 4, 2004.+

	10.22		Employment Agreement of Bruce Ehlers. Filed as Exhibit 10.1 on Form 10-Q for the quarter ended December 31, 2003, dated February 12, 2004.+

	10.23		Release Agreement of Bruce Ehlers. Filed as Exhibit 10.32 on Form 10-K for the year ended September 30, 2004, dated December 28, 2004.+

	10.24		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.

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

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

	10.27		Termination, Settlement and Release Agreement with Kingsbridge Capital Limited dated July 8, 2005. Filed as Exhibit 10.3 on Form 10-Q for the quarter ended June 30, 2005, dated August 9, 2005.

	10.28		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.+

	10.29		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.+

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

	10.31		Summary Sheet of Director and Executive Officer Compensation.*

	10.32		Employment offer letter for Bruce Gray effective March 21, 2005. Filed as Exhibit 10.2 on Form 10-Q for the quarter ended March 31, 2005, dated May 10, 2005.+

	10.33		Inducement Stock Option Grant Notice and Inducement Stock Option Agreement for Bruce Gray dated March 22, 2005. Filed as Exhibit 10.3 on Form 10-Q for the quarter ended March 31, 2005, dated May 10, 2005.+

	10.34		Commission Plan for Bruce Gray pursuant to Employment letter dated March 21, 2005, approved by the board of directors on September 28, 2005.+*^

	10.35		Securities Purchase Agreement dated July 14, 2005. Filed as Exhibit 99.1 on Form 8-K filed July 19, 2005.

	10.36		Registration Rights Agreement dated July 14, 2005. Filed as Exhibit 99.2 on Form 8-K filed July 19, 2005.

	10.37		Form of Warrant-A issued July 18, 2005. Filed as Exhibit 99.3 on Form 8-K filed July 19, 2005.

	10.38		Form of Warrant-B issued July 18, 2005. Filed as Exhibit 99.4 on Form 8-K filed July 19, 2005.

	10.39		Engagement letter with Olympus Securities, LLC dated July 15, 2005. Filed as Exhibit 99.5 on Form 8-K filed July 19, 2005.

	10.40		2005 Equity Incentive Plan as amended August 5, 2005. Filed as Exhibit 10.9 on Form 10-Q for the quarter ended June 30, 2005 dated August 9, 2005.+

	10.41		Form of Stock Option Agreement under the 2005 Equity Incentive Plan for grants prior to August 5, 2005. Filed as Exhibit 99.2 to Form S-8 filed June 2, 2005.+

	10.42		Form of Stock Option Agreement under the 2005 Equity Incentive Plan for grants on or after August 5, 2005. Filed as Exhibit 10.11 on Form 10-Q for the quarter ended June 30, 2005 dated August 9, 2005.+

	10.43		Form of Stock Award Agreement under the 2005 Equity Incentive Plan. Filed as Exhibit 10.12 on Form 10-Q for the quarter ended June 30, 2005 dated August 9, 2005.+

	10.44		Settlement Agreement and Mutual Release with eSoundIdeas, Inc., SoundIdeas, Greg O. Endsley, Douglas J. Paschall and Gordon & Holmes LLP dated April 27, 2005. Filed as Exhibit 10.14 on Form 10-Q for the quarter ended June 30, 2005 dated August 9, 2005.

	10.45		Registration Rights Agreement with Greg O. Endsley, Douglas J. Paschall and Gordon & Holmes LLP dated April 27, 2005. Filed as Exhibit 10.15 on Form 10-Q for the quarter ended June 30, 2005 dated August 9, 2005.

	10.46		Employment Agreement with James Croft III dated February 28, 2000.+*

	10.47		Employment Letter Agreement with John R. Zavoli dated October 17, 2005.+*

	10.48		Employment letter of Alan J. Ballard dated November 21, 2003.+*

	10.49		Employment letter of Rose Tomich-Litz dated November 29, 2005.+*

	10.50		Employment letter of Karen Jordan dated October 26, 2005, 2005.+*

	10.51		Sublease between ATC and Anacomp, Inc. dated December 13, 2005.*

	10.52		Separation Agreement between ATC and Michael A. Russell dated December 23, 2005.*

23. Consents of Experts and Counsel

		23.1	Consent of BDO Seidman, LLP.*

		23.2	Consent of Swenson Advisors, LLP.*

24. Power of Attorney

		24.1	Power of Attorney. Included on signature page.

31. Certifications

	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 John R. Zavoli, Co-Principal Executive Officer and 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, Co-Principal Executive Officer, John R. Zavoli, Co-Principal Executive Officer and Principal Financial Officer.*

* Filed concurrently herewith

+ Management contract or compensatory plan or arrangement. Exhibits 10.28, 10.29 and 10.30 are included as a management contract given that a trust affiliated with an officer, director and significant stockholder purchased a note and received a warrant in connection with that financing and is a party to those exhibits.

^ Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

Report of Independent Registered Public Accounting Firm	F-2

Report of Independent Registered Public Accounting Firm	F-5

Balance Sheets as of September 30, 2005 and 2004	F-6

Statements of Operations for the Years Ended September 30, 2005, 2004 and 2003	F-7

Statements of Stockholders’ Equity (Deficit) for the Years Ended September 30, 2005, 2004 and 2003	F-8 - F-9

Statements of Cash Flows for the Years Ended September 30, 2005, 2004 and 2003	F-10

Summary of Accounting Policies and Notes to Financial Statements	F-11 - F-32

Schedule II - Valuation and Qualifying Accounts	F-33