10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2002

or

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

For the transition period from                          to                          .

Commission File Number 0-24248

AMERICAN TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	87-03261799
(State or other jurisdiction of incorporation or organization)	(I.R.S. Empl. Ident. No.)

13114 Evening Creek Drive South, San Diego, California 92128

                        (Address of principal executive offices)                                         (Zip Code)

(858) 679-2114

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES    x    NO    ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $0.00001 par value	14,295,226
(Class)	(Outstanding at May 8, 2002)

AMERICAN TECHNOLOGY CORPORATION

INDEX

	Page
PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements:
Balance Sheets as of March 31, 2002 (unaudited) and September 30, 2001	3
Statements of Operations for the three and six months ended March 31, 2002 and 2001 (unaudited)	4
Statements of Cash Flows for the six months ended March 31, 2002 and 2001 (unaudited)	5
Notes to Interim Financial Statements	6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.    Quantitative and Qualitative Disclosures about Market Risk	18
PART II.    OTHER INFORMATION	18
Item 1.    Legal Proceedings	18
Item 2.    Changes in Securities and Use of Proceeds	18
Item 3.    Defaults upon Senior Securities	19
Item 4.    Submission of Matters to a Vote of Security Holders	19
Item 5.    Other Information	19
Item 6.    Exhibits and Reports on Form 8-K	19
SIGNATURES	20

2

AMERICAN TECHNOLOGY CORPORATION

BALANCE SHEETS

	March 31, 2002			September 30, 2001
	(unaudited)
ASSETS
Current Assets:
Cash	$	509,016		$	1,354,072
Trade accounts receivable, less allowance of $20,191 for doubtful accounts each period		166,135			117,584
Inventories [note 5]		170,008			197,013
Prepaid expenses and other		32,658			67,160
Total current assets		877,817			1,735,829
Equipment, net		418,655			516,208
Patents, net of accumulated amortization of $107,358 and $74,584		876,485			848,783
Purchased technology, net of accumulated amortization of $736,450 and $526,036 [note 6]		526,050			736,464
Total assets	$	2,699,007		$	3,837,284
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	576,254		$	321,775
Accrued liabilities and other:
Payroll and related		90,996			159,311
Deferred revenue		387,492			248,611
Interest		119,474			—
Other		36,133			114,092
12% Convertible Promissory Note, net of $1,215,000 and $800,000 for debt discount [note 7]		810,000			—
Total current liabilities		2,020,349			843,789
Commitments and contingencies [notes 6 and 8]
Stockholders’ equity [note 8]:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized
Series B Preferred stock 250,000 shares designated: 0 and 168,860 issued and outstanding, respectively		—			2
Series C Preferred stock 300,000 shares designated: 10,000 issued and outstanding.		—			—
Common stock, $0.00001 par value; 20,000,000 shares authorized 14,273,951 and 13,704,139 shares issued and outstanding		143			137
Additional paid-in capital		24,283,053			22,913,268
Accumulated deficit		(23,604,538	)		(19,919,912	)
Total stockholders’ equity		678,658			2,993,495
Total liabilities and stockholders’ equity	$	2,699,007		$	3,837,284

See accompanying notes to the interim financial statements

3

AMERICAN TECHNOLOGY CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months ended March 31,						For the six months ended March 31,
	2002			2001			2002			2001
Revenues:
Product sales	$	99,155		$	135,334		$	324,110		$	294,750
Contract and license		100,278			205,000			131,944			238,306
Total revenues		199,433			340,334			456,054			533,056
Cost of revenues		122,385			192,863			238,845			367,973
Gross profit		77,048			147,471			217,209			165,083
Operating expenses:
Selling, general and administrative		610,463			537,718			1,103,120			1,148,913
Research and development		987,060			731,494			1,880,997			1,595,414
Total operating expenses		1,597,523			1,269,212			2,984,117			2,744,327
Loss from operations		(1,520,475	)		(1,121,741	)		(2,766,908	)		(2,579,244	)
Other income (expense):
Interest income		9,910			40,169			12,556			104,092
Interest expense		(464,918	)		—			(929,474	)		—
Gain on sale of asset		—			3,000			—			3,000
Other		—			(800	)		(800	)		(800	)
Total other income (expense)		(455,008	)		42,369			(917,718	)		106,292
Net loss	$	(1,975,483	)	$	(1,079,372	)	$	(3,684,626	)	$	(2,472,952	)
Net loss available to common stockholders [note 3]	$	(1,978,442	)	$	(1,110,687	)	$	(3,707,541	)	$	(2,536,367	)
Net loss per share of common stock—basic and diluted	$	(0.14	)	$	(0.08	)	$	(0.26	)	$	(0.19	)
Average weighted number of common shares outstanding		14,273,238			13,578,428			14,074,903			13,434,584

See accompanying notes to the interim financial statements

4

AMERICAN TECHNOLOGY CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended March 31,
	2002			2001
Decrease in Cash Operating Activities:
Net loss	$	(3,684,626	)	$	(2,472,952	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		362,826			292,696
Allowance for doubtful account		—			191
Gain on sale of asset		—			(3,000	)
Stock issued for services		7,199			39,181
Options issued for services		137,590			—
Amortization of debt discount		810,000			—
Changes in assets and liabilities:
Trade accounts receivable		(48,551	)		91,347
Inventories		27,005			(78,995	)
Prepaid expenses and other		34,503			(82,923	)
Accounts payable		254,479			71,175
Accrued liabilities		112,081			(4,707	)
Net cash used in operating activities		(1,987,494	)		(2,147,987	)
Investing Activities:
Purchase of equipment		(27,086	)		(186,928	)
Patent costs paid		(55,476	)		(91,764	)
Proceeds loaned on notes receivable—officer		—			(40,000	)
Proceeds on sale of asset		—			3,000
Net cash used in investing activities		(82,562	)		(315,692	)
Financing Activities:
Proceeds from exercise of stock options		—			150,000
Proceeds from issuance of convertible promissory notes		1,225,000			—
Net cash provided by financing activities		1,225,000			150,000
Net decrease in cash		(845,056	)		(2,313,679	)
Cash, beginning of year		1,354,072			4,645,615
Cash, end of year	$	509,016		$	2,331,936
Supplemental Disclosure of Cash Flow Information:
Non-cash financing activities:					—
Supplemental disclosure of noncash investing and financing activities
Issuance of stock warrants in connection with convertible debt	$	624,750			—
Increase in additional paid in capital for the beneficial conversion feature of convertible debt	$	600,250			—
Common stock issued on conversion of Series B Preferred Stock	$	2,102,412		$	134,000
Dividends on conversion of Series B Preferred Stock		—			17,972

See accompanying notes to the interim financial statements.

5

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS

(Unaudited)

1.    OPERATIONS

American Technology Corporation (the “Company”), a Delaware corporation, is engaged in design, development and commercialization of sound, acoustics and other technologies and the sales and marketing of portable consumer products.

2.    STATEMENT PRESENTATION

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for interim periods. Operating results for the three and six month periods are not necessarily indicative of the results that may be expected for the year. The interim financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 2001.

3.    NET LOSS PER SHARE

The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” SFAS No. 128 provides for the calculation of “Basic” and “Diluted” earnings per share (“EPS”). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s net losses for the periods presented cause the inclusion of potential common stock instruments outstanding to be antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not required to present a diluted EPS. Convertible preferred stock, convertible promissory notes, stock options and warrants convertible or exercisable into approximately 3,786,805 and 2,624,643 shares of common stock were outstanding at March 31, 2002 and 2001, respectively. These securities were not included in the computation of diluted EPS because of the net losses but could potentially dilute EPS in future periods.

The provisions of the Company’s Series B Preferred Stock provided for an accretion in the conversion value (similar to a dividend) of 6% or $0.60 per share per annum. The Series C Preferred Stock provides for an accretion in the conversion value of 6% or $1.20 per share per annum. The accrued accretion of the Series B and Series C Preferred Stock for the six months ended March 31, 2002 and 2001 was $22,915 and $63,415, respectively, which increases the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:

	Three months ended March 31						Six months ended March 31
	2002			2001			2002			2001
Net Loss	$	(1,975,483	)	$	(1,079,372	)	$	(3,684,626	)	$	(2,472,952	)
Accretion on Series B and Series C Preferred Stock at stated rate		(2,959	)		(31,315	)		(22,915	)		(63,415	)
Net loss available to common stockholders	$	(1,978,442	)	$	(1,110,687	)	$	(3,707,541	)	$	(2,536,367	)

4.    RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141 “Business Combinations” (SFAS 141) and No. 142; “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

        SFAS 142 requires among other things, that companies no longer amortize goodwill but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company has not entered into any business combinations and has no recorded goodwill. The Company is assessing, but has not yet determined how the adoption of SFAS 142 will impact its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part

6

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS—(Continued)

(Unaudited)

of the carrying amount of the long-lived asset. SFAS No. 143 is effective for the Company, for the fiscal year ending September 30, 2003. The Company believes the adoption of this statement will have no material impact on its financial statements.

In October 2001, the SFAS issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lives Assets”. SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value, less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. The Company has not yet determined what effect, if any, SFAS 144 will have on its financial statements once implemented.

5.    INVENTORIES

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

	March 31, 2002			September 30, 2001
Finished goods	$	96,954		$	137,890
Raw materials		93,054			79,123
Reserve for obsolete inventory		(20,000	)		(20,000	)
	$	170,008		$	197,013

6.    PURCHASED TECHNOLOGY

In April 2000, the Company acquired all rights to certain loudspeaker technology owned by David Graebener (“Graebener”), Stephen M. Williams (“Williams”) and Hucon Limited, a Washington corporation (“Hucon”). The purchase price consisted of $300,000 cash plus 200,000 shares of common stock. The 200,000 shares of common stock were issued in June 2000 and were valued at $962,500. The Company will pay up to an additional 159,843 shares of common stock to Williams and Graebener contingent upon the achievement of certain performance milestones relating to gross revenues received by the Company from the purchased technology. These contingent shares will be recorded as compensation expense when earned and issued. The Company agreed to employ Mr. Williams and Mr. Graebener for a term of three years subject to certain terms and conditions.

7.    CONVERTIBLE PROMISSORY NOTES

In September and October, 2001 the Company sold for cash in a private offering $800,000 and $1,225,000, respectively of unsecured 12% Convertible Subordinated Promissory Notes due December 31, 2002 (“Notes”) to accredited investors. The principal and interest amount of each Note may at the election of the Note holder be converted one or more times into fully paid and nonassessable shares of common stock, at a price of $2.00 per share. The Notes may be called by the Company for conversion if the market price exceeds $5.00 per share for five days and certain conditions are met. The purchasers were granted warrants to purchase 1,012,500 common shares of the Company at $2.00 per share until September 30, 2006 (“Warrants”). As of March 31, 2002 the Notes and accrued interest would have been convertible into 1,072,238 shares of common stock.

The Notes and Warrants have antidilution rights reducing the conversion and exercise price for certain issuances of equity securities by the Company at an effective price below the applicable conversion or exercise price. In connection with the Notes and Warrants, the Company recorded $2,025,000 as the value of the beneficial conversion feature of the Notes and the value of the Warrants. The Warrants were valued using the Black-Scholes model and the value was reflected as a discount to the debt. This debt discount is being amortized as non-cash interest expense over the term of the Notes. As of March 31, 2002, $810,000 was amortized as non-cash interest expense.

8.    STOCKHOLDERS’ EQUITY

        The Company has 10,000 shares of Series C Preferred Stock outstanding convertible into 39,042 shares of Common stock as of March 31, 2002. The dollar amount of Series C Preferred Stock, increased by $1.20 per share accretion per annum and other adjustments, is convertible one or more times into fully paid shares of common stock at a conversion price which is the lower of (i) $8.00 per share or (ii) 92% of the average of the five days closing bid market price prior to conversion, but in no event less than $5.75 per share. The shares of Series C Preferred Stock may be called by the Company for conversion if the market price of the common stock exceeds $20.00 per share for ten days and certain conditions are met. The Series C Preferred Stock is subject to automatic conversion on March 31, 2003.

7

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes changes in equity components from transactions during the six months ended March 31, 2002:

	Series B Preferred Stock					Common Stock			Additional Additional Paid-In Capital			Accumulated Deficit
	Shares		Amount			Shares	Amount
Balance as of October 1, 2001	168,860		$	2		13,704,139	$	137	$	22,913,268		$	(19,919,912	)
Issuance of Common Stock for compensation and services	—			—		2,854		—		7,199			—
Options issued for services	—			—		—		—		137,590			—
Debt discount on promissory notes	—			—		—		—		1,225,000			—
Conversion of Series B preferred stock and cumulative dividends	(168,860	)		(2	)	566,958		6		(4	)		—
Net loss	—			—		—		—		—			(3,684,626	)
Balance as of March 31, 2002	—		$	—		14,273,951	$	143		24,283,053			(23,604,538	)

The following table summarizes information about stock option activity during the six months ended March 31, 2002:

	Shares		Weighted Average Exercise Price
Outstanding October 1, 2001	1,338,200		$	5.17
Granted	140,000		$	2.55
Canceled/expired	(290,175	)	$	8.87
Outstanding March 31, 2002	1,188,025		$	3.96
Exercisable at March 31, 2002	768,175		$	4.14

Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and expire over the period from 2002 to 2006 with an average life of three years.

At March 31, 2002, the Company had warrants outstanding, exercisable into the following number of common shares:

Number	Exercise Price	Expiration Date
50,000	$16.00	May 12, 2003
50,000	$10.00	January 5, 2004
375,000	$11.00	March 31, 2005
1,012,500	$  2.00	September 30, 2006
1,487,500

8

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In October 2001, the Company granted a total of 110,000 stock options to a consultant in conjunction with related development and manufacturing agreements. Options to purchase 65,000 shares of common stock vest depending on the consultant’s completion of various project milestones as well as the Company’s acceptance of the specified work. The Company estimates the period required to complete the specified milestones each reporting period and records consulting expense based on the current market price of the Company’s stock and the estimated percentage of the work completed. Consulting expense is adjusted each reporting period until vesting occurs. The Company has recorded consulting expense of $29,797 for the Black Scholes value of 10,000 milestone options vested at March 31, 2002 and consulting expense of $14,898 for the Black Scholes value of 10,000 milestone options to be vested April 2002. Options to purchase 45,000 shares of common stock vest based on the consultant meeting certain performance criteria. The Company records consulting expense at each vesting date. The Company has recorded consulting expense of $49,998 for the Black Scholes value of 30,000 performance options vested during the six month period ended March 31, 2002.

9.    INCOME TAXES

At March 31, 2002, a valuation allowance has been provided to offset the net deferred tax asset as management has determined that it is more likely than not that the deferred tax asset will not be realized. The Company has for federal income tax purposes net operating loss carryforwards of approximately $17,600,000, which expire through 2021 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended.

10.    SUBSEQUENT EVENT

On April 17, 2002, the Company entered into a letter of intent for the acquisition of HST, Inc. (“HST”) in a stock transaction. HST is a designer and manufacturer of technologically advanced material components for branded consumer products. The Company currently uses HST as an outsourced manufacturer of its HSS^® and NeoPlanar^® components. The letter of intent outlines the Company’s agreement to issue 13 million shares of common stock to acquire HST in a tax-free reorganization. HST executives and employees will also be granted options to purchase an aggregate of one million common shares after closing under the Company’s stock option plan, and HST executives will enter into three-year non-compete and employment agreements at their current base salary levels. The letter of intent is non-binding, and completion of the transaction is subject to a number of conditions precedents, including satisfactory completion of due diligence, completion and execution of definitive documentation, and the approval of shareowners of both companies. Provided all conditions are satisfied, the Company expects to consummate the transaction by end of the fiscal year ending September 30, 2002. However, there can be no assurance that all conditions will be satisfied or that if satisfied, the transaction will close when expected.

In May 2002, the Company sold 235,400 shares of Series D Convertible Preferred Stock (“Series D Stock”), par value $.00001 per share, at $10.00 per share for gross cash proceeds of $2,354,000. A total of 250,000 shares of Series D Stock have been authorized. The dollar amount of Series D Stock, increased by $0.60 per share accretion per annum and other adjustments, is convertible one or more times into fully paid shares of common stock at a conversion price which is the lower of (i) $4.50 per share or (ii) 90% of the volume weighted average market price for the five days prior to conversion, but in no event less than $2.00 per share, subject to adjustment. The shares of Series D Stock may be called by the Company for conversion if the market price of the common stock exceeds $9.50 per share for ten days and certain conditions are met. The Series D Stock is subject to automatic conversion on March 31, 2006. The purchasers of the Series D Stock were granted warrants to purchase an aggregate of 517,880 common shares of the Company at $4.50 per share until March 31, 2007 (“D Warrants”). The Series D Stock and the D Warrants have antidilution rights reducing the floor conversion and warrant exercise price for certain issuances of equity securities by the Company at an effective price below the applicable floor conversion or warrant exercise price. In connection with the Series D Stock financing, the Company incurred closing cost of $90,000.

9

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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, “BUSINESS RISKS.” ALSO SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2001.

Overview

We are focused on commercializing our proprietary HyperSonic, NeoPlanar, PureBass and Stratified Field sound technologies. Our HyperSonic Sound (HSS) technology employs a laser-like beam to project sound to any listening environment. Our NeoPlanar technology is a thin film magnetic speaker that uses unique films and materials, which we believe results in superior sound quality and volume for any given size with low distortion. PureBass is an extended range woofer designed to complement our high performance Stratified Field and NeoPlanar technologies. PureBass employs unique cabinet construction and vent configurations along with multiple acoustic filters, which we believe produces improved performance. Our Stratified Field technology features a thin form factor, in a variety of shapes and sizes, producing high-fidelity, low distortion sound reproduction. Our strategy is to commercialize these technologies through OEMs primarily through licensing or supply agreements.

On April 18, 2002 we announced a letter of intent for the strategic acquisition of HST, Inc. in a stock transaction. We entered into a letter of intent for the acquisition of HST, Inc. in a stock transaction. HST is a rapidly growing, profitable designer and manufacturer of technologically advanced material components for branded consumer products. HST’s leading customers include Callaway Golf, Ping, JBL, Fender, Dunlop, Answer Products and Blackhawk Archery. We currently use HST as an outsourced manufacturer of our HSS and NeoPlanar components.

The letter of intent outlines our agreement to issue 13 million common shares to acquire HST in a tax-free reorganization. HST executives and employees will also be granted options to purchase an aggregate of one million common shares after closing under our stock option plan, and HST executives will enter into three-year non-compete and employment agreements at their current base salary levels. The letter of intent is non-binding, and completion of the transaction is subject to a number of conditions precedents, including satisfactory completion of due diligence, completion and execution of definitive documentation, and the approval of stockholders. Provided all conditions are satisfied, we expect to consummate the transaction by end of our fiscal year ending September 30, 2002. However, there can be no assurance that all conditions will be satisfied or that if satisfied, the transaction will close when expected.

Unless otherwise indicated, the discussions in this report relate to ATC as a stand-alone entity and do not reflect the impact of the proposed business combination transaction with HST.

We believe our NeoPlanar, PureBass and Stratified Field technologies currently meet OEM commercial requirements. These technologies have been licensed to OEMs (including Harman International and Amtech Manufacturing Inc.) and are being transferred to commercial production. We expect product royalties to commence in fiscal 2002 from these technologies. We are also completing second generation HSS electronic packages and ultrasonic emitters that can be supplied to OEMs to be incorporated into end-user products. We expect that these components will be supplied to HSS licensees in fiscal 2002 for use in HSS products. We are however in the early stage of licensing of our sound technologies and have not generated significant revenues from such technologies to date.

When we license an audio technology, we typically receive a flat fee up-front, with the balance of payments based upon a percentage of net revenues of the products in which our technology is incorporated. Revenues from up-front license fees are recognized ratably over the specified term of the particular license. Contract fees are recorded as services are performed.

Our various technologies are high risk in nature. Unanticipated technical obstacles can arise at any time and disrupt licensing activities or OEM product sales or result in lengthy and costly delays. There can be no assurance commercially viable sound products being developed by OEMs will meet with market acceptance or that such products will perform on a cost-effective basis.

Our future is largely dependent upon the success of our sound technologies. We invest significant funds in research and development and on patent applications related to our proprietary technologies. There can be no assurance our technologies will achieve market acceptance sufficient to sustain operations or achieve future profits. See “Business Risks” below.

10

To date substantially all of our revenues have been derived from the sale of portable consumer products. We have sourced a total of 16 products targeted for niche markets at retail prices ranging from $11.99 to $29.99. Sourcing is on both an exclusive and nonexclusive basis and for different market territories on a product by product basis. Our market focus is in North America. We inventory finished goods as well as provide direct factory shipment to certain customers. There can be no assurance that our line of products can be marketed successfully. We have also produced high-end NeoPlanar speakers for sale to the marine market and expect to target other high-end sales to selected niche markets.

Critical Accounting Policies

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

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition

We derive our revenue from primarily two sources (i) product revenue and (ii) contract and license fee revenue. We recognize revenue on product sales in the periods that products are shipped. We recognize revenue from on going per unit license fees based on units shipped incorporating the Company’s patented proprietary technologies and in the period when the manufacturers’ units shipped information is available to the Company and collectibility is reasonably assured. We recognize revenue from up-front license and other fees and annual license fees ratably over the specified term of the particular license or agreement.

Research and Development Expenses

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

Deferred Tax Asset

The Company has provided a full valuation reserve related to its substantial deferred tax assets. In the future, if sufficient evidence of the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce its valuation allowances, resulting in income tax benefits in the Company’s consolidated statement of operations. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for valuation allowance quarterly.

Results of Operations

Total revenues for the six months ended March 31, 2002 were $456,054 a 14% decrease from the comparable six months of the prior year. Revenue for the three month period ended March 31, 2002 and 2001 were $199,433 and $340,334, respectively. Product revenue for the six months ended March 31, 2002 was $324,110 a 10% increase from the comparable six months of the prior year. Contract and license revenues for the six months ended March 31, 2002 and 2001 were $131,944 and $238,306, respectively. Consumer product sales are subject to significant month to month and quarter to quarter variability based on the timing of orders, new accounts, lost accounts and other factors. At March 31, 2002 and 2001 we had $387,492 and $15,278, respectively, collected and recorded as deferred revenue for existing contracts and licenses. We recognize upfront fees and advance revenues over the term of the license agreements.

Cost of sales for the six months ended March 31, 2002 was $238,845 resulting in a gross profit of $217,209 or 48%. This compares to a gross profit of $165,083 or 31% gross profit percentage for the comparable period of the prior year. Cost of sales for the three months ended March 31, 2002 and 2001 were $122,385 and $192,863, representing gross profit percentages of 39% and 43%, respectively. The fiscal 2002 second quarter gross profit can be attributed to the increase in margins for new products introduced in the retail radio division accompanied with higher margins for our acoustic technologies. Product cost of sales for the six months ended March 31, 2002 and 2001 were $190,721 and 249,795, respectively, representing a gross profit of 41% and 15% on product sales. Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and overhead allocations.

Selling, general and administrative expenses for the six months ended March 31, 2002 and 2001 were $1,103,120 and $1,148,913, respectively. The $45,793 decrease resulted primarily from a reduction in personnel and related costs. Selling, general and administrative expenses for the three month period ended March 31, 2002 and 2001 were $610,463 and $537,718, respectively. The $72,745 increase resulted from a $21,376 increase in personnel and related costs, $45,898 increase in non-cash compensation expense for stock options granted for professional services and other increases of $5,471. We may expend additional resources on marketing HSS, NeoPlanar and other technologies in future quarters, which may increase selling, general and administrative expenses. If the acquisition of HST is consummated, selling, general and administrative expenses will increase substantially.

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Research and development costs for the six months ended March 31, 2002 were $1,880,997 compared to $1,595,414 for the comparable six months of the prior year. The $285,583 increase resulted from an increase of $152,557 for materials and film cost associated with our HSS technology, an increase of $244,239 for consulting and professional services, offset by a reduction of $70,055 in material costs of our Stratified Field and NeoPlanar technologies, reduction of $56,151 in personnel and related costs and other increases of $14,993. HST has a significant research and development initiative, so research and development expenses will increase substantially if the acquisition of HST is consummated.

Research and development costs vary quarter by quarter due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. We expect fiscal 2002 research and development costs to remain at higher levels than the prior year due to increased staffing and the use of outside design and consultants.

We recorded in selling, general and administrative expenses non-cash compensation expenses of $7,199 and $39,181 for the six month periods ended March 31, 2002 and 2001. The non-cash compensation expense was for services paid through the issuance of 2,855 and 11,500 shares of common stock, respectively. Non-cash compensation costs vary depending on elections regarding the use of common stock to pay services and other factors related to warrant and option valuations.

We experienced a loss from operations of $2,766,908 during the six months ended March 31, 2002, compared to a loss from operations of $2,579,244 for the comparable six months ended March 31, 2001. The $187,664 increase is primarily due to the increase in research and development expenses.

The net loss available to common stockholders for the six months ended March 31, 2002 and 2001 of $3,707,541 and $2,536,367, respectively, included $22,915 and $63,415 of accretion on the Series B and Series C Preferred Stock, respectively.

We have federal net loss carryforwards of approximately $17,600,000 for federal tax purposes expiring through 2021. The amount and timing of the utilization of our net loss carryforwards may be limited under Section 382 of the Internal Revenue Code. A valuation allowance has been recorded to offset the related net deferred tax asset as management was unable to determine that it is more likely than not that the deferred tax asset will be realized.

Liquidity and Capital Resources

Since we recommenced operations in January 1992, we have had significant negative cash flow from operating activities. During the six months ended March 31, 2002, operating activities used cash of $1,987,494. This amount consisted primarily of a net loss of $3,684,626 and a $48,551 increase in accounts receivable, offset by $362,826 of depreciation and amortization, $810,000 of debt discount amortization, $144,790 of compensation paid in options, a decrease of $27,005 in inventory, a decrease of $34,502 in prepaid expenses and other, an increase of $254,479 in accounts payable and an increase of $112,081 in accrued liabilities.

At March 31, 2002, we had gross accounts receivable of $186,326 as compared to $137,775 at September 30, 2001. This represented approximately 92 days of sales. Receivables can vary dramatically due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers, many of which demand extended terms of 90-120 days.

For the six months ended March 31, 2002, net cash used in investing activities was $82,562, consisting primarily of $27,086 for the purchase of computer equipment, website development costs and leasehold improvements, and $55,476 in patents and new patent applications. We anticipate significant investments in patents in fiscal 2002 and requirements for additional equipment for developing NeoPlanar, HSS and other technologies. We cannot currently estimate the dollar amounts of these patent investments and equipment additions.

At March 31, 2002, we had working capital deficit of $1,142,532 compared to working capital of $892,040 at September 30, 2001.

We have financed our operations primarily through the sale of preferred stock, exercise of stock options, issuances of convertible notes, proceeds from the sale of investment securities and margins from consumer product sales. At March 31, 2002, we had cash of $509,016. As a result of the cash used in operations offset by proceeds from notes, our cash position decreased by approximately $845,056 from September 30, 2001. Subsequent to March 31, 2002 we received gross proceeds of $2,354,000 from the sale of Series D Convertible Preferred Stock. The terms of the Series D stock are described further under “Changes in Securities” below. Based on our present cash position assuming (a) currently planned expenditures and level of operations, (b) continuation of sales to existing retail customers and (c) royalty revenue against existing license agreements, we believe we have sufficient capital resources for the next twelve months. There can be no guarantee that the funds required during the next twelve months or thereafter can be generated from our operations or that such required funds will be available from the aforementioned or other potential sources. The lack of sufficient funds from operations or additional capital could force us to curtail or scale back operations and would therefore have an adverse effect on our business. Other than cash and cash equivalents, we have no unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for our sound and other products and technologies. The timing and amounts of these expenditures and the extent of our operating losses will depend on many factors, some of which are beyond our control. We anticipate that the commercialization of our technologies may require increased operating costs, however we cannot currently estimate the amounts of these costs. If the acquisition of HST is consummated, we anticipate that the combined entity will have sufficient cash on hand and cash generated from combined operations to fund such combined operations for at least twelve months after such acquisition.

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Contractual Commitments and Commercial Commitments

The following table sets forth a summary of our contractual obligations and commercial commitments as of March 31, 2002:

Year Ending September 30,	Convertible Promissory Notes		Operating Leases		Employment Agreements		Total
2002 (6 months)	$	—	$	100,100	$	286,500	$	386,600
2003		2,025,000		164,800		124,200		2,314,000
Total	$	2,025,000	$	264,900	$	410,700	$	2,700,600

Employment Agreements

The Company has entered into six employment agreements with executive officers and key employees. These agreements are each for one to three-year terms expiring from September 2002 to February 2003. Certain of the agreements provide for up to twelve months severance for certain terminations and payments for the term of the agreement (or in one case twelve months, if longer) on certain changes in control.

New Accounting Pronouncements

A number of new pronouncements have been issued for future implementation as discussed in the footnotes to our interim financial statements (see page 6, Note 4). As discussed in the notes to the interim financial statements, the implementation of these new pronouncements is not expected to have a material effect on our financial position or results of operations.

Business Risks

You should consider each of the following factors as well as the other information in this Quarterly Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report of Form 10-K for the fiscal year ended September 30, 2001, including our financial statements and the related notes.

We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability. We have incurred significant operating losses and anticipate continued losses in fiscal 2002. At March 31, 2002 we had an accumulated deficit of $23,604,538. We need to generate additional revenue to be profitable in future periods. Failure to achieve profitability, or maintain profitability if achieved may have a material adverse effect on our stock price.

We face numerous additional risks in connection with the proposed transaction with HST, which may adversely affect our results of operations whether or not the transaction is completed, and the transaction may not be completed on a timely basis or at all. Risks and uncertainties associated with the negotiation phase of the HST transaction include:

• Completion of the transaction is subject to numerous risks and uncertainties. The transaction remains subject to satisfactory completion of due diligence investigations by both parties and the negotiation and execution of definitive documentation. ATC and HST are each required to obtain shareowner approvals in connection with the transaction. ATC or HST may be unable to obtain shareowner approvals required to complete the transaction in a timely manner or at all.

• ,Shareowners of each entity who do not vote in favor of the transaction may have dissenters’ rights to receive a cash payment in lieu of continuing as an ATC stockholder after the merger. It is anticipated that even after ATC stockholders approve the transaction, closing will be conditioned on no more than a minimal percentage of ATC stockholders exercising statutory dissenters’ rights. The risk of ATC stockholders exercising dissenters’ rights increases if, during the thirty-day period after ATC stockholders approve the transaction, the market price of ATC stock declines below the fair market value of ATC’s common stock on the day before the terms were first announced. It may not be feasible to proceed with the transaction if it appears that a significant percentage of ATC stockholders may exercise dissenters’

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rights, as the combined company will likely not have sufficient cash reserves to discharge the dissenters’ rights claims and fund its ongoing operations.

• Uncertainty surrounding ATC’s proposed acquisition of HST may have an adverse effect on employee morale and retention, and result in the diversion of management attention and resources.

• The market value of our common stock will continue to vary prior to completion of the transaction due to changes in the business, operations or prospects of ATC or HST, market assessments of the transaction, market and economic considerations, or other factors. However, the letter of intent contemplates that there will be no adjustment to the number of shares of common stock to be issued for the acquisition of HST, and it is not currently contemplated that the parties will have a right to terminate the definitive acquisition agreement based upon changes in the market price of ATC common stock. The effective purchase price for HST might therefore increase substantially.

• ATC will be required to pay significant costs incurred in connection with the transaction, including legal, accounting and financial advisory fees, whether or not the transaction is completed.

• Some of the directors and executive officers of ATC and HST may have interests and arrangements that could have affected their decision to support or approve the merger.

If the transaction is completed, the combined company will face numerous risks and uncertainties, including:

• The combined company will face all of the risks and uncertainties of HST’s business, the full extent of which have not yet been evaluated by ATC management. These risks include HST’s rapid growth in recent quarters, which may not be able to be sustained, the highly competitive environment in which HST operates, HST’s dependence on a single customer, Callaway Golf Company, for a very large percentage of its current revenues, and other risks and uncertainties which will be detailed in the proxy statement to be delivered to ATC stockholders if and after the parties reach a definitive agreement.

• A significant portion of HST’s product and component manufacturing is located in Mexico, and will be subject to substantial risks of doing business outside the United States. These risks include being subject to many foreign regulatory requirements which may change without notice, the possibility of future export restrictions and/or foreign tariffs and other trade barriers, changes in tax rates in Mexico, possible political and economic instability, and difficulties in managing foreign operations.

• In order to be successful, the combined company must retain and motivate key employees. The change in management and structure caused by the transaction may impact the morale of employees and result in a loss of key employees. Failure to retain and properly provide incentives to key employees could seriously harm the combined company.

• The combined company will be highly dependent on the services of the executive officers and key employees of HST, as ATC management has little or no experience in HST’s business.

• The combined company may not effectively manage the transition from the existing products and strategic models of the separate companies to the new products and strategic model contemplated for the combined company. Failure to manage this transition could seriously harm the combined company.

• We may experience difficulties in the integration of operations, personnel, technologies, products and the information systems of ATC and HST. Integration will divert management’s attention from other business concerns, integration may divert resources from the existing businesses, products or technologies of ATC and/or HST.

• We may not realize the intended benefits and synergies of the transaction.

• The combined company will be required to make substantial salary payments to executive officers and key employees of HST for an anticipated period of at least three years. The combined company may be required to make these payments for the full period of an employment agreement even if it is unsatisfied with the performance of an employee, or if it elects to terminate an employee without cause.

• Charges to earnings resulting from the application of the purchase method of accounting may adversely affect the market value of our common stock following the transaction, as we will incur additional depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in connection with the transaction, and, to the extent the value of goodwill or intangible assets with indefinite lives acquired in connection with the transaction becomes impaired, we may be required to incur material charges relating to the impairment of those assets.

If the transaction is not completed, we face the following risks and uncertainties:

• The price of ATC common stock may decline to the extent that the current market price of ATC common stock reflects a market assumption that the transaction will be completed.

• ATC would not derive the strategic benefits expected to result from the transaction, such as creating a near-term source of revenue and profits, and leveraging our business model from a licensing model to a product and component business model.

• Our business may be harmed to the extent that customers, suppliers or investors believe that we cannot effectively compete in the marketplace without the transaction or there is customer and employee uncertainty surrounding the future direction of ATC on a standalone basis.

We are an early stage company introducing new technologies. If commercially successful products do not result from our efforts, we may be unprofitable or forced to cease operations. Our HSS, NeoPlanar, PureBass and SFT technologies have only recently been introduced to market and are still being improved. Commercially viable sound technology systems may not be successfully and timely produced by OEMs due to the inherent risks of technology development, new product introduction, limitations on financing, competition,

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obsolescence, loss of key technical personnel and other factors. We have not generated significant revenues from our sound technology to date, and we cannot guarantee significant revenues in the future. The development and introduction of our sound technology has taken longer than anticipated by management and could be subject to additional delays. Even if products employing our sound technology are introduced, they may not achieve market acceptance. Our various sound projects are high risk in nature, and unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in a determination that further exploitation is unfeasible. If we do not successfully exploit our technology, our financial condition and results of operations and business prospects would be adversely affected.

Our quarterly and annual revenues are subject to fluctuations caused by many factors, any of which could result in our failure to achieve our revenue expectations. Our quarterly and annual revenues from portable consumer products have varied significantly in the past and are likely to continue to vary in the future due to a number of factors. Our revenues from licensing our sound reproduction technologies are also expected to vary significantly due to a number of factors. Many of these factors are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue expectations. These factors include:

• our ability to develop, introduce, produce in volume quantities and market successfully new or enhanced portable consumer products;

• our ability to develop and license to OEMs our sound reproduction technologies or our ability to supply components to OEMs or customers;

• changes in the relative volume of sales of various products or components with sometimes significantly different margins or royalties;

• market acceptance of and changes in demand for our portable consumer products and products of our licensees;

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

• unpredictable volume and timing of customer orders;

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

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

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

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

• production delays by OEMs or by us or our suppliers;

• decreases in the average selling prices of products;

• seasonal fluctuations in sales;

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

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

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

Some or all of these factors could adversely affect demand for our portable consumer products and for OEM products incorporating our sound reproduction technologies, and therefore adversely affect our future operating results.

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

Because of the above factors, you should not rely on period-to-period comparisons of results of operations as an indication of future performance.

Our expenses may vary from period to period, which could affect quarterly results and our stock price. If we incur additional expenses in a quarter in which we do not experience increased revenue, our results of operations would be adversely affected and we may incur larger losses than anticipated for that quarter. Factors that could cause our expenses to fluctuate from period to period include:

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

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

• the timing of personnel and consultant hiring.

The demand for our portable consumer products has historically been weaker in certain quarters, which makes it difficult to compare our quarterly results. Due to industry seasonality, demand for consumer electronic products is strongest during the fourth quarter of each year and is generally slower in the period from March through July. Because the consumer products market experiences substantial seasonal

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fluctuations, with more sales occurring toward the end of the year, our quarterly results will be difficult to compare so long as portable consumer products remains our principal revenue source.

Sound reproduction markets are subject to rapid technological change, so our success will depend on our ability to develop and introduce new technologies. Technology and standards in the sound reproduction markets evolve rapidly, making timely and cost-effective product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render our technologies obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our technologies do not perform well, our business and financial condition will be adversely affected. The life cycles of our technologies are difficult to estimate, particularly those such as HyperSonic sound for which there is no established market. As a result, our technologies, even if successful, may become obsolete before we recoup our investment.

Our HSS technology is subject to government regulation, which could lead to unanticipated expense or litigation. Our HyperSonic Sound technology emits ultrasonic vibrations, and as such is regulated by the Food and Drug Administration. In the event of certain unanticipated defects in an HSS product, a licensee or we may be required to comply with FDA requirements to remedy the defect and/or notify consumers of the problem. This could lead to unanticipated expense, and possible product liability litigation against a licensee or us. Any regulatory impediment to full commercialization of our HSS technology, or any of our other technologies, could adversely affect our results of operation. For a further discussion of the regulation of our HSS technology, see Part I, Item 1 of our Annual Report on Form 10-K, under the heading “Government Regulation.”

Many potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete. Technological competition from other and longer established electronic and loudspeaker manufacturers are significant and expected to increase. Most of the companies with which we expect to compete have substantially greater capital resources, research and development staffs, marketing and distribution program and facilities, many of them have substantially greater experience in the production and marketing of products. In addition, one or more of our competitors may have developed or may succeed in developing technologies and products that are more effective than any of ours, rendering our technology and products obsolete or noncompetitive.

Commercialization of our sound technologies depends on collaborations with other companies. If we are not able to find collaborators and strategic alliance relationships in the future, we may not be able to develop our sound technologies and products. As we do not have the production, marketing and selling resources to commercialize our products on our own our strategy is to establish business relationships with leading participants in various segments of the electronics and sound reproduction markets to assist us in producing, marketing and selling consumer electronic components and products that include our sound technologies.

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

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

Our retail products and sound component production are dependent on outside contractors and suppliers. Disruptions in supply could adversely affect us. We are dependent on contract suppliers for our finished consumer electronics products. We source products from a variety of suppliers. The loss of a supply of a high selling product could have a material adverse effect on our operations. Disruption of our supply could cause additional costs and delays and could also have an adverse impact on our operations. The

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manufacturers of our consumer electronic products are also dependent upon the availability of electronic components. Any significant delays in obtaining components could have a material adverse effect on our financial condition and results of operations.

We have developed component supply arrangements for film and components for our Neoplanar and HSS sound technologies. These are generally sole supplier arrangements and the loss or a disruption of supply could have a material adverse effect on our ability to introduce these technologies, or once introduced in volume, could disrupt future revenues adversely affecting financial condition and results of operations.

Two customers represented a significant amount of our business in the last fiscal year. We do not know if we will receive further orders from them. ASI and Vulcan Northwest Inc. accounted for 23% and 11% of total revenues for the fiscal year ended September 30, 2001. Neither ASI nor Vulcan have committed to purchase any further products or technology from us. During the quarter ended March 31, 2002, neither company made significant purchases from us. We cannot provide any assurances that any of our current customers will continue at current or historical levels or that we will be able to obtain orders from new customers.

If our key employees do not continue to work for us, our business will be harmed because competition for replacements is intense. Our performance is substantially dependent on the performance of our executive officers and key technical employees. We are dependent on our ability to retain and motivate high quality personnel, especially highly skilled technical personnel. Our future success and growth also depend on our continuing ability to identify, hire, train and retain other highly qualified technical, managerial and sales personnel. Competition for such personnel is intense, there can be no assurance that we will be able to attract, assimilate or retain other highly qualified technical, managerial or sales personnel in the future. The inability to attract and retain the necessary technical, managerial or sales personnel could have a material adverse effect upon our business, operating results or financial condition.

Terrorist acts and acts of war may seriously harm our business and results of operations. Terrorist acts or acts of war (wherever located around the world) may cause damage or disruption to our employees, facilities, OEM partners, suppliers, distributors and resellers, and customers, which could significantly impact our results of operations. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially harm our business and results of operations. The long-term effects of the September 11, 2001 attacks on our business and results of operations are unknown. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

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

Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and, consequently, decrease the market value of your investment. Some provisions of our amended certificate of incorporation and bylaws and Delaware law could delay or prevent a change in control or changes in our management that a stockholder might consider favorable. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

Conversion of all of or part of our outstanding convertible preferred stock and debt or the exercise of outstanding warrants will cause immediate and possibly significant dilution in the net tangible book value of your shares. If the holders of our outstanding convertible preferred stock, convertible debt or warrants decide to convert or exercise all or part of their securities, you will experience immediate and possibly significant dilution in the net tangible book value of your shares. The market price of our common stock could also decline upon the resale of the common stock obtained upon conversion of our preferred stock or convertible debt or upon exercise of warrants.

Our stock price is volatile and may continue to be volatile in the future. Our common stock trades on the NASDAQ Small Cap Market. The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in (i) our anticipated or actual operating results; (ii) developments concerning our sound reproduction technologies; (iii) technological innovations or setbacks by us or our competitors; (iv) conditions in the consumer electronics market; (v) announcements of merger or acquisition transactions; and (vi) other events or factors and general economic and market conditions. The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, and that have often been unrelated or disproportionate to the operating performance of companies.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position, results of operations or cash due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks.

We are exposed to some market risk through interest rates, related to our investment of our current cash of $509,016 We do not consider this risk to be material, and we manage the risk by continuing to evaluate the best investment rates available for short-term high quality investments.

We have no activities in long-term indebtedness and our other investments are insignificant. At the present time we do not have any significant foreign sales or foreign currency transactions.

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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time we are involved in routine litigation incidental to the conduct of our business. There are currently no material pending legal proceedings to which we are a party or to which any of our property is subject.

Item 2.    Changes in Securities

(a)  Not applicable

(b)  As more particularly described below, we sold 235,400 shares of Series D Convertible Preferred Stock in May 2002. The Series D stock is entitled to a liquidation preference over the common stock equal to the purchase price of the Series D stock increased by 6% per annum. The Series D stock is also entitled to a cash dividend equal to 6% of the liquidation preference when, as and if a cash dividend is declared on the common stock. The Series D dividend must be paid in preference and priority to a dividend on the common stock. The liquidation preference could materially diminish the rights of the common stockholders in the event of a liquidation, and the dividend preference will impair our ability to declare a dividend on the common stock were it to choose to do so. At this time, we do not intend to declare dividends on the common stock in the foreseeable future.

(c)  We did not sell any equity securities during the quarter ended March 31, 2002 without registration under the Securities Act. The following is a description of the Series D Preferred Stock and related warrants we sold in May 2002 subsequent to the quarter ended March 31, 2002:

In May 2002 we sold in a private offering for cash at $10.00 per share a total of 235,400 shares of Series D Preferred Stock to a limited number of accredited or foreign investors for aggregate gross proceeds of $2,354,000. The dollar amount of the Series D stock, increased by $0.60 per share per annum and other adjustments, at the election of the holder, may be converted one or more times into common stock at a conversion price which is the lower of (i) $4.50 per share or (ii) 90% of the volume weighted average market price of the common stock for the five trading days prior to conversion, but no less than $2.00 per share, subject to certain adjustments. The Series D stock may not be converted at less than $4.50 per share prior to December 31, 2002. We may call the shares of Series D stock for conversion if the market price of the common stock exceeds $9.50 per share for ten consecutive trading days and certain conditions are met. The Series D stock will be subject to automatic conversion on March 31, 2006.

Each purchaser was also granted a warrant to purchase 2.2 common shares at $4.50 per share, subject to certain future adjustments, until March 31, 2007 for each share of preferred stock purchased (aggregate warrants exercisable into 517,880 shares).

The Series D stock and the related warrants have antidilution rights reducing the floor price for conversion of the Series D stock and the warrant exercise price for certain issuances of equity securities at an effective price below the applicable floor conversion or warrant exercise price.

We sold these securities without an underwriter. We paid finders fees of $78,750 for the introduction of purchasers. These securities were offered and sold without registration under the Securities Act in reliance upon the exemption provided by Regulation D or Regulation S thereunder, and an appropriate legend was placed on the Series D stock and the warrants and will be placed on the shares issuable upon conversion of the Series D stock or exercise of the warrants unless registered under the Securities Act prior to issuance. We have agreed to file, not later than December 31, 2002, a registration statement for the resale of the common stock issuable on conversion of the Series D stock and exercise of the warrants.

18

Net proceeds from the sale of the Series D stock of approximately $2,264,000 are intended primarily to pay for the costs of the acquisition of HST and for working capital to produce HSS and NeoPlanar components and to market our technologies.

(d)  Not applicable

Item 3.  Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5.    Other Information

Not applicable

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits:
3.1	Certificate of Designations of Series D Preferred Stock filed with Delaware on May 3, 2002.
10.1	Stock and Warrant Purchase Agreement dated May 3, 2002.
10.2	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)

(b)  Reports on Form 8-K

Not applicable

19

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AMERICAN TECHNOLOGY CORPORATION
Date:	May 15, 2002	By:	/s/ RENEE´ WARDEN
			Renee´ Warden, Chief Accounting Officer, Treasurer and Corporate Secretary (Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant)

20

EX-3.1

                                                                     Exhibit 3.1


                           CERTIFICATE OF DESIGNATION

                                       OF

                            SERIES D PREFERRED STOCK

                                       OF

                        AMERICAN TECHNOLOGY CORPORATION,

                             a Delaware Corporation

                            _________________________

                         PURSUANT TO SECTION 151 OF THE
                GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

                            _________________________

     American Technology Corporation, a Delaware corporation (the "Corporation"
or the "Company"), does hereby certify that:

     I. The name of the corporation is American Technology Corporation.

     II. The Corporation certifies that pursuant to the authority contained in
its Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation adopted the
following resolution, which resolution remains in full force and effect on the
date hereof:

     Resolved, that there is hereby established a series of authorized preferred
stock having a par value of $.00001 per share, which series shall be designated
as "Series D Preferred Stock," shall consist of 250,000 shares and shall have
the following voting powers, preferences and relative, participating, optional
and other special rights, and qualifications, limitations and restrictions
thereof as follows:

1.  Designation and Amount. The designation of the series of Preferred Stock
shall be "Series D Preferred Stock," par value $.00001 per share (the "Series D
Preferred Stock"). The number of authorized shares of Series D Preferred Stock
shall be 250,000. The Series D Preferred Stock shall have an initial issue price
of Ten Dollars ($10.00) per share (the "Original Issue Price"). The date on
which any shares of Series D Preferred Stock are first issued is referred to
herein as the "Original Issue Date."

2.   Dividends. The holders of record of shares of Series D Preferred Stock
shall be entitled to receive, on an as-if-converted to Common Stock basis, when,
as and if a cash dividend on the Corporation's common stock, par value $.00001
per share (the "Common Stock"), is declared by the Board of Directors, out of
funds legally available therefor, a cash dividend at a per share rate



equal to six percent (6%) per annum of the Liquidation Amount (as defined in
3(a) hereof), payable in preference and priority to any payment of any dividend
on Common Stock of the Corporation for such year.

3.   Liquidation.

     (a)  Preference Upon Liquidation, Dissolution or Winding Up. In the event
of any liquidation, dissolution or winding up of the affairs of the Corporation
(any or all of such events, a "liquidation"), whether voluntary or involuntary,
subject to the prior preferences and other rights of any Senior Stock (as
defined below), if any, the holders of shares of Series D Preferred Stock then
outstanding shall be entitled pari passu as if members of a single class of
securities with the holders of any Parity Stock (as defined below), if any, to
be paid out of the assets of the Corporation before any payment shall be made to
the holders of Junior Stock (as defined below) an amount per share equal to the
Conversion Value (as defined in Section 5(a) below), plus any declared but
unpaid dividends (the "Liquidation Amount"). Except as provided in this Section
3(a), holders of Series D Preferred Stock shall not be entitled to any
distribution in the event of liquidation, dissolution or winding up of the
affairs of the Corporation. The term "Junior Stock" shall mean Common Stock or
any other class or series of stock ranking junior to the Series D Preferred
Stock in respect of the right to receive dividends or the right to participate
in any distribution upon liquidation, the term "Senior Stock" shall mean the
Corporation's Series C Preferred Stock and any other class or series of stock of
the Corporation authorized before the date of issuance of the Series D Preferred
Stock ranking senior to the Series D Preferred Stock in respect of the right to
receive dividends or the right to participate in any distribution upon
liquidation, and the term "Parity Stock" shall mean any class or series of stock
of the Corporation authorized after the date of issuance of the Series D
Preferred Stock ranking on a parity with the Series D Preferred Stock in respect
of the right to receive dividends or the right to participate in any
distribution upon liquidation.

     (b)  Merger or Sale of Assets. A merger of the Corporation in which holders
of more than 50% of the outstanding Common Stock of the Corporation before the
merger do not hold more than 50% of the outstanding Common Stock of the
Corporation after the merger, or a sale of all or substantially all of the
Corporation's assets, shall be deemed to be a liquidation for purposes of this
Section 3; provided, however, that a merger, consolidation or reorganization
where the Corporation is the surviving entity, or a merger of the Corporation
into a wholly-owned subsidiary shall not be deemed a liquidation.

     (c)  Insufficient Assets. If, upon any liquidation of the Corporation, the
assets of the Corporation are insufficient to pay the holders of shares of the
Series D Preferred Stock and any Parity Stock, if any, then outstanding the full
amount to which they shall be entitled, such assets shall be distributed to each
holder of the Series D Preferred Stock and Parity Stock, if any, pro rata based
on the number of shares of Common Stock into which the Series D Preferred Stock
and Parity Stock, if any, held by each is convertible.

     (d)  Rights of Other Holders. In the event of any liquidation, after
payment shall have been made to the holders of the Series D Preferred Stock and
Parity Stock, if any, of all preferential amounts to which they shall be
entitled, the holders of shares of Junior Stock and

                                        2



other capital stock of the Corporation shall receive such amounts as to which
they are entitled by the terms thereof.

4.   Voting Rights.

     (a)  Voting. Each holder of shares of Series D Preferred Stock shall be
entitled to one (1) vote for each share of Common Stock then issuable upon
conversion of each share of Series D Preferred Stock thereof held on any matter
submitted to the Corporation's stockholders for their approval or consent.
Except as otherwise required by law or expressly provided herein, the holders of
the Series D Preferred Stock shall vote equally with the shares of Common Stock
of the Company and not as a separate class on any matter to voted upon by the
stockholders of the Company.

     (b)  Certificate of Incorporation; Certain Stock. The affirmative vote or
consent of the holders of a majority of the outstanding shares of Series D
Preferred Stock, voting separately as a class, will be required for (i) any
amendment, alteration, or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Certificate of Incorporation if the amendment,
alteration, or repeal materially and adversely affects the powers, preferences,
or special rights of the Series D Preferred Stock, (ii) any amendment,
alteration, or repeal of this Certificate of Designations, or (iii) the creation
or issuance of any Senior Stock; provided, however, that any increase in the
authorized preferred stock of the Corporation or the creation and issuance of
any Junior Stock or Parity Stock shall not be deemed to affect materially and
adversely such powers, preferences or special rights and any such increase or
creation and issuance may be made without any such vote by the holders of the
Series D Preferred Stock, except as otherwise required by law.

5.   Conversion Rights.

     (a)  Optional Conversion of Series D Preferred Stock. The holder of any
shares of Series D Preferred Stock shall have the right, at such holder's
option, at any time or from time to time to convert any or all of such holder's
shares of Series D Preferred Stock into such number of fully paid and
nonassessable shares of Common Stock (the "Conversion Shares") as determined for
each share of Series D Preferred Stock by dividing the Conversion Value (as
defined below) by the Conversion Price (as defined below). The "Conversion
Value" per share means, as of any date, the sum of (i) the Original Issue Price
plus any declared but unpaid dividends, provided, however, that if the
registration statement (the "Registration Statement") required to be filed by
the Company pursuant to Section 6.2 of that certain Series D Preferred Stock and
Warrant Purchase Agreement between the Corporation and the original holders of
shares of Series D Preferred Stock is not filed with the Securities and Exchange
Commission (the "SEC") by December 31, 2002, then the Original Issue Price shall
be increased by one percent (1%) for the first thirty (30) day period after
December 31, 2002 (pro-rated for any period less than 30 days) and by an
additional three percent (3%) for each thirty (30) day period after January 31,
2003 (pro-rated for any period less than 30 days) until either such Registration
Statement is filed with the SEC or until April 30, 2003 (whichever occurs
earlier), plus (ii) an amount which accrues from the Original Issue Date at a
rate of Sixty Cents ($.60) per annum, computed on the basis of a 360-day year to
the date of conversion. The "Conversion Price" shall be the lesser of (i) Four

                                        3



Dollars and Fifty Cents ($4.50) per share (as adjusted for any stock splits,
reorganizations, dividends, recapitalizations and the like), or (ii) ninety
percent (90%) of the volume weighted average price of the Corporation's Common
Stock from the hours of 9:30 a.m. to 4:00 p.m. on the NASDAQ as reported by
Bloomberg Financial using the AQR function (the "Market Price") for the five (5)
trading days immediately preceding the date of conversion for which there are
reported transactions in the Common Stock; provided, however, that in no event
shall the Conversion Price be less than Two Dollars ($2.00) per share (as
adjusted for any stock splits, reorganizations, dividends, recapitalizations and
the like) (the "Floor Price"); and provided, further, that no such conversion
shall be made prior to January 1, 2003 at a Conversion Price of less than Four
Dollars and Fifty Cents ($4.50) per share (as adjusted for any stock splits,
reorganizations, dividends, recapitalizations and the like). Notwithstanding
anything to the contrary set forth above, each such conversion at the option of
the holder pursuant to this Section 5(a) shall cover at least the total number
of shares of Series D Preferred Stock then held by such holder or a number of
shares of Series D Preferred Stock having an aggregate Conversion Value of at
least $50,000. The Conversion Shares and the Conversion Price are subject to
certain adjustments as set forth herein, and the terms Conversion Shares and
Conversion Price as used herein shall as of any time be deemed to include all
such adjustments to be given effect as of such time in accordance with the terms
hereof. The Floor Price is subject to adjustment as set forth in Section 5(g)
hereof.

          Upon the exercise of the option of the holder of any shares of Series
D Preferred Stock to convert Series D Preferred Stock into Common Stock, the
holder of such shares of Series D Preferred Stock to be converted shall
surrender the certificates representing the shares of Series D Preferred Stock
so to be converted in the manner provided in Section 5(d) below. Immediately
following such conversion, the rights of the holders of the Series D Preferred
Stock that has been converted shall cease and the persons entitled to receive
the Common Stock upon the conversion of Series D Preferred Stock shall be
treated for all purposes as having become the owners of such Common Stock.

     (b)  Automatic Conversion. Each remaining outstanding share of Series D
Preferred Stock shall be automatically converted into shares of Common Stock on
March 31, 2006 in accordance with the provisions of Section 5(a) hereof.
Pursuant to this Section 5(b), on the Conversion Date (as defined below), all
outstanding shares of Series D Preferred Stock shall be converted into that
number of shares of Common Stock as determined in accordance with Section 5(a)
hereof as if the conversion of such number of shares of Series D Preferred Stock
were made by the holders thereof in accordance therewith without any further
action on the part of such holders.

     (c)  Conversion at Option of Corporation. If for any ten (10) consecutive
trading days the Market Price of the Corporation's Common Stock is at least Nine
Dollars and Fifty Cents ($9.50) per share (as adjusted for stock splits,
reorganizations, dividends, recapitalizations and the like), then at any time
within ten (10) business days after the end of such ten (10) trading day period,
the Corporation shall have the right to require the conversion of all
outstanding shares of Series D Preferred Stock into shares of Common Stock in
accordance with the provisions of Section 5(a) hereof; provided, however, in the
event that the Corporation elects to convert shares of Series D Preferred Stock
to Common Stock pursuant to the terms of this

                                        4



Section 5(c) prior to May 31, 2004, the Corporation shall only be able to
require such conversion if a Registration Statement (as defined in Section 5(a))
filed with the SEC is then effective. For purposes of this Section 5(c), if on
any date there shall be no reported closing bid price, the "Market Price" on
such date shall be the closing bid price on the date next preceding such date on
which a closing bid price for such security has been reported. Pursuant to this
Section 5(c), on the Conversion Date (as defined below), all outstanding shares
of Series D Preferred Stock shall be converted into that number of shares of
Common Stock as determined in accordance with Section 5(a) hereof as if the
conversion of such number of shares of Series D Preferred Stock were made by the
holders thereof in accordance therewith without any further action on the part
of such holders; provided, however, that if the Conversion Date is prior to the
date which is one year after the Original Issue Date, the Conversion Value shall
be equal to the higher of (i) Ten Dollars and Sixty Cents ($10.60) (as adjusted
for any stock splits, reorganizations, dividends, recapitalizations and the
like), or (ii) the Conversion Value determined in accordance with Section 5(a)
hereof.

     (d)  Delivery of Stock Certificates. The holder of any shares of Series D
Preferred Stock may exercise the optional conversion right pursuant to Section
5(a) above by delivering to the Corporation or its duly authorized transfer
agent during regular business hours at the office of the Corporation the
certificate or certificates for the shares of Series D Preferred Stock to be
converted, duly endorsed or assigned either in blank or to the Corporation (if
required by it), accompanied by written notice (the "Conversion Notice") stating
that such holder elects to convert such shares of Series D Preferred Stock and
shall provide a certificate to the Corporation or its duly authorized transfer
agent as to the date of such conversion. Upon the occurrence of an automatic
conversion pursuant to Section 5(b) above or conversion at the option of the
Corporation pursuant to Section 5(c) above, the Corporation shall deliver notice
to each holder of Series D Preferred Stock and the holder of any shares of
Series D Preferred Stock shall deliver to the Corporation at the office of the
Corporation the certificate or certificates for all shares of Series D Preferred
Stock then held by such holder, duly endorsed or assigned either in blank or to
the Corporation (if requested by it). Conversion shall be deemed to have been
effected (1) in the case of an optional conversion pursuant to Section 5(a), on
the date when the aforesaid delivery of the Conversion Notice is made if such
day is a business day and otherwise on the business day following the date of
the aforesaid delivery, (2) in the case of an automatic conversion pursuant to
Section 5(b) on March 31, 2006, or (3) in the case of conversion at the option
of the Corporation pursuant to Section 5(c), upon the date of the notice, and in
each case such date is referred to herein as the "Conversion Date." As promptly
as practicable thereafter, the Corporation, through its transfer agent, if any,
shall issue and deliver to or upon the written order of such holder, to the
place designated by such holder, a certificate or certificates for the number of
full shares of Common Stock to which such holder is entitled and a check or cash
in respect of any fractional interest in a share of Common Stock, as provided
below; provided, however, that in the case of a conversion in connection with
liquidation, no such certificates need be issued. The person in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become the stockholder of record in respect of such Common Stock on the
applicable Conversion Date unless the transfer books of the Corporation are
closed on that date, in which event such holder shall be deemed to have become
the stockholder of record in respect of such Common Stock on the next succeeding
date on which the transfer books are open, but the

                                        5



Conversion Value and the Conversion Price shall be that in effect on the
Conversion Date. Upon conversion of only a portion of the number of shares
covered by a stock certificate representing shares of Series D Preferred Stock
surrendered for conversion, the Corporation shall issue and deliver to or upon
the written order of the holder of the stock certificate so surrendered for
conversion, at the expense of the Corporation, a new stock certificate covering
the number of shares of Series D Preferred Stock representing the unconverted
portion of the certificate so surrendered. Any transfer taxes applicable to the
above described transactions shall be paid by such transferee. The Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of Common Stock or the reissuance
of the Preferred Stock in a name other than that in which the shares of Series D
Preferred Stock so converted were registered, and no such issuance or delivery
shall be made unless and until the person requesting such issuance has paid to
the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid.

     (e)  No Fractional Shares of Common Stock. No fractional shares of Common
Stock shall be issued upon conversion of shares of Series D Preferred Stock and
in lieu thereof, the Corporation shall pay to the holder of such fractional
share interest cash in respect of such fractional interest in an amount equal to
the Market Price on the Conversion Date multiplied by such fractional interest.
The holders of fractional interests shall not be entitled to any rights as
stockholders of the Corporation in respect of such fractional interests. In
determining the number of shares of Common Stock and the payment, if any, in
lieu of fractional shares that a holder of Series D Preferred Stock shall
receive, the total number of shares of Series D Preferred Stock surrendered for
conversion by such holder shall be aggregated.

     (f)  Changes in Common Stock. If any capital reorganization or
reclassification of the capital stock of the Corporation, or consolidation or
merger of the Corporation with another corporation, or the sale, transfer or
other disposition of all or substantially all of its assets to another
corporation for cash or stock of such other corporation, shall be effected,
then, as a condition of such reorganization, reclassification, consolidation,
merger, sale, transfer or other disposition, lawful and adequate provision shall
be made whereby each holder of Series D Preferred Stock shall thereafter have
the right to purchase and receive upon the basis and upon the terms and
conditions herein specified and in lieu of the shares of the Common Stock of the
Corporation immediately theretofore issuable upon conversion of the Series D
Preferred Stock, such shares of stock, securities or properties as may be
issuable or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such Common Stock
immediately theretofore issuable upon conversion of the Series D Preferred Stock
had such reorganization, reclassification, consolidation, merger, sale, transfer
or other disposition not taken place, and in any such case appropriate
provisions shall be made with respect to the rights and interests of each holder
of Series D Preferred Stock to the end that the provisions hereof (including
without limitation provisions for adjustment of the Conversion Price) shall
thereafter be applicable, as nearly equivalent as may be practicable in relation
to any shares of stock, securities or properties thereafter deliverable upon the
exercise thereof. The Corporation shall not effect any such consolidation,
merger, sale, transfer or other disposition, unless prior to or simultaneously
with the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing or otherwise acquiring such properties shall assume, by written
instrument executed

                                        6



and mailed or delivered to the holders of Series D Preferred Stock at the last
address of suchholders appearing on the books of the Corporation, the obligation
to deliver to such holders such shares of stock, securities or properties as, in
accordance with the foregoing provisions, such holders may be entitled to
acquire. The above provisions of this subparagraph shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers, sales,
transfers, or other dispositions.

     (g)  Sale of Shares Below Floor Price.

               (i)    If at any time or from time to time after the Original
Issue Date, the Company issues or sells, or is deemed by the express provisions
of this subsection (g) to have issued or sold, Additional Shares of Common Stock
(as defined in subsection (g)(iv) below), for an Effective Price (as defined in
subsection (g)(iv) below) less than the then effective Floor Price, then and in
each such case the then existing Floor Price shall be reduced, as of the opening
of business on the date of such issue or sale, to such lesser price.

               (ii)   For the purpose of making any adjustment required under
this Section 5(g), the consideration received by the Company for any issue or
sale of securities shall (A) to the extent it consists of cash, be computed at
the amount of cash received by the Company without deduction for any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Company in connection with such issue or sale, (B) to the extent it
consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Board of Directors, and (C) if
Additional Shares of Common Stock, Convertible Securities (as defined in
subsection (g)(iii)) or rights or options to purchase either Additional Shares
of Common Stock or Convertible Securities are issued or sold together with other
stock or securities or other assets of the Company for a consideration which
covers both, be computed as the portion of the consideration so received that
may be reasonably determined in good faith by the Board of Directors to be
allocable to such Additional Shares of Common Stock, Convertible Securities or
rights or options.

               (iii)  For the purpose of the adjustment required under this
Section 5(g), if the Company issues or sells (i) stock or other securities
convertible into, Additional Shares of Common Stock (such convertible stock or
securities being herein referred to as "Convertible Securities") or (ii) rights
or options for the purchase of Additional Shares of Common Stock or Convertible
Securities and if the Effective Price of such Additional Shares of Common Stock
is less than the Floor Price, in each case the Company shall be deemed to have
issued at the time of the issuance of such rights or options or Convertible
Securities the maximum number of Additional Shares of Common Stock issuable upon
exercise or conversion thereof and to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, received by the Company for the issuance of such rights
or options or Convertible Securities, plus, in the case of such rights or
options, the minimum amounts of consideration, if any, payable to the Company
upon the exercise of such rights or options, plus, in the case of Convertible
Securities, the minimum amounts of consideration, if any, payable to the Company
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion thereof; provided that if in the
case of Convertible Securities the minimum amounts of such consideration cannot
be ascertained, but are a function of antidilution

                                        7



or similar protective clauses, the Company shall be deemed to have received the
minimum amounts of consideration without reference to such clauses; provided
further that if the minimum amount of consideration payable to the Company upon
the exercise or conversion of rights, options or Convertible Securities is
reduced over time or on the occurrence or non-occurrence of specified events
other than by reason of antidilution adjustments, the Effective Price shall be
recalculated using the figure to which such minimum amount of consideration is
reduced; provided further that if the minimum amount of consideration payable to
the Company upon the exercise or conversion of such rights, options or
Convertible Securities is subsequently increased, the Effective Price shall be
again recalculated using the increased minimum amount of consideration payable
to the Company upon the exercise or conversion of such rights, options or
Convertible Securities. No further adjustment of the Floor Price, as adjusted
upon the issuance of such rights, options or Convertible Securities, shall be
made as a result of the actual issuance of Additional Shares of Common Stock on
the exercise of any such rights or options or the conversion of any such
Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire without
having been exercised, the Floor Price as adjusted upon the issuance of such
rights, options or Convertible Securities shall be readjusted to the Floor Price
which would have been in effect had an adjustment been made on the basis that
the only Additional Shares of Common Stock so issued were the Additional Shares
of Common Stock, if any, actually issued or sold on the exercise of such rights
or options or rights of conversion of such Convertible Securities, and such
Additional Shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise, plus the
consideration, if any, actually received by the Company for the granting of all
such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually converted,
plus the consideration, if any, actually received by the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) on the conversion of such Convertible Securities.

               (iv)   "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued by the Company or deemed to be issued pursuant to this
Section 5(g), other than (A) shares of Common Stock issued upon conversion of
the Series D Preferred Stock; (B) shares of Common Stock and/or options,
warrants or other Common Stock purchase rights, and the Common Stock issued
pursuant to such options, warrants or other rights to employees, officers or
directors of, or consultants or advisors to, the Company or any subsidiary
pursuant to stock purchase or stock option plans, agreements or other
arrangements that are approved by the Board of Directors; (C) shares of Common
Stock issued pursuant to the exercise of options, warrants or convertible
securities outstanding as of the Original Issue Date; (D) shares of Common Stock
issued for consideration other than cash pursuant to a merger, consolidation,
acquisition or similar business combination approved by the Board of Directors;
(E) shares of Common Stock issued pursuant to any equipment leasing arrangement;
(F) shares of Common Stock issued pursuant to any debt financing from a bank or
similar financial institution approved by the Board of Directors; (G) shares of
Common Stock issued with the approval of the Board of Directors to customers or
vendors of the Company or to persons with similar commercial relationships with
the Company; (H) shares of Common Stock issued pursuant to corporate partnering
transactions on terms approved by the Board of Directors; and (I) up to 25,000
shares

                                        8



of Common Stock (as adjusted for stock splits, stock dividends, stock
combinations and the like) issued during any 180-day period commencing on or
after the Original Issue Date and which are not otherwise excluded from the
definition of Additional Shares of Common Stock pursuant to the foregoing
provisions of this clause (iv). References to Common Stock in the subsections of
this clause (iv) above shall mean all shares of Common Stock issued by the
Company or deemed to be issued pursuant to this Section 5(g). The "Effective
Price" of Additional Shares of Common Stock shall mean the quotient determined
by dividing the total number of Additional Shares of Common Stock issued or
sold, or deemed to have been issued or sold by the Company under this Section
5(g), into the aggregate consideration received, or deemed to have been received
by the Company for such issue under this Section 5(g), for such Additional
Shares of Common Stock.

     (h)  Stock to be Reserved. The Corporation will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issue upon the conversion of Series D Preferred Stock as herein provided, such
number of shares of Common Stock as shall then be issuable upon the conversion
of all outstanding Series D Preferred Stock. The Corporation covenants that all
shares of Common Stock which shall be so issuable shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, free from preemptive
or similar rights on the part of the holders of any shares of capital stock or
securities of the Corporation, and free from all liens and charges with respect
to the issue thereof; and without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be requisite to assure that the par value, if any, per share of the Common Stock
is at all times equal to or less than the then effective Conversion Price. The
Corporation will take all such action as may be necessary to assure that such
shares of Common Stock may be so issued without violation by the Corporation of
any applicable law or regulation or agreement, or of any requirements of any
domestic securities exchange upon which the Common Stock may be listed. Without
limiting the foregoing, the Corporation will take all such action as may be
necessary to assure that, upon conversion of any of the Series D Preferred
Stock, an amount equal to the lesser of (i) the par value of each share of
Common Stock outstanding immediately prior to such conversion, or (ii) the
Conversion Price shall be credited to the Corporation's stated capital account
for each share of Common Stock issued upon such conversion, and that, if clause
(i) above is applicable, the balance of the Conversion Price of Series D
Preferred Stock converted shall be credited to the Corporation's capital surplus
account.

     (i)  Closing of Books. The Corporation will at no time close its transfer
books against the transfer of any Series D Preferred Stock or of any shares of
Common Stock issued or issuable upon the conversion of any Series D Preferred
Stock in any manner which interferes with the timely conversion of such Series D
Preferred Stock.

     (j)  Taxes. The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of Series D
Preferred Stock. The Corporation shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of Common Stock or the reissuance of the Series D Preferred Stock in a
name other than that in which the shares of Series D Preferred Stock so
converted were registered, and no such issuance or delivery shall be made unless
and until the person requesting such issuance has

                                        9



paid to the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid.

     (k)  Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Series D Preferred Stock shall not have any voting powers,
preferences and relative, participating, optional or other special rights, other
than those specifically set forth in this Certificate of Designations and in the
Certificate of Incorporation.

     (l)  Limitation on Issuance of Conversion Shares; Redemption.
Notwithstanding any adjustment of the Conversion Price made under this Section
5, and except as provided below, the Corporation shall not be obligated to issue
upon conversion of the Series D Preferred Stock, in the aggregate, more than
that number of shares of Common Stock equal to 19.99% of the number of shares of
Common Stock of the Corporation outstanding on the Original Issue Date (such
amount to be proportionately and equitably adjusted from time to time in the
event of stock splits, stock dividends, combinations, reverse stock splits,
reclassifications, capital reorganization and similar events relating to the
Common Stock) (the "Maximum Share Amount") if the issuance of shares of Common
Stock in excess of the Maximum Share Amount (such number of excess shares
referred to in the aggregate as the "Excess Shares") would constitute a breach
or violation of the Corporation's obligations under the rules or regulations of
Nasdaq or any other principal securities exchange or market upon which the
Common Stock is or becomes traded (the "Exchange Rules"). To the extent the
Corporation will be required, or it appears likely to the Board of Directors of
the Corporation that it will be required, to issue any Excess Shares as a result
of an adjustment to the Conversion Price, the Corporation shall, at its option,
either (i) promptly take such action that would enable it to issue such Excess
Shares without breaching or violating any Exchange Rules, including without
limitation, obtaining stockholder approval, or (ii) redeem the Excess Shares at
a redemption price equal to the Conversion Price. The number of shares
comprising the Maximum Share Amount (and if applicable, any Excess Shares to be
issued) shall be allocated among the holders of the shares of Series D Preferred
Stock pro rata based on the total number of shares of Series D Preferred Stock
then outstanding.

6.   No Redemption. The Series D Preferred Stock shall not be redeemable by the
Corporation.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       10



     In Witness Whereof, this Certificate of Designation of Series D Preferred
Stock has been subscribed this ___ day of April 2002, by the undersigned who
affirms that the statements made herein are true and correct.

                                        American Technology Corporation





                                        By:_____________________________________
                                               Name:
                                               Title:

EX-10.1

                                                                    Exhibit 10.1




                               AMERICAN TECHNOLOGY
                                  CORPORATION

             SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

                                 May 3, 2002



                               TABLE OF CONTENTS
                               -----------------



                                                                      Page
                                                                      ----
                                                                   
1.   Agreement To Sell And Purchase. ...............................   1

     1.1    Authorization of Shares ................................   1

     1.2    Sale and Purchase ......................................   1

2.   Closing, Delivery And Payment .................................   2

     2.1    Delivery. ..............................................   2

     2.2    Subsequent Sales of Shares .............................   2

3.   Representations, Warranties and Covenants of the Company ......   2

     3.1    Organization, Good Standing and Qualification ..........   2

     3.2    Subsidiaries ...........................................   3

     3.3    Capitalization; Voting Rights ..........................   3

     3.4    Authorization; Binding Obligations .....................   4

     3.5    SEC Reports and Filings ................................   4

     3.6    Changes ................................................   4

     3.7    Title to Properties and Assets; Liens, etc. ............   4

     3.8    Compliance with Other Instruments ......................   5

     3.9    Litigation .............................................   5

     3.10   Employees ..............................................   5

     3.11   Registration Rights ....................................   5

     3.12   Compliance with Laws; Permits ..........................   5

     3.13   Patents and Trademarks .................................   6

     3.14   Offering Valid .........................................   6

     3.15   Eligibility for Form S-3 ...............................   6

     3.16   Reporting Status .......................................   7



                                       i



                               TABLE OF CONTENTS
                               -----------------
                                  (continued)



                                                                       Page
                                                                       ----
                                                                    
     3.17   NASDAQ Small Cap Market ...................................  7

4.   Representations And Warranties Of The Purchasers. ................  7

     4.1   Requisite Power and Authority ..............................  7

     4.2   Investment Representations .................................  7

5.   Conditions To Closing. ........................................... 11

     5.1   Conditions to Purchasers' Obligations at the Closing ....... 11

     5.2   Conditions to Obligations of the Company ................... 12

6.   Registration Rights .............................................. 12

     6.1   Definitions ................................................ 12

     6.2   Mandatory Registration. .................................... 13

     6.3   Expenses of Registration ................................... 14

     6.4   Obligations of the Company ................................. 14

     6.5   Obligations of Holder. ..................................... 15

     6.6   Indemnification ............................................ 16

     6.7   Assignment of Registration Rights .......................... 18

7.   Miscellaneous. ................................................... 18

     7.1   Governing Law .............................................. 18

     7.2   Survival ................................................... 18

     7.3   Successors and Assigns ..................................... 18

     7.4   Entire Agreement ........................................... 18

     7.5   Severability ............................................... 19

     7.6   Amendment and Waiver. ...................................... 19

     7.7   Delays or Omissions ........................................ 19


                                       ii




                               TABLE OF CONTENTS
                               -----------------
                                  (continued)



                                                                      Page
                                                                      ----
                                                                   
        7.8   Notices ...............................................  19

        7.9   Expenses ..............................................  19

        7.10  Attorneys' Fees .......................................  19

        7.11  Confidentiality .......................................  20

        7.12  Titles and Subtitles ..................................  20

        7.13  Counterparts ..........................................  20

        7.14  Broker's Fees .........................................  20

        7.15  Exculpation Among Purchasers ..........................  20

        7.16  Pronouns ..............................................  20


                                      iii




                                List of Exhibits


Schedule of Purchasers                                 Exhibit A

Certificate of Designation                             Exhibit B

Warrant Agreement                                      Exhibit C

Schedule of Exceptions                                 Exhibit D

                                       iv



                         AMERICAN TECHNOLOGY CORPORATION

             SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

         THIS SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the
"Agreement") is entered into as of April ____, 2002, by and among American
Technology Corporation, a Delaware corporation (the "Company"), and each of
those persons and entities, severally and not jointly, whose names are set forth
on the Schedule of Purchasers attached hereto as Exhibit A (which persons and
                                                 ---------
entities are hereinafter collectively referred to as "Purchasers" and each
individually as a "Purchaser").

                                    RECITALS

         WHEREAS, the Company has authorized the sale and issuance of an
aggregate of up to two hundred fifty thousand (250,000) shares of its Series D
Preferred Stock (the "Shares") and warrants to purchase an aggregate of up to
five hundred fifty thousand (550,000) shares of its Common Stock (the
"Warrants," and together with the Shares, the "Securities");

         WHEREAS, Purchasers desire to purchase the Securities on the terms and
conditions set forth herein; and

         WHEREAS, the Company desires to issue and sell the Securities to
Purchasers on the terms and conditions set forth herein.

         NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:

         1.   AGREEMENT TO SELL AND PURCHASE.

              1.1   Authorization of Shares. On or prior to the Closing (as
defined in Section 2 below), the Company shall have authorized (i) the sale and
issuance to Purchasers of the Securities, and (ii) the issuance of such shares
of Common Stock to be issued upon conversion or exercise, as the case may be, of
the Securities (the "Conversion Shares"). The Shares and the Conversion Shares
shall have the rights, preferences, privileges and restrictions set forth in the
Company's Certificate of Designation of Series D Preferred Stock, in the form
attached hereto as Exhibit B (the "Certificate of Designation") and in the
                   ---------
Company's Certificate of Incorporation, as amended (collectively with the
Certificate of Designation, the "Charter").

              1.2   Sale and Purchase. Subject to the terms and conditions
hereof, at the Closing (as hereinafter defined) the Company hereby agrees to
issue and sell to each Purchaser, severally and not jointly, and each Purchaser
agrees to purchase from the Company, severally and not jointly, the number of
Shares set forth opposite such Purchaser's name on Exhibit A, at a purchase
                                                   ---------
price of Ten Dollars ($10.00) per share and a Warrant, in the form attached
hereto as Exhibit C, to purchase the number of shares of Common Stock set forth
          ---------
opposite such Purchaser's name on Exhibit A.
                                  ---------



         2.   CLOSING, DELIVERY AND PAYMENT.

              2.1   Closing. The closing of the sale and purchase of the
Securities under this Agreement (the "Closing") shall take place at 10:00 a.m.
on the date hereof, at the offices of Procopio, Cory, Hargreaves & Savitch LLP,
530 B Street, Suite 2100, San Diego, California 92101, or at such other time or
place as the Company and Purchasers may mutually agree (such date is hereinafter
referred to as the "Closing Date").

              2.2   Delivery.

                    (a) Closing Deliveries. At the Closing, each Purchaser shall
pay the purchase price for the Securities as set forth next to such Purchaser's
name on Exhibit A hereto by delivering immediately available funds in United
States Dollars, along with an executed Stock Purchase Agreement, to the
Company's offices. The Company shall deliver certificates for the Shares and
Warrants, registered in the name of such Purchaser, to the Purchaser.

                    (b) Method of Payment. Payment of the purchase price for the
Securities shall be made by wire transfer of funds to:

                    US Bank
                    PO Box 64799
                    St. Paul, MN 55164
                    1-800-673-3555
                    ABA#:  122235821
                    Account Name:  American Technology Corporation
                    Account#:  165600532825

              2.3   Subsequent Sales of Shares. At any time on or before the
60th day following the Closing, the Company may sell up to the balance of the
authorized shares of Series D Preferred Stock and Warrants not sold at the
Closing to such persons as may be approved by the Board of Directors of the
Company. All such sales shall be made on the terms and conditions set forth in
this Agreement, including, without limitation, the representations and
warranties by such Purchasers as set forth in Section 4. Any Shares of Series D
Preferred Stock sold pursuant to this Section 2.3 shall be deemed to be "Shares"
for all purposes under this Agreement, any Warrants sold pursuant to this
Section 2.3 shall be deemed "Warrants" for all purposes under this Agreement,
and any purchasers thereof shall be deemed to be "Purchasers" for all purposes
under this Agreement.

         3.   REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.

         Except as set forth in the Schedule of Exceptions attached hereto as
Exhibit D, the Company hereby represents and warrants to, and covenants with,
each Purchaser as of the date of this Agreement as follows:

              3.1   Organization, Good Standing and Qualification. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of

                                       2



Delaware. The Company has all requisite corporate power and authority to own
and operate its properties and assets, to execute and deliver this Agreement and
the Warrants to issue and sell the Securities and the Conversion Shares and to
carry out the provisions of this Agreement, the Warrants and the Charter and to
carry on its business as presently conducted and as presently proposed to be
conducted. The Company is duly qualified and is authorized to do business and is
in good standing as a foreign corporation in all jurisdictions in which the
nature of its activities and of its properties (both owned and leased) makes
such qualification necessary, except for those jurisdictions in which failure to
do so would not have a material adverse effect on the Company or its business.

              3.2   Subsidiaries. The Company owns no equity securities of any
other corporation, limited partnership or similar entity. The Company is not a
participant in any joint venture, partnership or similar arrangement.

              3.3   Capitalization; Voting Rights. The authorized capital stock
of the Company consists of: (A) 20,000,000 shares of Common Stock, par value
$.00001 per share, of which, as of March 31, 2002 (the "Reference Date"), (i)
14,273,951 shares are issued and outstanding, (ii) 1,188,025 shares are subject
to outstanding options, (iii) 173,250 shares are reserved for future issuance to
employees, directors and consultants pursuant to the Company's stock option
plans, (iv) 1,487,500 shares are subject to outstanding warrants, and (v)
1,072,238 shares are issuable upon conversion of outstanding convertible
promissory notes; and (B) 5,000,000 shares of Preferred Stock, par value $.00001
per share, of which (i) 350,000 shares are designated Series A Preferred Stock,
no shares of which are issued and outstanding as of the Reference Date, (ii)
250,000 shares are designated Series B Preferred Stock, no shares of which are
issued and outstanding as of the Reference Date, (iii) 300,000 shares are
designated as Series C Preferred Stock, 10,000 shares of which are issued and
outstanding as of the Reference Date and are convertible into 39,042 shares of
Common Stock as of the Reference Date, and (iv) 250,000 shares are designated
Series D Preferred Stock, none of which, prior to the Closing, are issued and
outstanding. All issued and outstanding shares of the Company's Common Stock (a)
have been duly authorized and validly issued, and (b) are fully paid and
nonassessable. The rights, preferences, privileges and restrictions of the
Shares are as stated in the Charter 1,138,889 shares of Common Stock have been
duly and validly reserved for issuance as Conversion Shares, and the Company
will take all reasonable measures to ensure that, at all times, a sufficient
number of shares of its Common Stock are reserved for issuance upon conversion
of the Shares and exercise of the Warrants. As of the Reference Date, other than
the shares of capital stock issuable upon exercise or conversion of the
foregoing outstanding options, warrants and convertible securities, and except
as may be granted pursuant to this Agreement or the Warrants, there are no
outstanding options, warrants, rights (including conversion, anti-dilution or
preemptive rights and rights of first refusal), proxy or stockholder agreements,
or agreements of any kind for the purchase or acquisition from the Company of
any of its securities. When issued in compliance with the provisions of this
Agreement and the Charter, the Securities and the Conversion Shares will be
validly issued, fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Shares and the Conversion Shares may
be subject to restrictions on transfer under state and/or federal securities
laws as set forth herein or as otherwise required by such laws at the time a
transfer is proposed.

                                       3



              3.4   Authorization; Binding Obligations. All corporate action on
the part of the Company, its officers, directors and stockholders necessary for
the authorization of this Agreement and the Warrants, the performance of all
obligations of the Company hereunder and thereunder at the Closing and the
authorization, sale, issuance and delivery of the Securities pursuant hereto and
the Conversion Shares pursuant to the Charter has been taken or will be taken
prior to the Closing. The Agreement, and the Warrants, when executed and
delivered, will be valid and binding obligations of the Company enforceable in
accordance with their terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights; (b) general principles of equity
that restrict the availability of equitable remedies; and (c) to the extent that
the enforceability of the indemnification provisions in Section 6.6 of this
Agreement may be limited by applicable laws. The sale of the Securities and the
subsequent conversion or exercise of the Securities, as the case may be, into
Conversion Shares are not and will not be subject to any preemptive rights,
anti-dilution or rights of first refusal that have not been properly waived or
complied with.

              3.5   SEC Reports and Filings. The Company has delivered to
Purchaser complete and accurate copies of (i) the Annual Report on Form 10-K for
the fiscal year ended September 30, 2001, (ii) the Quarterly Report on Form 10-Q
for the quarter ended December 31, 2001, and (iii) the Current Report on Form
8-K dated April 23, 2002, each as filed by the Company with the Securities and
Exchange Commission ("SEC") (the "SEC Documents"). The SEC Documents, including
the financial statements contained therein, (i) complied with the requirements
of the Securities Act of 1933, as amended (the "Securities Act") or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the case
may be, at and as of the times they were filed (or, if amended or superseded by
a filing prior to the date of this Agreement, then on the date of such filing)
in all material respects and (ii) did not at and as of the time they were filed
(or, if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Company has made all filings with the SEC
required under the Securities Act, the Exchange Act and all regulations
promulgated thereunder since January 1, 1997.

              3.6   Changes. Since January 1, 2002, there has been no material
adverse change or disruption in the business, operations, prospects or financial
condition of the Company other than as disclosed in the SEC Documents.

              3.7   Title to Properties and Assets; Liens, etc. The Company has
good and marketable title to its properties and assets, including the properties
and assets reflected in the most recent balance sheet included in the SEC
Documents, and good title to its leasehold estates, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those
resulting from taxes which have not yet become delinquent, (b) minor liens and
encumbrances which do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company, and (c)
those that have otherwise arisen in the ordinary course of business. All
facilities, machinery, equipment, fixtures, vehicles and other properties owned,
leased or used by the Company are in good operating condition and repair and

                                       4



are reasonably fit and usable for the purposes for which they are being
used. The Company is in compliance with all material terms of each lease to
which it is a party or is otherwise bound.

              3.8    Compliance with Other Instruments. The Company is not in
violation or default of any term of its Charter or Bylaws, or of any provision
of any mortgage, indenture, contract, agreement, instrument or contract to which
it is party or by which it is bound or of any judgment, decree, order, writ or,
to its knowledge, any statute, rule or regulation applicable to the Company
which would materially and adversely affect the business, assets, liabilities,
financial condition or operations of the Company. The execution, delivery, and
performance of and compliance with this Agreement, and the Warrants, and the
issuance and sale of the Securities pursuant hereto and of the Conversion Shares
pursuant to the Certificate of Designations and the Charter, will not, with or
without the passage of time or giving of notice, result in any such material
violation, or be in conflict with or constitute a default under any such term,
or result in the creation of any mortgage, pledge, lien, encumbrance or charge
upon any of the properties or assets of the Company or the suspension,
revocation, impairment, forfeiture or nonrenewal of any permit license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.

              3.9    Litigation. There is no action, suit, proceeding or
investigation pending or to the Company's knowledge currently threatened in
writing against the Company that questions the validity of this Agreement or the
Warrants or the right of the Company to enter into any of such agreements, or to
consummate the transactions contemplated hereby or thereby, or which might
result, either individually or in the aggregate, in any material adverse change
in the assets, prospects, condition or affairs of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing.

              3.10   Employees. The Company has no collective bargaining
agreements with any of its employees. There is no labor union organizing
activity pending or, to the Company's knowledge, threatened with respect to the
Company.

              3.11   Registration Rights. Except as required pursuant to this
Agreement and pursuant to the terms of an aggregate of $2,125,000 in principal
amount of 12% Convertible Subordinated Promissory Notes due December 31, 2002,
the Company is presently not under any obligation, and has not granted any
rights, to register (as defined in Section 6.1 of this Agreement) any of the
Company's presently outstanding securities or any of its securities that may
hereafter be issued.

              3.12   Compliance with Laws; Permits. To its knowledge, the
Company is not in violation of any applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof or any administrative or self-regulatory agency in respect of the
conduct of its business or the ownership of its properties which violation would
materially and adversely affect the business, assets, liabilities, financial
condition or operations of the Company. No orders, permissions, consents,
approvals or authorizations are required to be obtained and no registrations or
declarations are required to be filed in connection with the execution and
delivery of this Agreement and the issuance of the

                                       5



Securities or the Conversion Shares, except such as has been duly and validly
obtained or filed, or with respect to any filings that must be made after the
Closing, as will be filed in a timely manner. The Company has all franchises,
permits, licenses and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could materially and
adversely affect the business, properties, prospects or financial condition of
the Company and believes it can obtain, without undue burden or expense, any
similar authority for the conduct of its business as planned to be conducted.

              3.13   Patents and Trademarks. To the best of its knowledge, the
Company owns or possesses sufficient legal rights to all patents, trademarks,
service marks, trade names, copyrights, trade secrets, information and other
proprietary rights and processes necessary for its business as now conducted and
as proposed to be conducted, without any known infringement of the rights of
others. There are no outstanding options, licenses or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes of any other person or
entity other than such licenses or agreements arising from the purchase of "off
the shelf" or standard products. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with their duties to
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any employee is now obligated. The Company does not believe it is or will be
necessary to utilize any inventions, trade secrets or proprietary information of
any of its employees made prior to their employment by the Company, except for
inventions, trade secrets or proprietary information that have been assigned to
the Company.

              3.14   Offering Valid. Assuming the accuracy of the
representations and warranties of the Purchasers contained in Section 4.2
hereof, the offer, sale and issuance of the Securities and the Conversion Shares
will be exempt from the registration requirements of the Securities Act and will
have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws. Neither the Company nor any agent on its
behalf has solicited or will solicit any offers to sell or has offered to sell
or will offer to sell all or any part of the Securities to any person or persons
so as to bring the sale of such Securities by the Company within the
registration provisions of the Securities Act or any state securities laws.

              3.15   Eligibility for Form S-3. The Company represents and
warrants that it meets the requirements for the use of Form S-3 for registration
of the sale by the Purchaser of the

                                       6



Conversion Shares, and the Company shall file all reports required to be filed
by the Company with the SEC in a timely manner and take all other necessary
action so as to maintain such eligibility for the use of Form S-3.

              3.16   Reporting Status. The Company's Common Stock is registered
under Section 12 of the Exchange Act. So long as any Purchaser beneficially owns
any of the Securities or Conversion Shares, the Company shall timely file all
reports required to be filed with the SEC pursuant to the Exchange Act, and the
Company shall not voluntarily terminate its status as an issuer required to file
reports under the Exchange Act even if the Exchange Act or the rules and
regulations thereunder would permit such termination.

              3.17   NASDAQ Small Cap Market. The Company's Common Stock is
listed on the Nasdaq Small Cap Market maintained by the National Association of
Securities Dealers, Inc. ("NASD"), and for so long as any Purchaser owns any of
the Securities or Conversion Shares, the Company shall use its best efforts to
continue the listing and trading of its Common Stock on the Nasdaq SmallCap
Market or to secure and maintain listing and trading on the Nasdaq National
Market System, the New York Stock Exchange or the American Stock Exchange, and
shall comply in all respects with the Company's reporting filing and other
obligations under the bylaws or rules of such market or exchange. The Company is
not aware of any delisting or suspension proceeding regarding its Common Stock
or any SEC or NASD inquiries regarding the Company and does not reasonably
anticipate any such delisting, suspension or inquiry.

         4.   REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.

         Each Purchaser hereby represents and warrants, severally and not
jointly, to the Company as follows:

              4.1    Requisite Power and Authority. Purchaser has all necessary
power and authority under all applicable provisions of law to execute and
deliver this Agreement and to carry out its provisions. All action on
Purchaser's part required for the lawful execution and delivery of this
Agreement has been or will be effectively taken prior to the Closing. Upon its
execution and delivery, this Agreement will be a valid and binding obligation of
Purchaser, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, (b) general
principles of equity that restrict the availability of equitable remedies, and
(c) to the extent that the enforceability of the indemnification provisions of
Section 6.6 of this Agreement may be limited by applicable laws.

              4.2    Investment Representations. Purchaser understands that
neither the Securities nor the Conversion Shares have been registered under the
Securities Act, and that the certificates representing the Shares and the
Conversion Shares will contain appropriate restrictive legends. Purchaser also
understands that the Securities are being offered and sold pursuant to an
exemption from registration contained in the Securities Act based in part upon
Purchaser's representations contained in the Agreement. Purchaser hereby
represents and warrants as follows:

                                       7



                    (a) Purchaser Bears Economic Risk. Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. Purchaser must bear the economic risk of
this investment indefinitely unless the Securities (or the Conversion Shares)
are registered pursuant to the Securities Act, or an exemption from registration
is available. Purchaser understands that other than pursuant to the terms of
this Agreement the Company has no present intention of registering the
Securities, the Conversion Shares or any shares of its Common Stock. Purchaser
also understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow Purchaser to transfer all or any portion of the
Securities or the Conversion Shares under the circumstances, in the amounts or
at the times Purchaser might propose.

                    (b) Acquisition for Own Account. Purchaser is acquiring the
Securities and the Conversion Shares for Purchaser's own account for investment
only, and not with a present view towards their distribution other than in
compliance with the Securities Act.

                    (c) Purchaser Can Protect Its Interest. Purchaser represents
that by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated in this Agreement. Further, Purchaser is aware of no
publication of any advertisement in connection with the transactions
contemplated in the Agreement.

                    (d) Accredited Investor. Unless Purchaser has initialed the
blank next to Section 4.2(h) below, Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.

                    (e) Company Information. Purchaser has received and read the
SEC Documents and has had an opportunity to discuss the Company's business,
management and financial affairs with directors, officers and management of the
Company and has had the opportunity to review the Company's operations and
facilities. Purchaser has also had the opportunity to ask questions of and
receive answers from, the Company and its management regarding the terms and
conditions of this investment.

                    (f) Rule 144. Purchaser acknowledges and agrees that the
Securities, and, if issued, the Conversion Shares must be held indefinitely
unless they are subsequently registered under the Securities Act or an exemption
from such registration is available. Purchaser has been advised or is aware of
the provisions of Rule 144 promulgated under the Securities Act as in effect
from time to time, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things: the availability of certain current public information about the
Company, the resale occurring following the required holding period under Rule
144 and (other than Rule 144(k)) the number of shares being sold during any
three-month period not exceeding specified limitations.

                    (g) Residence. If the Purchaser is an individual, then the
Purchaser resides in the state or province identified in the address of the
Purchaser set forth on Exhibit A; if the
                       ---------

                                       8



Purchaser is a partnership, corporation, limited liability company or other
entity, then the office or offices of the Purchaser in which its investment
decision was made is located at the address or addresses of the Purchaser set
forth on Exhibit A.

(Initial if applicable) _____ (h) Foreign Investors. Regulation S
Representations. The representations in this Section 4.2(h) apply only to
Purchasers who enter their initials next to this section. Purchaser understands
that the Company is relying on the following representations and warranties, and
other representations and warranties in the Section 4, for the purpose of
establishing that the offer and sale of the Securities is excluded from Section
5 of the Securities Act by virtue of Regulation S.

                                    i.   All offers and sales of securities to
Purchaser were made in an offshore transaction, as defined in Rule 902(h) of
Regulation S. Specifically, the offer to sell the Securities was made to
Purchaser who was located outside the United States at the time of such offer,
and this Agreement was executed by Purchaser or a duly authorized representative
of Purchaser located outside the United States at the time of execution.

                                    ii.  If Purchaser attempts to sell, transfer
or otherwise dispose of the Securities or the Conversion Shares prior to one
year after the Closing, such Purchaser agrees that:

                                         a.   Each "Distributor" (as defined in
Regulation S, Rule 902(d)) in connection with such resale agrees in writing (i)
that all offers and sales of the Securities and the Conversion Shares prior to
the expiration of the Distribution Compliance Period shall be made only in
accordance with the provisions of Regulation S, Rule 903 or Rule 904, pursuant
to registration of such securities under the Securities Act, or pursuant to an
available exemption from the registration requirements of the Securities Act;
and (ii) not to engage in hedging transactions with regard to such securities
prior to the expiration of the Distribution Compliance Period, unless in
compliance with the Securities Act.

                                         b.   All offering materials and
documents (other than press releases) used in connection with offers and sales
of the Securities and the Conversion Shares prior to the expiration of the
Distribution Compliance Period shall include statements to the effect that such
securities have not been registered under the Securities Act and may not be
offered or sold in the United States or to U.S. Persons (as defined in Section
4.2(h)(iii)), other than Distributors, unless the securities are registered
under the Securities Act, or an exemption from the registration requirements of
the Securities Act is available. Such offering materials and documents also must
state that hedging transactions involving those securities may not be conducted
unless in compliance with the Securities Act. Such statements shall appear (i)
on the cover or inside cover page of any prospectus or offering circular used in
connection with the offer or sale of the securities; (ii) in the underwriting
section of any prospectus or offering circular used in connection with the offer
or sale of the securities; and (iii) in any advertisement made or issued by the
Company, any Distributor, any of their respective affiliates, or any person
acting on behalf of any of the foregoing. Such statements may appear in summary
form on prospectus cover pages and in advertisements.

                                       9



                                         c.   The offer or sale of the
Securities and the Conversion Shares by such Purchaser shall not be made to a
U.S. Person or for the account of a U.S. Person, other than a Distributor.

                                         d.   The offer and sale of the
Securities and the Conversion Shares shall also comply with the following
conditions (i) such Purchaser shall require that prior to the sale or transfer,
the purchaser of the Securities or the Conversion Shares (other than a
Distributor) certifies that it is not a U.S. Person and is not acquiring such
securities for the account or benefit of any U.S. Person or certifies that it is
a U.S. Person who purchased securities in a transaction that did not require
registration under the Securities Act; (ii) such Purchaser shall require that
prior to the sale or transfer, the purchaser of such securities agrees to resell
such securities only in accordance with the provisions of Regulation S, pursuant
to registration under the Securities Act, or pursuant to an available exemption
from registration; and agrees not to engage in hedging transactions with regard
to such securities unless in compliance with the Securities Act; (iii) such
Purchaser shall require each Distributor selling securities to a Distributor, a
dealer (as defined in Section 2(12) of the Securities Act), or a person
receiving a selling concession, fee or other remuneration, prior to the
expiration of the Distribution Compliance Period, to send a confirmation or
other notice to the purchaser stating that the purchaser is subject to the same
restrictions on offers and sales that apply to the Distributor.

                                         e.   Such Purchaser understands that
the Securities and the Conversion Shares will at all times, prior to the
expiration of the Distribution Compliance Period, contain a legend to the effect
that transfer is prohibited except in accordance with the provisions of
Regulation S, pursuant to registration under the Securities Act, or pursuant to
an available exemption from registration; and that hedging transactions
involving these securities may not be conducted unless in compliance with the
Securities Act.

                                         f.   Such Purchaser further understands
the Company, to comply with Regulation S, shall refuse to register any transfer
of the Securities or the Conversion Shares not made in accordance with the
provisions of Regulation S, pursuant to registration under the Securities Act,
or pursuant to an available exemption from registration.

                                   iii.  Such Purchaser is not a U.S. Person and
is not acquiring the Securities for the account or benefit of any U.S. Person.
The term "U.S. Person" means (i) any natural person resident in the United
States; (ii) any partnership or corporation organized or incorporated under the
laws of the United States; (iii) any estate of which any executor or
administrator is a U.S. Person; (iv) any trust of which any trustee is a U.S.
Person; (v) any agency or branch of a foreign entity located in the United
States; (vi) any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit or account
of a U.S. Person; (vii) any discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary organized, incorporated,
or (if an individual) resident in the United States; and (viii) any partnership
or corporation if: (1) organized or incorporated under the laws of any foreign
jurisdiction; and (2) formed by a U.S. Person principally for the purpose of
investing in securities not registered under the Securities Act, unless it is
organized or incorporated, and owned, by accredited investors (as defined in
Rule 501(a) under the Securities Act) who are not natural persons, estates or
trusts. Notwithstanding the foregoing definition of

                                       10



"U.S. Person": (a) any discretionary account or similar account (other than an
estate or trust) held for the benefit or account of a non-U.S. Person by a
dealer or other professional fiduciary organized, incorporated, or (if an
individual) resident in the United States shall not be deemed a U.S. Person; (b)
any estate of which any professional fiduciary acting as executor or
administrator is a U.S. Person shall not be deemed a U.S. Person if: (1) an
executor or administrator of the estate who is not a U.S. Person has sole or
shared investment discretion with respect to the assets of the estate; and (2)
the estate is governed by foreign law; (c) any trust of which any professional
fiduciary acting as trustee is a U.S. Person shall not be deemed a U.S. Person
if a trustee who is not a U.S. Person has sole or shared investment discretion
with respect to the trust assets, and no beneficiary of the trust (and no
settlor if the trust is revocable) is a U.S. Person; (d) an employee benefit
plan established and administered in accordance with the law of a country other
than the United States and customary practices and documentation of such country
shall not be deemed a U.S. Person; (e) any agency or branch of a U.S. Person
located outside the United States shall not be deemed a U.S. Person if: (1) the
agency or branch operates for valid business reasons; and (2) the agency or
branch is engaged in the business of insurance or banking and is subject to
substantive insurance or banking regulation, respectively, in the jurisdiction
where located; (f) the International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the United Nations, and their
agencies, affiliates and pension plans, and any other similar international
organizations, their agencies, affiliates and pension plans shall not be deemed
U.S. Persons.

     5.   Conditions to Closing.

          5.1  Conditions to Purchasers' Obligations at the Closing. Purchasers'
obligations to purchase the Securities at the Closing are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions:

               (a) Representations and Warranties True; Performance of
Obligations. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if they had been made as of the Closing Date,
and the Company shall have performed all obligations and conditions herein
required to be performed or observed by it on or prior to the Closing.

               (b) Legal Investment.  On the Closing Date, the sale and issuance
of the Securities and the proposed issuance of the Conversion Shares shall be
legally permitted by all laws and regulations to which Purchasers and the
Company are subject.

               (c) Consents, Permits, and Waivers. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement (except for such
as may be properly obtained subsequent to the Closing).

               (d) Filing of Certificate of Designation.  The Certificate of
Designation shall have been filed with the Secretary of State of the State of
Delaware.

                                       11



               (e) Reservation of Conversion Shares. The Conversion Shares
issuable upon conversion of the Shares and exercise of the Warrants shall have
been duly authorized and reserved for issuance upon such conversion or exercise.

               (f) NASDAQ Small Cap Market. The Company's Common Stock shall be
currently trading on the Nasdaq Small Cap Market. The Company and Purchasers
shall not be aware of any delisting or suspension proceeding regarding the
Company's Common Stock or any SEC or NASD inquiries regarding the Company, nor
shall the Company or any Purchaser reasonably anticipate any such delisting,
suspension or inquiry.

               (g) Size of Offering. Purchasers purchasing at least an aggregate
of $1,000,000 of the Securities pursuant to this Agreement shall have purchased,
or will be purchasing, such Securities prior to or concurrent with the Closing.

          5.2  Conditions to Obligations of the Company. The Company's
obligation to issue and sell the Securities at the Closing is subject to the
satisfaction, on or prior to such Closing, of the following conditions:

               (a) Representations and Warranties True. The representations and
warranties made in Section 4 hereof by those Purchasers acquiring Securities
shall be true and correct in all material respects at the date of the Closing,
with the same force and effect as if they had been made on and as of said date.

               (b) Performance of Obligations. Such Purchasers shall have
performed and complied with all agreements and conditions herein required to be
performed or complied with by such Purchasers on or before the Closing.

               (c) Filing of Certificate of Designation. The Certificate of
Designation shall have been filed with the Secretary of State of the State of
Delaware.

               (d) Consents, Permits, and Waivers. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement (except for such
as may be properly obtained subsequent to the Closing).

               (e) Payment. Each Purchaser shall have delivered to the Company
immediately available funds as payment in full of an amount equal to the
purchase price of the Securities as set forth next to such Purchaser's name on
Exhibit A hereto in accordance with Section 2.2 hereof.

     6.   Registration Rights.

          6.1  Definitions.  As used in this Section 6, the following terms
shall have the following respective meanings:

          "Form S-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the

                                       12



SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.

          "Holder" means any person owning of record Registrable Securities that
have not been sold to the public or any assignee of record of such Registrable
Securities in accordance with Section 6.7 hereof.

          "Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.

          "Registrable Securities" means (a) Common Stock of the Company issued
or issuable upon conversion of the Shares; (b) Common Stock of the Company
issued or issuable upon exercise of the Warrants; and (c) any Common Stock of
the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
above-described securities. Notwithstanding the foregoing, Registrable
Securities shall not include (i) any Conversion Shares issued prior to the date
the Registration Statement covering such other Registrable Securities which is
required to be filed by the Company pursuant to the first sentence of Section
6.2(a) hereof is declared effective by the SEC, and (ii) any securities sold by
a person to the public either pursuant to a registration statement or Rule 144
or sold in a private transaction in which the transferor's rights under this
Section 6 are not assigned.

          "Registrable Securities then outstanding" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.

          "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 6 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).

          "SEC" or "Commission" means the Securities and Exchange Commission.

          "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale.

          6.2  Mandatory Registration.

               (a) The Company shall prepare and file with the SEC on or before
December 31, 2002 (the "SEC Filing Date") a Registration Statement on Form S-3
or, if Form S-3 is not available, on another appropriate form reasonably
acceptable to the Investors, which covers the resale of a number of shares of
Common Stock equal to at least the number of Registrable Securities issuable to
each Holder upon conversion of the Shares and exercise of the

                                       13



Warrants, determined as if the Shares were converted in full (based on a $4.50
per share conversion price) and the Warrants were exercised in full on the first
anniversary of the Closing Date. If at any time the number of shares of Common
Stock included in the Registration Statement required to be filed as provided in
the first sentence of this Section 6.2(a) shall be insufficient to cover the
number of shares of Common Stock issuable on conversion in full of the
unconverted Shares and unexercised Warrants, then promptly, but in no event
later than 60 days after such insufficiency shall occur, the Company shall file
with the SEC an additional Registration Statement on Form S-3, or another
appropriate form (which shall not constitute a post-effective amendment to the
Registration Statement filed pursuant to the first sentence of this Section
6.2(a)) covering such number of shares of Common Stock as shall be sufficient to
permit such conversion and exercise. For all purposes of this Agreement such
additional Registration Statement shall be deemed to be the Registration
Statement required to be filed by the Company pursuant to this Section 6.2(a),
and the Company and the Holders shall have the same rights and obligations with
respect to such additional Registration Statement as they shall have with
respect to the initial Registration statement required to be filed by the
Company pursuant to this Section 6.2(a).

               (b) Adjustment of Conversion Terms. If the Registration Statement
covering the Registrable Securities which is required to be filed by the Company
pursuant to the first sentence of Section 6.2(a) hereof is filed by December 31,
2002, the terms of conversion of the Shares shall be adjusted as provided in the
Certificate of Designation.

          6.3  Expenses of Registration. Except as specifically provided herein,
all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 6.2 shall be borne by the
Company. All Selling Expenses incurred in connection with any registrations
hereunder, shall be borne by the holders of the securities so registered pro
rata on the basis of the number of shares so registered.

          6.4  Obligations of the Company.  Whenever required to effect the
registration of any Registrable Securities, the Company shall:

               (a) Prepare and file with the SEC a Registration Statement on
Form S-3 with respect to the number of Registrable Securities provided in
Section 6.2(a), and thereafter to use all reasonable efforts to cause each
Registration Statement relating to Registrable Securities to become effective
and keep the Registration Statement effective for two years after the Closing
Date.

               (b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement for the period set forth in paragraph (a) above.

               (c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of

                                       14



Registrable Securities owned by them.

               (d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.

               (e) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and use its best efforts to prepare a supplement or amendment to the
Registration Statement to correct such untrue statement or omission, and deliver
such number of copies of such supplement or amendment to each Holder as such
Holder may reasonably request.

               (f) Use all reasonable efforts to prevent the issuance of stop
orders or any other suspensions in trading of the Company's Common Stock by the
SEC or any applicable exchange or market, and use its best efforts to have
removed or reversed any such stop order or suspension in trading that occurs.

          6.5  Obligations of Holder.

               (a) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 6.

               (b) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 6.2 or 6.4 that each Holder shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request.

               (c) Each Holder by such Holder's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Holder has notified the Company in writing of
such Holder's election to waive all of such Holder's rights to register any
securities under this Section 6;

               (d) Each Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 6.4(e),
such Holder will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities and
all other transactions involving or relating to

                                       15



the Company's securities until such Holder's receipt of copies of a supplemented
or amended prospectus and, if so directed by the Company, such Holder shall
deliver to the Company (at the expense of the Company) or destroy (and deliver
to the Company a certificate of destruction) all copies in such Holder's
possession, of the prospectus covering such Registrable Securities current at
the time of receipt of such notice.

          6.6    Indemnification.  In the event any Registrable  Securities are
included in a registration  statement under this Section 6:

                 (a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners, officers and directors of each
Holder, any underwriter (as defined in the Securities Act) for such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the Securities Act or the Exchange Act, against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(collectively a "Violation") by the Company: (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will pay as incurred to
each such Holder, partner, officer, director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 6.6
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.

                 (b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers and
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of such other Holder may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such

                                       16



losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder under an instrument duly executed
by such Holder and stated to be specifically for use in connection with such
registration; and each such Holder will pay as incurred any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or other Holder, or partner, officer, director
or controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action if it is judicially
determined that there was such a Violation; provided, however, that the
indemnity agreement contained in this Section 6.6 shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 6.6 exceed the proceeds from the offering received
by such Holder.

                 (c) Promptly after receipt by an indemnified party under this
Section 6.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6.6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 6.6, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 6.6.

                 (d) If the indemnification provided for in this Section 6.6 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or

                                       17



omission; provided, that in no event shall any contribution by a Holder
hereunder exceed the proceeds from the offering received by such Holder.

                 (e) The obligations of the Company and Holders under this
Section 6.6 shall survive completion of any offering of Registrable Securities
in a registration statement and the termination of this agreement. No
indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation.

          6.7    Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 6 may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(a) is a subsidiary, parent, general partner, limited partner, retired partner,
member or retired member of a Holder, (b) is a Holder's family member or trust
for the benefit of an individual Holder, or (c) acquires at least fifty thousand
(50,000) shares of Registrable Securities (as adjusted for stock splits and
combinations); provided, however, (i) the transferor shall, within ten (10) days
after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned and (ii) such transferee shall agree
to be subject to all restrictions set forth in this Agreement.

     7.   MISCELLANEOUS.

          7.1    Governing Law. This Agreement shall be governed in all respects
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and performed entirely in California.

          7.2    Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by any Purchaser and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.

          7.3    Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Securities from time to time.

          7.4    Entire Agreement. This Agreement, the Exhibits and Schedules
hereto, the Warrants and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.

                                       18



          7.5    Severability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

          7.6    Amendment and Waiver.

                 (a) This Agreement may be amended or modified only upon the
written consent of the Company and holders of at least fifty percent (50%) of
the Shares (treated as if converted and including any Conversion Shares into
which the Shares or Warrants have been converted or exercised that have not been
sold to the public).

                 (b) The obligations of the Company and the rights of the
holders of the Shares, the Warrants and the Conversion Shares under the
Agreement may be waived only with the written consent of the holders of at least
fifty percent (50%) of the Shares (treated as if converted and including any
Conversion Shares into which the Shares or Warrants have been converted or
exercised that have not been sold to the public).

          7.7    Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Charter,
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of or in any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on any Purchaser's part of any breach, default or
noncompliance under this Agreement or under the Charter or any waiver on such
party's part of any provisions or conditions of the Agreement or the Charter
must be in writing and shall be effective only to the extent specifically set
forth in such writing. All remedies, either under this Agreement, the Charter by
law, or otherwise afforded to any party, shall be cumulative and not
alternative.

          7.8    Notices. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified; (b) when sent by confirmed facsimile if sent during
normal business hours of the recipient, if not, then on the next business day;
(c) five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid; or (d) one (1) day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the Company
at the address as set forth on the signature page hereof and to Purchaser at the
address set forth on Exhibit A attached hereto or at such other address as the
Company or Purchaser may designate by ten (10) days advance written notice to
the other parties hereto.

          7.9    Expenses. Each party shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
this Agreement and the Warrants.

          7.10   Attorneys' Fees. In the event that any dispute among the
parties to this Agreement should result in litigation, the prevailing party in
such dispute shall be entitled to

                                       19



recover from the losing party all fees, costs and expenses of enforcing any
right of such prevailing party under or with respect to this Agreement,
including without limitation, such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.

          7.11   Confidentiality. The Company shall not publicly disclose the
name or identity of any Purchaser unless (i) required by law or the rules and
regulations of the SEC, (ii) such Purchaser has given its prior written consent
or (iii) such information is already in the public domain.

          7.12   Titles and Subtitles. The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.

          7.13   Counterparts. This Agreement may be executed in any number of
counterparts, by facsimile, or both, each of which shall be an original, but all
of which together shall constitute one instrument.

          7.14   Broker's Fees. Each party hereto represents and warrants that
no agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Notwithstanding the foregoing, the Company
may pay finder's fees in cash equal to up to 5% of the purchase price of the
Securities for the introduction of qualified Purchasers accepted by the Company.
Each party hereto further agrees to indemnify each other party for any claims,
losses or expenses incurred by such other party as a result of the
representation in this Section 7.14 being untrue.

          7.15   Exculpation Among Purchasers. Each Purchaser acknowledges that
it is not relying upon any person, firm, or corporation, other than the Company
and its officers and directors, in making its investment or decision to invest
in the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable for any action heretofore or hereafter taken or
omitted to be taken by any of them in connection with the Securities and
Conversion Shares.

          7.16   Pronouns. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       20



     IN WITNESS WHEREOF, the parties hereto have executed the SERIES D PREFERRED
STOCK AND WARRANT PURCHASE AGREEMENT as of the date set forth in the first
paragraph hereof.

COMPANY:                                    PURCHASER:

AMERICAN TECHNOLOGY CORPORATION             ____________________________________
13114 Evening Creek Drive South             [Print Name of Purchaser]
San Diego, California  92128


By: ______________________________          By:_________________________________
       Name:
       Title:
                                            Title (if any):_____________________

                        AMERICAN TECHNOLOGY CORPORATION
                                 SIGNATURE PAGE
           TO SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT



             SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

                                    EXHIBIT A

                             SCHEDULE OF PURCHASERS

                                     AGGREGATE          NUMBER       SHARES OF
NAME AND ADDRESS                     PURCHASE             OF        COMMON STOCK
- ----------------                       PRICE            SHARES      UNDERLYING
                                     ---------          ------        WARRANT
                                                                    ------------

[Purchaser]

____________________________         $________         _______      ____________
____________________________






TOTALS:
                                     =========         =======      ============


                                    EXHIBIT C

                            FORM OF WARRANT AGREEMENT



                                    EXHIBIT D

                             SCHEDULE OF EXCEPTIONS

EX-10.2

                                                                    Exhibit 10.2

                                                                     No. W-D____

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.

                      WARRANT TO PURCHASE _________ SHARES
                               OF COMMON STOCK OF
                         AMERICAN TECHNOLOGY CORPORATION
                           (Void after March 31, 2007)

     This certifies that _________________________________ or its assigns (the
"Holder"), for value received, is entitled to purchase from American Technology
Corporation, a Delaware corporation (the "Company"), having a place of business
at 13114 Evening Creek Drive South, San Diego, California 92128, a maximum of
______________ fully paid and nonassessable shares of the Company's Common Stock
("Common Stock") for cash at a price of Four Dollars and Fifty Cents ($4.50) per
share, as may be adjusted as provided herein (the "Stock Purchase Price"), at
any time or from time to time up to and including 5:00 p.m. (Pacific time) on
March 31, 2007 (the "Expiration Date"), upon surrender to the Company at its
principal office (or at such other location as the Company may advise the Holder
in writing) of this Warrant properly endorsed with the Form of Subscription
attached hereto duly filled in and signed and, if applicable, upon payment in
cash or by check of the aggregate Stock Purchase Price for the number of shares
for which this Warrant is being exercised determined in accordance with the
provisions hereof. The Stock Purchase Price and the number of shares purchasable
hereunder are subject to adjustment as provided in Section 3 of this Warrant.

     This warrant to purchase Common Stock (this "Warrant") is one of a series
of warrants issued pursuant to the Series D Preferred Stock and Warrant Purchase
Agreement dated as of April __, 2002 (the "Purchase Agreement"), which warrants
are collectively referred to herein as the "Warrants."

     This Warrant is subject to the following terms and conditions:

     1.   Exercise; Issuance Of Certificates; Payment For Shares.

          1.1  General. This Warrant is exercisable at the option of the holder
of record hereof, at any time or from time to time, up to the Expiration Date
for all or any part of the shares of Common Stock (but not for a fraction of a
share) which may be purchased hereunder. The Company agrees that the shares of
Common Stock purchased under this Warrant shall be and are deemed to be issued
to the Holder hereof as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been surrendered, properly
endorsed, the completed, executed Form of Subscription delivered and payment
made for such shares.

                                       1.



Certificates for the shares of Common Stock so purchased, together with any
other securities or property to which the Holder hereof is entitled upon such
exercise, shall be delivered to the Holder hereof by the Company at the
Company's expense within five (5) business days after the rights represented by
this Warrant have been so exercised. In case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall cancel this
Warrant and execute and deliver a new Warrant or Warrants of like tenor for the
balance of the shares purchasable under the Warrant surrendered upon such
purchase to the Holder hereof within five (5) business days. Each stock
certificate so delivered shall be in such denominations of Common Stock as may
be requested by the Holder hereof and shall be registered in the name of such
Holder. Notwithstanding anything to the contrary set forth above, each exercise
of the Warrant shall cover at least the lesser of (i) 10,000 shares of Common
Stock (as adjusted for stock splits, stock dividends, combinations and the
like), or (ii) the total number of shares of Common Stock then subject to the
Warrant.

          1.2   Net Issue Exercise.

                (a)   Section 1.2(b) shall not apply and shall have no force or
effect if, in accordance with the terms of the Purchase Agreement, the shares of
Common Stock issuable upon exercise of this Warrant have been registered for
resale under the Securities Act of 1933, as amended, on a registration statement
on Form S-3, or another appropriate form.

                (b)   Notwithstanding any provisions herein to the contrary
(other than Section 1.2(a)), if the fair market value of one share of the
Company's Common Stock is greater than the Stock Purchase Price (at the date of
calculation as set forth below), in lieu of exercising this Warrant for cash,
the Holder may elect to receive shares equal to the value (as determined below)
of this Warrant (or the portion thereof being canceled) by surrender of this
Warrant at the principal office of the Company together with the properly
endorsed Form of Subscription and notice of such election in which event the
Company shall issue to the Holder a number of shares of Common Stock computed
using the following formula:

                X = Y (A-B)
                    -------
                       A

     Where X = the number of shares of Common Stock to be issued to the Holder

                              Y = the number of shares of Common Stock
                              purchasable under the Warrant or, if only a
                              portion of the Warrant is being exercised, the
                              portion of the Warrant being canceled (at the date
                              of such calculation)

                              A = the fair market value of one share of the
                              Company's Common Stock (at the date of such
                              calculation)

                              B = Stock Purchase Price (as adjusted to the date
                              of such calculation)

                                       2.



For purposes of the above calculation, fair market value of one share of Common
Stock shall be the volume weighted average price of the Company's Common Stock
from the hours of 9:30 a.m. to 4:00 p.m. on the NASDAQ as reported by Bloomberg
Financial using the AQR function for the ten (10) trading days immediately
preceding the date of exercise for which there are reported transactions in the
Common Stock.

     2.   Shares To Be Fully Paid; Reservation Of Shares. The Company covenants
and agrees that all shares of Common Stock which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any stockholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Common Stock may be listed; provided, however, that the
Company shall not be required to effect a registration under Federal or State
securities laws with respect to such exercise other than as provided pursuant to
the Purchase Agreement. The Company will not take any action which would result
in any adjustment of the Stock Purchase Price (as set forth in Section 3 hereof)
if the total number of shares of Common Stock issuable after such action upon
exercise of all outstanding warrants, together with all shares of Common Stock
then outstanding and all shares of Common Stock then issuable upon exercise of
all options and upon the conversion of all convertible securities then
outstanding, would exceed the total number of shares of Common Stock then
authorized by the Company's Certificate of Incorporation.

     3.   Adjustment Of Stock Purchase Price And Number Of Shares. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.

          3.1   Subdivision or Combination of Stock. In case the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.

                                       3.



          3.2   Dividends in Common Stock, Other Stock, Property,
Reclassification. If at any time or from time to time the Holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,

                (a)  Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution,

                (b)  any cash paid or payable otherwise than as a cash dividend,
or

                (c)  Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares of
Common Stock issued as a stock split or adjustments in respect of which shall be
covered by the terms of Section 3.1 above),

then and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clause (b) above and this clause (c)) which such
Holder would hold on the date of such exercise had he been the holder of record
of such Common Stock as of the date on which holders of Common Stock received or
became entitled to receive such shares or all other additional stock and other
securities and property.

          3.3   Reorganization, Reclassification, Consolidation, Merger or Sale.
If any recapitalization, reclassification or reorganization of the capital stock
of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
"Organic Change"), then, as a condition of such Organic Change, lawful and
adequate provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the value of the stock, securities or other assets or
property (determined in good faith by the Board of Directors of the Company)
issuable or payable with respect to one share of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby is in excess of the Stock Purchase Price hereof
effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to or simultaneous with such Organic Change. In the event
of any Organic Change, appropriate provision shall be made by the Company with
respect to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof (including, without limitation,

                                       4.



provisions for adjustments of the Stock Purchase Price and of the number of
shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, in relation to any shares of stock, securities or
assets thereafter deliverable upon the exercise hereof. The Company will not
effect any such consolidation, merger or sale unless, prior to the consummation
thereof, the successor corporation (if other than the Company) resulting from
such consolidation or the corporation purchasing such assets shall assume by
written instrument reasonably satisfactory in form and substance to the Holders
of a majority of the warrants to purchase Common Stock then outstanding,
executed and mailed or delivered to the registered Holder hereof at the last
address of such Holder appearing on the books of the Company, the obligation to
deliver to such Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such Holder may be entitled to
purchase.

          3.4   Certain Events. If any change in the outstanding Common Stock of
the Company or any other event occurs as to which the foregoing provisions of
this Section 3 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the Holder of the Warrant in accordance
with such provisions, then the Board of Directors of the Company shall make an
adjustment in the number and class of shares available under the Warrant, the
Stock Purchase Price or the application of such provisions, so as to protect
such purchase rights as aforesaid. The adjustment shall be such as will give the
Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price
the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.

          3.5   Sale of Shares Below Stock Purchase Price.

                (a)  If at any time or from time to time after the date of the
Purchase Agreement (the "Issue Date"), the Company issues or sells, or is deemed
by the express provisions of this Section 3.5 to have issued or sold, Additional
Shares of Common Stock (as defined in Section 3.5(d) below), for an Effective
Price (as defined in Section 3.5(d) below) less than the then effective Stock
Purchase Price, then and in each such case the then existing Stock Purchase
Price shall be reduced, as of the opening of business on the date of such issue
or sale, to such lesser price.

                (b)  For the purpose of making any adjustment required under
this Section 3.5, the consideration received by the Company for any issue or
sale of securities shall (A) to the extent it consists of cash, be computed at
the amount of cash received by the Company without deduction for any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Company in connection with such issue or sale, (B) to the extent it
consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Board of Directors, and (C) if
Additional Shares of Common Stock, Convertible Securities (as defined in Section
3.5(c)) or rights or options to purchase either Additional Shares of Common
Stock or Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration which covers both,
be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board of Directors to be allocable to
such Additional Shares of Common Stock, Convertible Securities or rights or
options.

                                       5.



          (c)   For the purpose of the adjustment required under this Section
3.5, if the Company issues or sells (i) stock or other securities convertible
into, Additional Shares of Common Stock (such convertible stock or securities
being herein referred to as "Convertible Securities") or (ii) rights or options
for the purchase of Additional Shares of Common Stock or Convertible Securities
and if the Effective Price of such Additional Shares of Common Stock is less
than the Stock Purchase Price, in each case the Company shall be deemed to have
issued at the time of the issuance of such rights or options or Convertible
Securities the maximum number of Additional Shares of Common Stock issuable upon
exercise or conversion thereof and to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, received by the Company for the issuance of such rights
or options or Convertible Securities, plus, in the case of such rights or
options, the minimum amounts of consideration, if any, payable to the Company
upon the exercise of such rights or options, plus, in the case of Convertible
Securities, the minimum amounts of consideration, if any, payable to the Company
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion thereof; provided that if in the
case of Convertible Securities the minimum amounts of such consideration cannot
be ascertained, but are a function of antidilution or similar protective
clauses, the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; provided
further that if the minimum amount of consideration payable to the Company upon
the exercise or conversion of such rights, options or Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated using
the increased minimum amount of consideration payable to the Company upon the
exercise or conversion of such rights, options or Convertible Securities. No
further adjustment of the Stock Purchase Price, as adjusted upon the issuance of
such rights, options or Convertible Securities, shall be made as a result of the
actual issuance of Additional Shares of Common Stock on the exercise of any such
rights or options or the conversion of any such Convertible Securities. If any
such rights or options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, the Stock
Purchase Price as adjusted upon the issuance of such rights, options or
Convertible Securities shall be readjusted to the Stock Purchase Price which
would have been in effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional Shares of Common
Stock, if any, actually issued or sold on the exercise of such rights or options
or rights of conversion of such Convertible Securities, and such Additional
Shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of all such rights or
options, whether or not exercised, plus the consideration received for issuing
or selling the Convertible Securities actually converted, plus the
consideration, if any, actually received by the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) on the conversion of such Convertible Securities.

          (d)   "Additional Shares of Common Stock" shall mean all shares of

                                       6.



Common Stock issued by the Company or deemed to be issued pursuant to this
Section 3.5, other than (A) shares of Common Stock issued or issuable upon
conversion of the Company's Series D Preferred Stock or upon exercise of the
Warrants; (B) shares of Common Stock and/or options, warrants or other Common
Stock purchase rights, and the Common Stock issued pursuant to such options,
warrants or other rights to employees, officers or directors of, or consultants
or advisors to, the Company or any subsidiary pursuant to stock purchase or
stock option plans, agreements or other arrangements that are approved by the
Board of Directors; (C) shares of Common Stock issued or issuable pursuant to
the exercise of options, warrants or convertible securities outstanding as of
the Issue Date; (D) shares of Common Stock issued or issuable for consideration
other than cash pursuant to a merger, consolidation, acquisition or similar
business combination approved by the Board of Directors; (E) shares of Common
Stock issued or issuable pursuant to any equipment leasing arrangement; (F)
shares of Common Stock issued or issuable pursuant to any debt financing from a
bank or similar financial institution approved by the Board of Directors; (G)
shares of Common Stock issued or issuable with the approval of the Board of
Directors to customers or vendors of the Company or to persons with similar
commercial relationships with the Company; (H) shares of Common Stock issued or
issuable pursuant to corporate partnering transactions on terms approved by the
Board of Directors; and (I) up to 25,000 shares of Common Stock (as adjusted for
stock splits, stock dividends, stock combinations and the like) issued or deemed
issued pursuant to this Section 3.5 during any 180-day period commencing on or
after the Issue Date and which are not otherwise excluded from the definition of
Additional Shares of Common Stock pursuant to the foregoing provisions of this
subsection (d). References to Common Stock in the subclauses of this Section
3.5(d) above shall mean all shares of Common Stock issued by the Company or
deemed to be issued pursuant to this Section 3.5. The "Effective Price" of
Additional Shares of Common Stock shall mean the quotient determined by dividing
the total number of Additional Shares of Common Stock issued or sold, or deemed
to have been issued or sold by the Company under this Section 3.5, into the
aggregate consideration received, or deemed to have been received by the Company
for such issue under this Section 3.5, for such Additional Shares of Common
Stock.

          3.6  Notices of Change.

               (a)  Within 10 business days after any adjustment in the number
or class of the shares subject to this Warrant and of the Stock Purchase Price,
the Company shall give written notice thereof to the Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.

               (b)  The Company shall give written notice to the Holder at least
15 business days prior to the date on which the Company closes its books or
takes a record for determining rights to receive any dividends or distributions.

               (c)  The Company shall also give written notice to the Holder at
least 15 business days prior to the date on which an Organic Change shall take
place.

     4.   Issue Tax. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the

                                       7.



Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any certificate in a name
other than that of the then Holder of the Warrant being exercised.

     5.   Closing Of Books. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant.

     6.   No Voting Or Dividend Rights; Limitation Of Liability. Other than as
set forth herein, nothing contained in this Warrant shall be construed as
conferring upon the Holder hereof the right to vote or to consent or to receive
notice as a shareholder of the Company or any other matters or any rights
whatsoever as a shareholder of the Company. No dividends or interest shall be
payable or accrued in respect of this Warrant or the interest represented hereby
or the shares purchasable hereunder until, and only to the extent that, this
Warrant shall have been exercised. No provisions hereof, in the absence of
affirmative action by any holder, and no mere enumeration herein of the rights
or privileges of the holder hereof, shall give rise to any liability of such
Holder for the Stock Purchase Price or as a shareholder of the Company, whether
such liability is asserted by the Company or by its creditors.

     7.   Warrants Transferable. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.

     8.   Rights And Obligations Survive Exercise Of Warrant. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.

     9.   Modification And Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought; provided,
however, that any term of this Warrant may be amended with the written consent
of the Company and the holders of Warrants representing a majority in interest
of the shares of Common Stock then issuable upon exercise of the Warrants issued
pursuant to the Purchase Agreement, and any amendment so effected shall be
binding upon each holder of such Warrants.

     10.  Notices. Any notice, request or other document required or permitted
to be given or delivered to the holder hereof or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to each such holder at its
address as shown on the books of the

                                       8.



Company or to the Company at the address indicated therefor in the first
paragraph of this Warrant or such other address as either may from time to time
provide to the other.

     11.  Binding Effect On Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
shall survive the exercise and termination of this Warrant. All of the covenants
and agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.

     12.  Descriptive Headings And Governing Law. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.

     13.  Lost Warrants. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.

     14.  Fractional Shares. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.

     15.  Specific Performance. The parties hereto hereby declare that it is
impossible to measure in money the damages which will accrue to a party hereto
or to their heirs, personal representatives, or assigns by reason of a failure
to perform any of the obligations under this Warrant and agree that the terms of
this Warrant shall be specifically enforceable. If any party hereto or his
heirs, personal representatives, or assigns institutes any action or proceeding
to specifically enforce the provisions hereof, any person against whom such
action or proceeding is brought hereby waives the claim or defense therein that
such party or such personal representative has an adequate remedy at law, and
such person shall not offer in any such action or proceeding the claim or
defense that such remedy at law exists.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       9.



     In Witness Whereof, the Company has caused this Warrant to be duly executed
y its officers, thereunto duly authorized this ______ day of April, 2002.

                                        American Technology Corporation,
                                        a Delaware corporation


                                        By:_____________________________________
                                                Title:
                                                Name:

ATTEST:


_______________________________
Name:
                                        Title:

                                       10.



                                    Exhibit A

                                SUBSCRIPTION FORM

                                             Date:  _________________, _____

American Technology Corporation
13114 Evening Creek Drive South
San Diego, California 92128

Attn: President

Ladies and Gentlemen:

     The undersigned hereby elects to exercise the warrant issued to it by
American Technology Corporation (the "Company") and dated April _____, 2002,
Warrant No. W-D___ (the "Warrant") and to purchase thereunder
___________________________ shares of the Common Stock of the Company (the
"Shares") at a purchase price of Four Dollars and Fifty Cents ($4.50) per Share
for an aggregate purchase price of _____________________ Dollars ($__________)
(the "Purchase Price").

     Pursuant to the terms of the Warrant the undersigned has delivered the
aggregate Purchase Price herewith in full in cash or by certified check or wire
transfer.

                                            Very truly yours,


                                            ____________________________________

                                            By: ________________________________

                                            Title: _____________________________

                                       11.