UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





———————


FORM 10-K


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þANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





for the fiscal year ended December 31, 2010





 ̈TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from: _____________ to _____________





Commission file number 0-23723


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AMBIENT CORPORATION


(Exact name of registrant as specified in its charter)


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Delaware

98-0166007(State or Other Jurisdiction

(I.R.S. Employerof Incorporation)

Identification No.)





7 WELLS AVENUE, NEWTON, MASSACHUSETTS 02459


(Address of Principal Executive Office)





617-332-0004


(Registrant’s telephone number, including area code)





Securities Registered Under Section 12(b) of the Exchange Act: None





Securities Registered Under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share.





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ̈   No  þ





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act of 1933. Yes  ̈   No  þ





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  þ   No    ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files Yes  ̈   No  ̈





Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.





Large accelerated filer   ̈    Accelerated filer   ̈    Non-accelerated filer   ̈    Smaller reporting company  þ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  ̈   No  þ





The registrant had 1,648,826,354 shares of common stock outstanding as of February 22, 2011.  The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2010, was $15,666,074 computed by reference to the closing price of such common stock on the OTC Bulletin Board on such date.





DOCUMENTS INCORPORATED BY REFERENCE





Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2011 Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission.













AMBIENT CORPORATION


2010 FORM 10-K ANNUAL REPORT





TABLE OF CONTENTS





PagePART IItem 1.
Business


4Item 1A.
Risk Factors


13Item 1B.
Unresolved Staff Comments


17Item 2.
Properties


17Item 3.
Legal Proceedings


17Item 4.
[REMOVED AND RESERVED]


17PART IIItem 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


17Item 6.
Selected Financial Data


18Item 7.
Management Discussion and Analysis of Financial Condition and Results of Operation.


18Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.


24Item 8.
Financial Statements and Supplementary Data


25Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure


25Item 9A(T).
Controls and Procedures


25Item 9B.
Other Information


25PART IIIItem 10.
Directors, Executive Officers and Corporate Governance


26Item 11.
Executive Compensation


26Item 12.
Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters


26Item 13.
Certain Relationships and Related Transactions and Director Independence


26Item 14.
Principal Accountant Fees and Services


26Item 15.
Exhibits and Financial Statement Schedules


27SIGNATURES



29





2




FORWARD LOOKING STATEMENTS





CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995





THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K. CERTAIN STATEMENTS MADE IN THIS DISCUSSION ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "INTENDS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," OR "CONTINUE" OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING:. THE COMPANY'S INTENDED BUSINESS PLANS; EXPECTATIONS AS TO PRODUCT PERFORMANCE; EXPECTATIONS AS TO MARKET ACCEPTANCE OF THE COMPANY'S TECHNOLOGY; AND BELIEF AS TO THE SUFFICIENCY OF CASH RESERVES. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S SIGNIFICANT DEPENDENCE ON ONE KEY CUSTOMER, THE COMPANY'S INABILITY TO OBTAIN NECESSARY FINANCING; THE COMPETITIVE ENVIRONMENT GENERALLY AND IN THE COMPANY'S SPECIFIC MARKET AREAS; CHANGES IN TECHNOLOGY; THE AVAILABILITY OF AND THE TERMS OF FINANCING; INFLATION; CHANGES IN COSTS AND AVAILABILITY OF GOODS AND SERVICES; ECONOMIC CONDITIONS IN GENERAL AND IN THE COMPANY'S SPECIFIC MARKET AREAS; DEMOGRAPHIC CHANGES; CHANGES IN FEDERAL, STATE AND /OR LOCAL GOVERNMENT LAW AND REGULATIONS AFFECTING THE TECHNOLOGY; CHANGES IN OPERATING STRATEGY OR DEVELOPMENT PLANS; AND THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.





3


PART I




ITEM 1. BUSINESS





OVERVIEW




Ambient Corporation (“Ambient” the “Company” “we or “us”) is a pioneering integrator of smart grid communications platforms, creating high-speed Internet Protocols (IP) based data communications networks for the medium and low-voltage distribution grid. The Ambient smart grid platform, known as Ambient Smart Grid®, facilitates a two-way, real-time communications network designed to modernize the power grid infrastructure, making it more receptive to wide-scale adoption of renewable energy sources and supportive of new energy efficiency technologies and programs. The Ambient Smart Grid® platform facilitates a utility’s ability to implement smart grid applications such as Advanced Metering Infrastructures (AMI), Demand Side Management (DSM), Distribution Monitoring and Automation, direct load control and more. When combined, these applications offer economic, operational and environmental benefits for utilities, and ultimately the utility customers.





Ambient has been focused, since 2000, on the collaborative development of communication solutions that meet the needs of utilities to ultimately deploy what is now referred to as the smart grid. From inception, Ambient’s platform, which includes nodes, management systems, current transformers and a suite of applications, has been designed to function as an open standards-based system intended to support a variety of applications and services simultaneously. Over the years, Ambient has developed and delivered three generations of smart grid communications nodes that with thousands of our units deployed in the field are already beginning to transform today’s century-old power delivery system into an advanced energy network that provides timely energy usage information and remote grid monitoring, automation and control. With each successive generation, Ambient has continued to support and integrate additional applications, while driving lower the manufacturing costs and price to our customers making our products even more attractive. In December 2010, Ambient delivered to our marquee customer, units of our fourth generation communications node which are being beta tested in the field.


Throughout the past five years, Ambient has been a key supplier to Duke Energy’s grid efficiency programs, and the leading supplier of the smart grid communications nodes for their smart grid deployments. During 2008, Ambient received purchase orders from Duke Energy to purchase its X2000 and X-3000 communications nodes and to license our AmbientNMS®, to enable the building out of an intelligent grid/intelligent-metering platform, which generated approximately $14.8 million in revenues throughout 2008 and 2009.





In September 2009, we entered into a long-term agreement, running through 2015 to supply Ambient’s X-3100 Node and to license our management software – AmbientNMS® for deployment throughout the utility’s electric power distribution grid. Since the execution of the agreement, we have generated, through December 31, 2010, approximately $21.1 million in revenues from the sale of our product.


With Ambient Smart Grid®, our goal remains to be a leading designer, developer and systems integrator of smart grid communications platforms, incorporating a wide array of communications protocols and smart grid applications such as advanced metering solutions to complement our communications platform and our internally developed energy sensing capabilities. We view a flexible smart grid communications platform to be a key factor for utilities to efficiently integrate the increasing portfolios of smart grid technologies and applications into and on the electrical grid.


Ambient continues to seek new opportunities for commercial deployments and to bring new and existing networks to full commercialization. Throughout 2011, Ambient’s principal target customers will continue to be electric utilities that seek to both increase efficiencies in the delivery of energy and enable consumers to better understand and manage their energy consumption.  Ambient seeks to continue to extend existing relationships and develop new relationships to collaborate on efforts to drive the development of new functionality for both utility and consumer applications that further enhance the value of the Ambient Smart Grid® platform.


Ambient is a Delaware Corporation incorporated on June 26, 1996. Since inception, we have funded operations primarily through the sale of our securities and most recently from the revenue generated from purchase orders received from our marquee customer. In connection with the continued development, upgrade, and marketing of our products, technology, and services, Ambient will continue to emphasize the ongoing development efforts necessary to complete development of our fourth generation node, incorporate additional applications into our platform, and to continue to enhance the capabilities and functionality of our AmbientNMS® system.
 
 In February 2011, our majority stockholder approved a reverse split of our common stock, in the range of 1-for 30 to 1-for 100, which our Board of Directors may implement in its discretion (if at all) before December 31, 2011, without any further stockholder approval.  Our Board approved and recommended the reverse stock split primarily in order to increase Ambient’s prospects of successfully listing its common stock onthe NASDAQ Capital Market.


4




INDUSTRY BACKGROUND





The existing electrical power distribution system continues to be under increasing pressure to catch up to the digital economy.  Through the incorporation and deployment of advanced communication technology throughout the grid system, the singular approach of building new environmentally unfriendly centrally located power plants to meet energy and capacity requirements will no longer be the sole solution to utilities. The smarter grid will help increase the use of renewable capacity, embrace the emergence of electric vehicles and distributed generation, and equip customers with the tools and technology needed to help navigate through an environment increasingly concerned with such issues as climate change, rising costs, increasing regulation, and energy independence. Increasing the efficiency in the delivery of energy will continue to be an emphasis for utilities and regulators alike.  A dedicated communication infrastructure to monitor and manage the distribution grid is a key enabler for accomplishing this efficiency.





In 2007, the Federal Energy Independence and Security Act underscored the need for a smart grid and provided a mechanism for federal funds to help promote smart grid deployments and developments. The prospects of the deployment of smart grid technologies were significantly advanced through the passage of both the Troubled Asset Relief Program, which reduced the period of depreciation of smart grid assets from twenty years to ten years and the later passage of the American Reinvestment and Recovery Act (ARRA) in February 2009, which provided stimulus funding of smart grid projects. In March 2010, the smart grid received a further federal boost with the release of the National Broadband Plan that highlighted the role smart grid communications can have in improving the grid’s reliability, security and efficiency.


The ultimate allocation of funding from the federal government provided by the ARRA (Stimulus Funding) was intended to eliminate a portion of the risk associated with early adoption of technology.  The promise of funding encouraged utilities considering smart grid deployments to actively develop business and deployment plans and to negotiate terms with the U.S. Department of Energy ("DOE") to receive the ARRA funds.  For many utilities, this process required significant effort over many months, and thus resulted in the lack of available federal funds throughout 2009 and into 2010. Many of the ultimate grant recipients executed agreements with the DOE and thus smart grid deployments began in earnest in the later part of 2010.





AMBIENT SOLUTION





THE AMBIENT SMART GRID® COMMUNICATIONS NETWORK





Ambient’s vision for the smart grid calls for solutions based on interoperable and open, standards-based technologies.  This vision is made a reality through the Ambient Smart Grid® Node and network management system - AmbientNMS® and an open application environment. A common underlying communications platform (Ambient Smart Grid®) is utilized to support all the smart grid applications and services in parallel to achieve the lowest cost point on an overall system basis while achieving a high level of integration of communications services and applications.  The use of open, standards-based technologies is widely accepted as the basis for the success of the Internet and credited with enabling all of the applications that have evolved on the Internet.  Ambient’s communication platform relies on distributed Ambient Smart Grid® Nodes incorporating remote processing and flash memory that allow for a robust application-hosting environment enabling the platform to evolve like the Internet. Additionally, remote processing and storage of data combined with the ability to access this locally, without the use of the backhaul connection, allow the utility and end users to limit network charges.




5





Ambient’s distributed platform system architecture are depicted below in Figure 1.











Rather than the typical disconnected and application specific communications systems that have been the norm in the utility environment, Ambient provides a common communications platform that allows costs to be allocated across many applications or purposes thus enhancing the value and minimizing the overall costs of the communications infrastructure and total smart grid build out.  The Internet is an excellent reference and analogy for the common infrastructure concept. The growing trend of providing multiple communications services (television, telephone, and Internet access) over a single medium into the premises demonstrates the concept, both technically and economically, of supporting multiple services and applications over a common network infrastructure. This holistic approach will enable a variety of distribution system monitoring and management capabilities that have not thus far not been feasible or not even envisioned today.





AMBIENT SMART GRID® COMMUNICATIONS PLATFORM FUNCTIONALITY AND BENEFITS





Complete Turnkey Delivery: Ambient designs and builds the core network hardware and management software incorporating smart grid communication technologies. Our familiarity with multiple communications protocols, architecture, hardware, and software requirements, coupled with experienced field engineers, provides us with the tools necessary for a successful rollout.





Open Architecture: For a smart grid to evolve with the advancement in technologies, and expectations of what the smart grid will enable, utilities need an open and flexible platform architecture comprised of open and flexible building blocks such as the Ambient Smart Grid® Node (“Node”) and AmbientNMS®. Ambient’s architecture for the communications Node, offers the openness and flexibility that allows utilities to mix and match smart grid application technologies today, and a platform that can evolve with the technology.  As no single communication technology is likely to meet all smart grid requirements for all environments or locations, the use of an open and flexible communications architecture and Node is more likely to ensure higher levels of interoperability, longevity and overall success. Having several available Node components and options overcomes fundamental impediments, such as topographical, economical, or other inherent impediments in the physical infrastructure itself, and will be required to successfully address as large a portion of the system requirements as possible.




6





Wide Area Network (WAN) Technologies: There are a variety of Ethernet technologies, both wired and wireless, that can be used by Ambient’s Node for backhaul or WAN purposes.  The use of 3G/4G cellular wireless networks for WAN services for a large, if not the most significant, portions of the smart grid infrastructure is most practical as it leverages the cellular carrier's commitment and investment into their wireless network.  Although utilities have a long history of using cellular networks for some applications, the scale required for the smart grid is unprecedented.   The availability of multiple carriers and technologies is beneficial.  The 3G networks of today and the planned 4G networks being rolled-out certainly provide sufficient bandwidth to address the requirements of the smart grid.





Local Area Network (LAN) Technologies: Ambient’s Node also supports a variety of LAN technologies.  As demonstrated with its products to date, Ambient has been able to support a variety of smart grid applications and services with these technologies.  Ethernet and serial ports are the basic and most commonly found technologies used for communications interfaces.  This is why Ambient’s typical Node configuration has included both Ethernet and serial (RS-232) ports.





The Ambient Node supports multiple communication technologies simultaneously allowing a utility to leverage a single communications infrastructure to support many smart grid applications that rely on different communication methods i.e. 3G cellular, Wi-Fi, 900MHz radio frequency, power line carrier etc., all operating in parallel in a single communications Node. Each customizable Node combines to create the overarching communication platform that protects a utility against stranding IT and smart grid related assets. A graphical description of how an individual Node can function as part of a collected platform is below.







The Node utilizes standard-based protocols as well as proprietary technologies for communications. This allows the Ambient Smart Grid® platform to connect with any IP device as well as legacy systems and vendor technologies reliant on proprietary protocols. Ambient’s architecture provides utilities an open IP-based architecture that pushes proprietary technologies out to the fringes of the network, which enhances the flexibility and longevity of the overall architecture.   Flexibility with communication technologies and protocols means in different segments of the utility’s distribution network a single communications platform and foundational architecture can be leveraged yet customized to meet locational needs and economies that vary between urban and rural environments.





7


Flexible and Expandable Network Architecture: The Ambient Smart Grid® communications platform permits sequential expansions corresponding to actual demand. When the platform is first deployed, separate network elements can be “bridged” at specific points. As the network load increases, switches and/or routers can maximize the bandwidth available to a particular network segment. At higher subscriber densities, additional backhaul connectivity points may be added. By allowing utilities to build networks that provide just the capacity that is needed, as it is needed, we help our customers minimize initial installation costs, shorten the time between investment and realization of revenues, and reduce operations and maintenance expense.





Ability to Integrate Many Applications: Utility operators are not limited to Advanced Meter Reading (AMR), smart metering, or other applications at the end of the distribution grid: Grid operators can monitor and communicate with Nodes or any piece of IP-based equipment integrated at any point along the medium and low voltage distribution network, which can range from distributed generation resources, power quality control devices, and a range of Demand Side Management and Demand Response applications. When couplers are integrated into an Ambient Smart Grid® communications network, information on the current of the distribution grid can be obtained in real-time enabling better energy management, predictive maintenance and less system down-time which can combine to reduce the need for additional generation facilities.





Outage Detection and Restoration Confirmation: Rather than dedicated outage detection systems that employ either customer premise or service side equipment, the Node is powered from the low voltage line itself and can be equipped with an optional battery that can help a utility specifically identify line outages and allow for continued Node operation in the event of such a power outage. Access to the Nodes in an outage scenario allows timely recognition of outage locations and provides invaluable input to the restoration process. Additional information provided by our energy sensing capabilities may also provide useful and preventative information to utilities.




Support External Applications: A high-speed Ambient Smart Grid® enhances traditional low bandwidth, one-way applications such as meter reading. In addition to the elimination of the labor required to visit every customer location each month, or the inaccuracies introduced by customer self-reporting, the constant real-time load data can enhance a utility's ability to balance its supply portfolio, improve its load profiling, and increase its knowledge of customer usage patterns. Meters that remotely turn service on or off can be deployed, eliminating the labor involved in this non-repair, non-revenue task. Additionally, real-time communications enabled by Ambient’s high-speed backhaul network allow utilities the flexibility to introduce time-of-use pricing models.
 
 Application Development Environment: To support our collaborative efforts, Ambient has developed specifications for developing and supporting third-party applications to run on the Ambient’s platform.  The specifications provide for third-party applications to run in a structured, controlled, and predictable environment. This framework has been used to support third party application to provide connectivity to, and management of, their distribution line sensors.  This configuration is deployed for testing in the field today.


8


AMBIENT STRATEGY





We intend to generate revenues and gross margin from the sales, and support of the necessary equipment and technologies, of the Ambient Smart Grid® communications platform, licensing of our network management system, AmbientNMS®, and from software maintenance. Our efforts include the following areas of focus:





BUSINESS DEVELOPMENT





Ambient believes the industry is being driven by a few key early adopters who will set the stage for additional smart grid deployments of our open architecture design. Ambient has and will continue to work closely with utility partners to develop an increasing value proposition for each utility’s unique needs and infrastructure. Ambient will focus engineering efforts on developing more robust solutions and additional value-added functionality for the Ambient Smart Grid® solution, creating an even more attractive business model for other utilities. In 2010, Ambient expanded our relationships with the public carriers by adding certifications on the Sprint Network to our long-standing relationship with Verizon Wireless.





EXPAND THE RANGE OF AMBIENT SMART GRID® APPLICATIONS





Applications create the need for the platform, and thus our goal is to drive application development. The Ambient Smart Grid® communications platform incorporates our voltage and current sensing capabilities (Energy Sensing) allowing for outage notification. We believe that growth in the smart grid communications industry will come primarily as utilities deploy and adopt smart grid applications. Applications, such as AMR/AMI allowing for time-of-day pricing, demand side management, and the potential to assist in direct load control, which enables the reduction of electrical usage at critical times, will require the backhaul capability provided by the Ambient Smart Grid® network. Ambient is currently piloting and deploying some of the aforementioned applications.





PURSUE OUR ROLE AS A PIONEERING SYSTEMS INTEGRATOR





We are committed to continuing our role as a supplier of a turnkey smart grid communications platform, taking responsibility for network design, hardware and software delivery, installation support, operator training and network management. Our familiarity with the architecture, hardware, and software requirements from years of close collaboration with major utility clients has enabled us to design the Ambient Smart Grid® communications platform from the ground up and to meet individual utility requirements. Ambient designs, manufactures (through a contract manufacturer) and markets the key hardware and software components of the Ambient Smart Grid® network. We have developed strategic relationships with key material and fabrication suppliers, and have put in place a reliable, scalable supply chain for timely delivery of the necessary product. Our technical personnel, including experienced field engineers, support pilot as well as larger deployments, ensuring successful Ambient Smart Grid® rollouts.




9





FURTHER ENHANCE THE AMBIENTNMS®





To manage communications networks, we have developed, and continue to improve, our network management software solution, AmbientNMS®. Ambient has developed AmbientNMS® to work with Ambient and non-Ambient hardware and it currently manages multiple Ambient-supported networks. AmbientNMS® allows for multiple user groups, each with customizable permission and views. Using the AmbientNMS®, a user can sort and filter lists and views via many Node parameters including geographical views, enabled applications, firmware and software versions and more. We intend to continue to develop and extend our network design expertise, as well as our hardware and software technology and our deployment and network management capabilities, to generate revenues from all phases of Ambient Smart Grid® communication deployments. To date, we have not sold and /or licensed any software for use on third party equipment.





EXPAND OUR STRATEGIC COLLABORATIVE RELATIONSHIPS





Continued collaboration with smart grid application providers, suppliers, and utility customers will enhance the development and functionality of our Ambient Smart Grid® platform. To keep us on the cutting edge of new technologies, we maintain collaborative working relationships with leading suppliers of critical network components such as signal processing chips, wireless devices and cellular modems, as well as metering solution providers to develop and demonstrate Ambient Smart Grid® utility applications, and our network management system, AmbientNMS®. We intend to strengthen these existing relationships and to seek out new strategic and commercial relationships with utilities and other technology companies.





INDUSTRY STANDARDIZATION EFFORTS





We believe that open standards andinteroperability will hasten the deployment of all smart grid technology and lead to greater success for both Ambient and the entire smart grid industry, and we are active in standards organizations and efforts to promote openness and interoperability. Ambient is a voting member of the National Institute of Standards and Technology’s Smart Grid Interoperability Panel (NIST SGIP) and several working groups such as PAP15.





We will continue to drive industry standardization efforts through leadership roles in the major industry associations and standards setting organizations, and promote open standards through our participation in both local and federal smart grid and utility organizations including the GridWise Alliance, DRSG, UTC, EEI, NRECA, IEEE and more.





COMMERCIAL DEPLOYMENTS





Duke Energy is currently deploying the Ambient Smart Grid® and AmbientNMS®. The deployments are directed towards a variety of goals, including developing, integrating, and demonstrating smart grid utility applications within our product offering.





DUKE ENERGY





Since 2005, Ambient has worked and collaborated with Duke Energy, our marquee customer, and an innovator and early adopter of smart grid technologies. Over the course of that time, 98% of Ambient’s revenue has been generated from contracts with and purchase orders received from Duke Energy for the Ambient Smart Grid® platform which has allowed this utility to deploy a robust smart grid platform. Our relationship with this customer has supported the development and enhancement of the Ambient Smart Grid® platform. Because Duke Energy is subject to both federal regulations and state utility regulators, much of Duke’s ability to deploy our technology is influenced by federal and state regulations.





In 2005, Ambient entered into an initial pilot agreement to test our Communications Node and newly developed AmbientNMS® with Duke Energy.  In September 2006, we entered into an additional agreement expanding the scope and functionality of our developing network.





During 2007, Ambient focused on the execution of the agreement entered into in September 2006 that expanded the scope of Ambient's platform while addressing the challenges raised in our early 2006 pilot. In late 2007, Ambient enhanced the communication options available in our Node by introducing cellular technology into our platform.




10





During 2008, Ambient furthered its relationship with Duke Energy with the execution of a second Commercial Deployment Agreement to serve, initially, 50,000 end points in Cincinnati, Ohio. The Company received purchase orders from Duke Energy to purchase its X2000 and X-3000 communications Nodes and license of its AmbientNMS® software in support of building out an intelligent grid/intelligent-metering platform. As a result of these purchase orders, we generated approximately $12.6 million in revenues for the year ended December 31, 2008.





In September 2009, the Company and Duke Energy entered into a long-term agreement to supply Ambient’s latest X-series smart grid communications Nodes, the X-3100, for deployment throughout the utility’s electric power distribution grid. The agreement also provides for a license of the Node software and the network management system software to operate and manage the product. Additionally, the agreement set forth the terms for Ambient to provide maintenance service and support for which Duke Energy will be required to pay an established maintenance fee beginning at the expiration of the stated warranty period.





Since entering into the long- term supply agreement in 2009, Ambient has delivered approximately 23,900 units of the X-3100s. Today there are three generations of Nodes deployed in the field totaling over 25,000 Nodes which are supplying connectivity to over 250,000 endpoints.





The agreement is in effect until December 31, 2015, subject to various rights of the parties to terminate the agreement prior to such time. Ambient has agreed to provide maintenance services potentially extending for ten years after the termination of the agreement if Duke Energy continues to pay for such maintenance services on an uninterrupted basis throughout the extended period. Since the execution of the long-term supply agreement, we have generated, approximately $21.1 million in revenues through December 31, 2010 from the sale of our product.





KEY ALLIANCES / PRODUCTION & SUPPLIES





In addition to working closely with our electric utility customers, we have cultivated, maintained and grown collaborative working relationships with leading suppliers of the critical components necessary for Ambient Smart Grid® solutions. These relationships and advancements of our technology have provided us with the means of significant scalability.





Ambient continuously looks to further collaborative efforts to enhance our smart grid capabilities. Ambient’s communications platform facilitates the delivery of data and information over the utility distribution grid from low-speed control networks and other devices allowing utilities the ability to enable such smart grid functionality as advanced metering, load profiles, remote disconnect/reconnect and more.





We believe that an enhanced suite of utility automation products is complementary to Ambient’s communications platform, and such collaborative efforts will enable comprehensive offerings to utilities enabling a more efficient platform for Ambient Smart Grid® applications.





In September 2009 we entered into a Master Supply and Alliance Agreement with an equipment manufacturer with global manufacturing capabilities, for the supply of our communication Nodes. This relationship has been instrumental in allowing us to successfully deliver 23,900 Nodes over the sixteen month period ended December 31, 2010. We are also a party to a number of third party software license agreements that allow us to incorporate third party software products and features into our products.





Ambient continues to maintain open dialogue with leaders in the utility and communications industries to keep Ambient’s solution at the cutting edge. In the future, we intend to continue leveraging our technology and distribution alliances along with value-added manufacturing services to ensure we are positioned to support continued large-scale rollouts of our products and technology, allowing us to ensure competitive pricing.




11





COMPETITION





Competition in our market involves rapidly changing technologies, evolving industry standards, frequent new product introductions, and changes in customer requirements. To maintain and improve our competitive position, we must keep pace with the evolving needs of our customers and continue to develop and introduce new products, features and services in a timely and efficient manner.





Our competitors include both small companies as well as some of the largest companies in the electronics industry, operating either alone or together with trade associations and partners. Some of our potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources than Ambient.





PROPRIETARY RIGHTS





We have taken steps to ensure the protection of our internally developed intellectual property (IP). We currently rely on a combination of patent, trade secret, copyright and trademark law, as well as non-disclosure agreements and invention assignment agreements, to protect our technologies and other proprietary company information.





Our IP portfolio includes twenty-six patents issued or allowed by the United States Patent and Trademark Office ("USPTO") primarily relating to coupling technology, and we have several pending patent applications in the United States and in other jurisdictions. We have filed with the USPTO and with the appropriate agencies in foreign countries and other jurisdictions, patent applications with respect to various aspects and applications of our smart grid technology including the Energy Sensing portion of Ambient Smart Grid®.





Ambient, Ambient Smart Grid, Communications for a Smarter Grid and AmbientNMS are registered trademarks of Ambient Corporation with the USPTO.  Other marks are pending with the USPTO.





Our policy is to require our employees, consultants, advisors, and collaborators to execute confidentiality agreements. Additionally, we require employees and consultants, to execute assignment of invention agreements, upon the commencement of employment, consulting or advisory relationships. These agreements generally provide that all confidential information developed or made known to a party by us during the course of the party's association with the Company is to be kept confidential and not to be disclosed to third parties except in specific circumstances. In the case of employees and consultants, the agreements also provide that all inventions conceived by the individual in the course of their employment or consulting relationship will be our exclusive property.





EMPLOYEES





We presently employ 59 full time employees, 56 of whom work out of our offices in Newton, Massachusetts. The three off site employees are field engineers dedicated to active network deployments.





RESEARCH AND DEVELOPMENT





During our 2010 and 2009 fiscal years, we incurred approximately $6.1 and $4.6 million, respectively, on the research and development of our Ambient Smart Grid® and related solutions.





AVAILABLE INFORMATION





Our Internet website is located at http://www.ambientcorp.com. The reference to our Internet website does not constitute incorporation by reference of the information contained on or hyperlinked from our Internet website and should not be considered part of this document. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC's Internet website is located at http://www.sec.gov.




12





ITEM 1A. RISK FACTORS





OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED BY VARIOUS RISKS, INCLUDING, BUT NOT LIMITED TO THE PRINCIPAL RISKS NOTED BELOW.





RISKS CONCERNING OUR BUSINESS




WE CURRENTLY DEPEND ON ONE KEY CUSTOMER FOR ALL OUR REVENUE, AND THE LOSS OF, OR A SIGNIFICANT SHORTFALL IN ORDERS FROM, THIS KEY CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUE.





For the years ended December 31, 2010 and 2009, 100% of our revenue was from Duke Energy. Our inability to generate additional anticipated revenue from our key customer, or a significant shortfall in sales will likely significantly reduce our revenue and adversely affect our business. Our operating results in the foreseeable future continue to depend on our ability to further our deployments with our existing customer.




Our immediate business opportunities continue to be largely dependent on the success of our deployments, and the future decisions of Duke Energy relating to smart grid system architecture, and the Ambient fourth generation Node. We are focusing much of our time, attention and resources on the rollout of the equipment and software delivered to Duke Energy. The success of our endeavors with respect to the deployment is subject to several risks. We depend on third parties to deliver and support reliable components to manufacture and assemble our end products, as well as our engineering team to continue to advance our software products.
 
 If we are unable to effectively manage, maintain and grow our relationship with Duke Energy, our business could be materially and adversely affected in its ability to continue operations as currently conducted. 
 Additionally, management is unable at this time to assess the effects, if any, that the proposed merger between Duke and Progress Energy, which merger was announced in January 2011 and is subject to shareholder and regulatory approval, will have on the continuation and/or expansion of our deployment by the new combined company following the merger, No assurance can be provided that the post merger entity will continue with or expand the current deployments at Duke Energy.


WE UTILIZE ONE SUPPLIER TO MANUFACTURE OUR NODES





In both 2010 and 2009, we utilized one contract manufacturer to produce our Nodes. Should our relationship with the manufacturer deteriorate or terminate or should this supplier lose some or all of its access to the products or components that comprise all or part of the Nodes that we purchase from it performance would be adversely affected.  Under such circumstances, we would be required to seek alternative sources of supply for these products, and there can be no assurance that we would be able to obtain such products from alternative sources on the same terms.  A failure to obtain such products on as favorable terms would have an adverse effect on our revenue and/or gross margin.





SLOWER ECONOMIC GROWTH RATES IN THE US MAY MATERIALLY ADVERSELY IMPACT OUR OPERATING RESULTS.
 
 The US and other economies are recovering from a global financial crisis and recession which began in 2008. Growth has resumed, but has been modest and at an unsteady rate.  There are likely to be significant long-term effects resulting from the financial crisis and recession, including a future global economic growth rate that is slower than what was experienced in the years leading up to the crisis, and more volatility may occur before a sustainable, yet lower, growth rate is achieved.
 
 In addition, the OECD has encouraged countries with large federal budget deficits, such as the US, to initiate deficit reduction measures. Such measures, if they are undertaken too rapidly, could further undermine economic recovery and slow growth by reducing demand.
 
 A lower future economic growth rate could result in reductions in sales of our products and services, slower adoption of new technologies and increase price competition. Any of these events would likely harm our business, results of operations and financial condition or cash flows from operations and our profitability.


IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS WHEN NEEDED, WE MAY NOT BE ABLE TO EXPAND EXISTING COMMERCIAL DEPLOYMENTS.





Management believes that our currently available cash resources, as well as anticipated revenue from firm purchase orders will allow us to meet our operating requirements through fiscal 2011. However, it is conceivable that we may raise additional funds to expand existing commercial deployments, support strategic acquisitions and/ orjoint venture opportunities, and/or to satisfy any additional significant purchase order that it may receive.  If and or when additional capital is required there are no assurances that we will be successful in obtaining additional required capital on reasonable terms and conditions.




13





OTHERS MAY CHALLENGE OUR INTELLECTUAL PROPERTY RIGHTS WHICH MAY NEGATIVELY IMPACT OUR COMPETITIVE POSITION





Although we rely on a combination of patents, copyrights, trade secrets, nondisclosure and other contractual provisions and technical measures to protect our intellectual property rights, it is possible that our rights relating to Ambient’s Smart Grid® solution may be challenged and invalidated or circumvented. Further, effective intellectual property protection may be unavailable or limited. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy, reverse engineer, or otherwise use aspects of processes and devices that we may regard as proprietary. Policing unauthorized use of proprietary information is difficult, and there can be no assurance that the steps we have taken will prevent misappropriation of our technologies. In the event that our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for technologies, which could have a material adverse effect on our business, financial condition and results of operations.





OTHER COMPANIES MAY DEVELOP AND SELL COMPETING PRODUCTS WHICH MAY REDUCE THE SALES OF OUR PRODUCTS OR RENDER OUR PRODUCTS OBSOLETE.





The smart grid communications marketplace is rapidly evolving and therefore has rapidly changing technological, regulatory and consumer requirements. We will need to continue to maintain and improve our competitive position to keep pace with the evolving needs of our customers, and continue to develop and introduce new products, features and services in a timely and efficient manner.





Some of our potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources than our Company. These potential competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers and exert more influence on the sales channel than we do. As a result, we may not be able to compete successfully with these potential competitors, and these potential competitors may develop or market technologies and products that are more widely accepted than those we are developing or that would render our products obsolete or noncompetitive.





WE HAVE A HISTORY OF LOSSES AND WE MAY EXPERIENCE LOSSES IN THE FUTURE





We are a company engaged in the design, development and marketing of our smart grid communication technology and solutions. We have incurred losses of $3,186,229 and $14,246,284 for the years ended December 31, 2010 and 2009, respectively.




14





Our ability to generate and sustain significant additional revenues or achieve profitability will depend upon the factors discussed elsewhere in this "Risk Factors" section. There are no assurances that we will sustain profitability, or that operating losses will not resume in the future.





RISKS CONCERNING OUR CAPITAL STRUCTURE





VICIS CAPITAL MASTER FUND OWNS A MAJORITY OF AMBIENT’S ISSUED AND OUTSTANDING COMMON STOCK AND WILL THUS BE ABLE TO CONTROL THE OUTCOME OF ALL ISSUES SUBMITTED TO OUR STOCKHOLDERS.





Vicis holds, as of February 22, 2011, approximately 84.2% of our issued and outstanding common stock. As a result, Vicis is able to control the outcome of all issues submitted to our stockholders, including the election of all of our directors and the approval of any other action requiring the approval of our stockholders, including any amendments to our certificate of incorporation, a sale of all or substantially all of our assets or a merger or a private transaction. A principal of Vicis also is a member of our board of directors.





THE EFFECTS OF A POTENTIAL REVERSE STOCK SPLIT OF OUR COMMON STOCK ARE UNKNOWN.





In February 2011, our majority stockholder approved a reverse split of Ambient’s stock, in the range of 1-for 30 to 1-for 100, which the Board of Directors may implement in its discretion (if at all) before December 31, 2011, without any further stockholder approval.  In connection therewith, on February 16, 2011, we filed with the Securities and Exchange Commission (“SEC”) a preliminary information statement on Schedule 14 C. The Board’s discretionary authority will become effective only after the filing with the SEC and mailing to Ambient's shareholders of record of the definitive Information Statement on Schedule 14 C.




The Board approved and recommended the reverse stock split primarily in order to increase Ambient’s prospects of successfully listing its common stock on the Nasdaq Capital Market.  If the Board determines to effect a reverse stock split, we cannot assure you that it will be successful in achieving a listing on The Nasdaq Capital Market (or any other exchange). Stockholders should also note that if our Board elects to implement a reverse stock split, there is no assurance that prices for shares of the Common Stock after the reverse split will increase proportionally to the exchange ratio of the reverse stock split (or at all).  We cannot guarantee to stockholders that the price of our shares will reach or sustain any price level in the future, and it is possible the proposed reverse stock split will have no lasting impact on our share price.




15





FUTURE SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT PREVAILING MARKET PRICES FOR OUR COMMON STOCK.





As of February 22, 2011, we were authorized to issue up to 2,000,000,000 shares of common stock, of which 1,648,376,354 shares were outstanding. As of February 22, 2011, an additional 292,931,931 shares of common stock were reserved for the exercise of outstanding options and warrants to purchase common stock and the reservations of shares in the various stock option plans. Many of the above options and warrants contain provisions that require the issuance of increased numbers of shares of common stock in the event of stock splits, redemptions, mergers and other transactions. The occurrence of any such event or the exercise of any of these options or warrants would dilute the interest in our company represented by each share of common stock and may adversely affect the prevailing market price of our common stock.





Additionally, our board of directors has the authority, without further action or vote of our stockholders, to issue authorized shares of our common stock that are not reserved for issuance. In addition, in order to raise the amount of capital that we may need at the current market price of our common stock, we may need to issue a significant number of shares of common stock or securities that are convertible into or exercisable for a significant number of shares of our common stock.





Any of these issuances will dilute the percentage ownership interests of our current stockholders, which will have the effect of reducing their influence on matters on which our stockholders vote, and might dilute the book value and market value of our common stock. Our stockholders may incur additional dilution upon the exercise of currently outstanding or subsequently granted options or warrants to purchase shares of our common stock.





OUR STOCK PRICE MAY BE VOLATILE.





The market price of our common stock will likely fluctuate significantly in response to the following factors, some of which are beyond our control:





·
Announcements by us of commencement of, changes to, or cancellation of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;





·
Changes in financial estimates of our revenues and operating results by securities analysts or investors;





·
Variations in our quarterly operating results due to a number of factors, including but not limited to those identified in this "RISK FACTORS" section;


·
Additions or departures of key personnel;





·
Future sales of our common stock;





·
Stock market price and volume fluctuations attributable to inconsistent trading volume levels of our stock;





·
Commencement of or involvement in litigation; and/or





·
Announcements by us, or by our competitors of technological innovations or new products.





In addition, the equity markets have experienced volatility that has particularly affected the market prices of equity securities issued by high technology companies and that often has been unrelated or disproportionate to the operating results of those companies. These broad market fluctuations may adversely affect the market price of our common stock.




16





PENNY STOCK REGULATIONS ARE APPLICABLE TO INVESTMENT IN SHARES OF OUR COMMON STOCK.





Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, provided that current prices and volume information with respect to transactions in such securities are provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to penny stock rules. Many brokers will not deal with penny stocks, restricting the market for our shares of common stock.





BECAUSE WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON OUR SHARES OF COMMON STOCK, OUR STOCKHOLDERS WILL NOT BE ABLE TO RECEIVE A RETURN ON THEIR SHARES UNLESS THEY SELL THEM.





We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.





ITEM 1B. UNRESOLVED STAFF COMMENTS





Not applicable.





ITEM 2. PROPERTIES





Ambient does not own any real property. The Company's corporate office in Newton, Massachusetts consists of two floors comprised of approximately 20,242 square feet. The lease term for the premises was scheduled to commence on September 1, 2009 and continues through December 31, 2012. At our request, the landlord agreed that we could commence the lease earlier, and we completed the move into our new headquarters in August 2009.





The lease provides for an initial period of the lease to be rent-free and includes scheduled rent escalations.  Accounting principals generally accepted in the United States of America require that the total rent expense to be incurred over the term of the lease be recognized on a straight-line basis. Deferred rent represents the cumulative excess of the straight-line expense over the payments made.  The average annual rent expense over the term of the lease is approximately $304,000.





ITEM 3. LEGAL PROCEEDINGS





We are not involved in any pending legal proceedings that we anticipate would result in a material adverse effect on our business or operations.





ITEM 4. [REMOVED AND RESERVED]





PART II





ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Our Common Stock is quoted on the OTC Bulletin Board under the symbol "ABTG.” Although trading in our Common Stock has occurred on a relatively consistent basis, the volume of shares traded has been sporadic. There can be no assurance that an established trading market will develop, that the current market will be maintained or that a liquid market for our Common Stock will be available in the future. Investors should not rely on historical stock price performance as an indication of future price performance.




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The following table shows the quarterly high and low bid prices for our Common Stock over the last two completed fiscal years as quoted on the OTC Bulletin Board. The prices represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commission and may not represent actual transactions. The closing price of our Common Stock on February 22, 2011, was $0.09 per share.





Low


HighYear Ended December 31, 2010First Quarter

$
0.102


$
0.165Second Quarter

$
0.062


$
0.101Third Quarter


0.063



0.097Fourth Quarter


0.088



0.139Year Ended December 31, 2009First Quarter

$
0.02


$
0.101Second Quarter

$
0.091


$
0.198Third Quarter

$
0.14


$
0.183Fourth Quarter

$
0.13


$
0.25





As of February 21, 2011, there were 140 holders of record of our Common Stock. A significant number of shares of our Common Stock are held in either nominee name or street name brokerage accounts, and consequently, we are unable to determine the number of beneficial owners of our stock.





DIVIDEND POLICY





We have not paid dividends on our Common Stock and do not expect to pay cash dividends in the foreseeable future. It is the present policy of the Board to retain all earnings to provide funds for the growth of our company. The declaration and payment of dividends in the future will be determined by the Board based upon our earnings, financial condition, capital requirements and such other factors as the Board may deem relevant.




ISSUER PURCHASES OF EQUITY SECURITIES




We do not have a stock repurchase program for our common stock.


ITEM 6. SELECTED FINANCIAL DATA





Not applicable.





ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.





THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE “RISK FACTORS” SECTION OF THIS ANNUAL REPORT.





OVERVIEW





Ambient Corporation (“Ambient” the “Company” “we or “us”) is a pioneering integrator of smart grid communications platforms, creating high-speed Internet Protocols (IP) based data communications networks for the medium and low-voltage distribution grid. The Ambient smart grid platform, known as Ambient Smart Grid®, facilitates a two-way, real-time communications network designed to modernize the power grid infrastructure, making it more receptive to wide-scale adoption of renewable energy sources and supportive of new energy efficiency technologies and programs. The Ambient Smart Grid® platform facilitates a utility’s ability to implement smart grid applications such as Advanced Metering Infrastructures (AMI), Demand Side Management (DSM), Distribution Monitoring and Automation, direct load control and more. When combined, these applications offer economic, operational and environmental benefits for utilities, and ultimately the utility customers.




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Ambient has been focused, since 2000, on the collaborative development of communication solutions that meet the needs of utilities to ultimately deploy what is now referred to as the smart grid. From inception, Ambient’s platform, which includes Nodes, management systems, current transformers and a suite of applications, has been designed to function as an open standards-based system intended to support a variety of applications and services simultaneously. Over the years, Ambient has developed and delivered three generations of smart grid communications Nodes that with thousands of our units deployed in the field are already beginning to transform today’s century-old power delivery system into an advanced energy network that provides timely energy usage information and remote grid monitoring, automation and control. With each successive generation, Ambient has continued to support and integrate additional applications, while driving lower the manufacturing costs and price to our customers making our products even more attractive. In December of 2010, Ambient delivered to our marquee customer units of our fourth generation communications Node which are being beta tested in the field.





Throughout the past five years, Ambient has been a key supplier to Duke Energy’s grid efficiency programs, and the leading supplier of the smart grid communications Nodes for their smart grid deployments. During 2008, Ambient received purchase orders from Duke Energy to purchase its X2000 and X-3000 communications Nodes and to license our AmbientNMS®, to enable the building out of an intelligent grid/intelligent-metering platform, which generated approximately $14.8 million in revenues throughout 2008 and 2009.





In September 2009, we entered into a long-term agreement, running through 2015 to supply Ambient’s X-3100 Node and to license our management software – AmbientNMS® for deployment throughout the utility’s electric power distribution grid. Since the execution of the agreement, we have generated, through December 31, 2010, approximately $21.1 million in revenues from the sale of our product.





With Ambient Smart Grid®, our goal remains to be a leading designer, developer and systems integrator of smart grid communications platforms, incorporating a wide array of communications protocols and smart grid applications such as advanced metering solutions to complement our communications platform and our internally developed energy sensing capabilities. We view a flexible smart grid communications platform to be a key factor for utilities to efficiently integrate the increasing portfolios of smart grid technologies and applications into and on the electrical grid.





Ambient continues to seek new opportunities for commercial deployments and to bring new and existing networks to full commercialization. Throughout 2011, Ambient’s principal target customers will continue to be electric utilities that seek to both increase efficiencies in the delivery of energy and enable consumers to better understand and manage their energy consumption.  Ambient seeks to continue to extend existing relationships, and develop new relationships to collaborate on efforts to drive the development of new functionality for both utility and consumer applications that further enhance the value of the Ambient Smart Grid® platform.





Since inception, we have funded operations primarily through the sale of our securities and most recently from the revenue generated from purchase orders received from our marquee customer. In connection with the continued development, upgrade, and marketing of our products, technology, and services, Ambient will continue to emphasize the ongoing research and development efforts necessary to complete development of our fourth generation Node, incorporate additional applications into our platform, and to continue to enhance the capabilities and functionality of our AmbientNMS® system used by customers to scale and manage the network created by the deployment of our Nodes.





In February 2011, our majority stockholder approved a reverse split of our common stock, in the range of 1-for 30 to 1-for 100, which our Board of Directors may implement in its discretion (if at all) before December 31, 2011, without any further stockholder approval.  Our Board approved and recommended the reverse stock split primarily in order to increase Ambient’s prospects of successfully listing its common stock on the NASDAQ Capital Market.  In connection therewith and in an effort to strengthen our balance sheet position in any such listing effort, as discussed below in further detail in December 2010 our majority stockholder applied the $5 million then remaining in the escrow account for our benefit to the purchase of Ambient’s securities.




Prospects and Outlook




Our business success in the immediate future will depend largely on our marquee customer expanding their existing deployments, as well as the deployment decisions of other utilities. Today, Ambient is reliant on one significant marquee customer that shares the Ambient vision for an open standards-based common communications infrastructure. We anticipate that we will continue to collaborate with this customer and continue to support their smart grid deployments.





Notwithstanding the above, Ambient recognizes that our customer could alter their vision regarding the common communications infrastructure, determine that a competing company offers a more desirable product, or slow its deployments indefinitely, significantly affecting the prospects and outlook of the Company. 
 Additionally, management is unable at this time to assess the effects, if any, that the proposed merger between Duke and Progress Energy, which merger was announced in January 2011 and is subject to shareholder and regulatory approval, will have on the continuation and/or expansion of our deployment by the new combined company following the merger, No assurance can be provided that the post merger entity will continue with or expand the current deployments at Duke Energy.





As we have demonstrated success over the course of 2010, we believe that additional utilities will ultimately begin to accept and endorse the concept of one common communications infrastructure to support many utility and consumer applications, strengthening Ambient’s position. However, no assurance can be given that this development will in fact ultimately occur and even if it does that the Ambient Smart Grid® will be their choice technology.




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RESULTS OF OPERATIONS





COMPARISON OF THE YEAR ENDED DECEMBER 31, 2010 (the “2010 Period”) AND THE YEAR ENDED DECEMBER 31, 2009 (the “2009 Period”)





REVENUES. Revenues for the 2010 Period were $20,358,040, compared to $2,193,338, for the 2009 Period. Revenues for each of the 2010 and 2009 Periods were attributable to the sales of products, and maintenance to our customer. Revenues for the 2010 and 2009 Periods related to the sales of products totaled $20,282,596 and $2,127,977, respectively. Revenues from the sale of software and services for the 2010 Period and the 2009 Period totaled $75,444 and $65,361, respectively. The increase in revenue during the 2010 Period compared to the 2009 Period reflects an increase in the number of communication nodes delivered as well as increased license fees recorded from the licensing of our AmbientNMS®.




COST OF GOODS SOLD. Cost of goods sold for the 2010 Period was $12,023,332 compared to $1,836,546 for the 2009 Period. Cost of goods sold included all costs related to manufacturing of our products and consisted primarily of direct material costs. Cost of goods sold also included expenses related to the write down of inventory to the lower of cost or market. For the 2010 and 2009 Periods, cost of goods sold included an inventory write-off of $0 and $151,689 and respectively for excess, obsolete inventory. The increase in cost of goods sold during the 2010 period reflected the increase in production to fill orders placed by our customer as discussed above in REVENUES.




GROSS PROFIT. Gross profits for the 2010 Period was $8,334,708 compared to $356,792 for the 2009 Period. The gross profit on product sales amounted to $11,177,367 during the 2010 Period compared to $291,431 during the 2009 Period. The overall gross margins for the 2010 Period increased to 41% compared to 16% during the 2009 Period. The increase in the gross margin percentage in the 2010 Period compared to the 2009 Period is a reflection of the maturing of our product set, an enhanced ability to plan production and scale based on increased lead-time and transparency in the forecasting and purchasing process of our customer, and a stable and productive relationship with our contract manufacturer.





RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consisted of expenses incurred primarily in designing, developing and field testing our smart grid solutions. These expenses consisted primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties. Research and development expenses were approximately $6.1 million for the 2010 Period compared to $4.6 million for the 2009 Period. The increase in research and development during the 2010 Period was due primarily to the increase in personnel and consultants for the continued development of our fourth generation communications Node, and the enhancement of our AmbientNMS® system. We believe that our continued development efforts are critical to our strategic objectives of enhancing our technology while reducing cost and therefore we expect that our research and development expenses will increase over the next twelve months as we continue to focus our efforts on developing more robust solutions and additional value-added functionality for the Ambient Smart Grid® communications platforms.




OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and administrative expenses primarily consisted of salaries and other related costs for personnel in executive and other administrative functions. Other significant costs included professional fees for legal, accounting and other services. General and administrative expenses for the 2010 Period were approximately $4.8 million compared to $4.1 million for the 2009 Period. The increase in operating, general and administrative expenses during the 2010 period as compared to the 2009 period was due to the increase in efforts to market and commercialize the Ambient Smart Grid® communications platforms.  As we continue to increase our efforts to market and commercialize the Ambient Smart Grid® communication platforms, over the next twelve months, we expect our operating, general and administrative expenses to increase during that time.





STOCK BASED COMPENSATION. A portion of our operating expenses was attributable to non-cash charges associated with the compensation of consultants and employees through the issuance of stock options and stock grants. Stock-based compensation is non-cash and will therefore have no impact on our cash flows or liquidity. For the 2010 Period, we incurred non-cash stock based compensation expense of $725,343 compared to $967,301 for the 2009 Period.




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INTEREST AND FINANCE EXPENSES. For the 2010 Period, we incurred interest of $31,814 compared to $617,060 for the 2009 Period, respectively. The interest related primarily to our 8% Secured Convertible Promissory Notes, which were issued in July and November of 2007 and January 2008. Additionally, for the 2010 Period and 2009 Period, we incurred non-cash interest of $183,609 and $4,375,767, respectively. This interest related to the amortization of the beneficial conversion features and deferred financing costs incurred in connection with the placement of our convertible promissory notes. These costs are amortized to the date of maturity of the debt unless converted earlier. In January 2010, Vicis converted the remaining $10 million outstanding on the notes. Following the conversion of the notes, we no longer had any long-term debt.  In addition, on June 30, 2009, we agreed to modify the terms of the expiring Class A warrants. Under the new terms, the warrants were exercisable through August 31, 2009 and the exercise prices were reduced from $0.20 to $0.15 per share. The resulting charge due to the modification was $1,147,167 and was reflected as additional interest expense.





LIQUIDITY AND CAPITAL RESOURCES





While we have, since inception, funded operations primarily through the sale of our securities, most recently the revenues generated from purchase orders received from our marquee customer have been applied to meet our operating requirement. In addition, the $5 million proceeds from the investment in December 2010 by our majority stockholder formerly on deposit in the escrow account established for our benefit strengthened our cash position. Management believes that cash on hand plus anticipated revenue from purchase orders received from our marquee customer will allow us to meet our operating requirements for fiscal year 2011. However, we may need to raise additional funds to expand existing commercial deployments, support strategic acquisitions and/ or joint venture opportunities, and/or to satisfy any additional significant purchase order that it may receive. At the present time, the Company does not have any commitments for additional funding.


Cash balances totaled $6,986,881 at December 31, 2010 and $987,010 at December 31, 2009. As of February 21, 2011, we have approximately $7,494,525 cash on hand.





Net cash used in operating activities during the year ended December 31, 2010 was approximately $1.7 million and was used primarily to pay ongoing research and development and operating, general and administrative expenses.





Net cash used in investing activities during the year ended December 31, 2010 was approximately $410,805 and was for additions to property and equipment.





Net cash provided by financing activities during the year ended December 31, 2010 was approximately $8,118,934, and represented the issuance of common stock, exercise of warrants and options and the payments on capitalized lease obligations.







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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES





The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, investments, intangible assets and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.





We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.





REVENUE RECOGNITION. Hardware sales consist of smart grid Nodes as well as system software embedded in the Nodes. System software embedded in Ambient’s Nodes is used solely in connection with the operation of the product.  Upon the sale and shipment of its product, Ambient is not required to update the embedded software for newer versions that are subsequently developed.  In addition, the Company does not offer or provide any free post-contract customer support.  There is an original warranty period, which may run for a period of up to twelve months from sale of product, in which the Company will provide fixes for the Nodes when and if appropriate. As such, we recognize revenue from the sales of the Nodes when Product is received by the customer.




The Company’s other proprietary software consists of the AmbientNMS® an element management product that may be sold on a stand-alone basis.  A purchaser of Ambient’s Nodes is not required to purchase this product, as our Nodes could be managed with independently developed management software. The sale and or license of the AmbientNMS® does not include post-contract customer support, unless the customer enters into a maintenance agreement with the Company. As such, Ambient recognizes revenue from the sale of this software product when shipped. Amounts billed to customers before software is shipped are classified as deferred revenue.
 
 The Company offers maintenance service, on a fee basis that entitles the purchasers of its Nodes and NMS® software to benefits including telephone support, as well as updates and upgrades to our products.  Such revenue, when received, will be amortized over the appropriate period based on the terms of individual agreements and contracts.


22








INVENTORY VALUATION. Inventory is valued at the lower of cost or market determined on the first-in, first-out (FIFO) basis. Market, with respect to direct materials, is replacement cost and is net realizable value for work-in-process and finished goods. The value of the inventory is adjusted for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.





SOFTWARE DEVELOPMENT COSTS. Costs incurred in the research and development of new software products and enhancements to existing software products have historically been expensed as incurred. After technological feasibility is established, additional development costs are capitalized. No software development costs have been capitalized as of December 31, 2010 and 2009.





STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation in accordance with accounting guidance now codified as Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of ASC 718 stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model.





DEFERRED INCOME TAXES. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. At December 31, 2010, our deferred income tax assets consisted primarily of net operating loss carry forwards and stock based compensation charges which have been fully offset with a valuation allowance due to the uncertainty that a tax benefit will be realized from the assets in the future.





WARRANTIES.The Company accounts for its warranties under the FASB ASC 450 “Contingencies.” The Company generally warrants that its products are free from defects in material and workmanship for a period of one year from the date of initial acceptance by our customers. The warranty does not cover any losses or damage that occurs as a result of improper installation, misuse or neglect or repair or modification by anyone other than the Company or its authorized repair agent. The Company's policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. The Company’s repair rate of products under warranty has been minimal, and a historical percentage has not been established. The Company has not provided for any reserves for such warranty liability.





The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if the Company's software products infringe upon a third party's intellectual property rights. The Company has not provided for any reserves for such warranty liabilities.





The Company’s software license agreements also generally include a warranty that the Company's software products will substantially operate as described in the applicable program documentation. The Company also warrants that services the Company performs will be provided in a manner consistent with industry standards. To date, the Company has not incurred any material costs associated with these product and service performance warranties, and as such the Company has not provided for any reserves for any such warranty liabilities in its operating results.




23





RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





The Financial Accounting Standards Board (FASB) ratified Accounting Statement Update 2009-13 (ASU), “Revenue Recognition-Milestone Method (Topic 605): Multiple-Deliverable Revenue Arrangements,” which eliminates the residual method of allocation, and instead requires companies to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, and otherwise using third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, companies shall use their best estimate of the selling price for that deliverable when applying the relative selling price method. ASU 2009-13 shall be effective in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Companies may elect to adopt this guidance prospectively for all revenue arrangements entered into or materially modified after the date of adoption, or retrospectively for all periods presented. The Company will adopt this standard effective January 1, 2011.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company. 
 In April 2010, the FASB issued ASU 2010-17 (ASU 2010-17), “Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition.” The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company will adopt this standard effective January 1, 2011. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.


Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.





OFF-BALANCE SHEET ARRANGEMENTS





None.





TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS





Payments Due By PeriodContractual Obligations

Total


Less Than

1 Year


1 – 3

Years


3 – 5

Years


More Than

5 yearsShort -Term Debt Obligations

$
0


$
0


$
0


$
0


$
0Capital Lease Obligations


10,842



10,842



0



0



0Operating Lease Obligations


793,724



389,885



403,839



0



0Purchase Obligations


0



0



0



0



0Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP


0



0



0



0



0Total

$
804,566


$
400,727


$
403,839


$
0


$
0





ITEM 7A. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not applicable




24





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The information called for by Item 8 is included following the "Index to Financial Statements" on page F-1contained in this Annual Report on Form 10-K.





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None





ITEM 9A. CONTROLS AND PROCEDURES





EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.





We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our President and Chief Executive Officer (who also serves as our principal executive officer and principal financial and accounting officer) to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e).





As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our President and Chief Executive Officer (who also serves as our principal executive officer and principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer concluded that our disclosure controls and procedures were effective.





MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management, including our principal executive officer who also serves as our principal financial and accounting officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on his evaluation under the framework in Internal Control - Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2010.





This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this Annual Report.





During the year ended December 31, 2010, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, out internal control over financial reporting.





ITEM 9B. OTHER INFORMATION





None.





25




PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2011 annual meeting of stockholders.
 
 ITEM 11. EXECUTIVE COMPENSATION
 
 The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2011 annual meeting of stockholders.
 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2011 annual meeting of stockholders.
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS INDEPENDENCE
 
 The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2011 annual meeting of stockholders.
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The information required by this Item is incorporated by reference to the Company's definitive proxy statement for the 2011 annual meeting of stockholders.
   26
  PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 (a)
(1)
Financial Statements:
 
 Report of Independent Registered Public Accounting FirmsCONSOLIDATED FINANCIAL STATEMENTS:Consolidated Balance Sheets as of December 31, 2010 and 2009Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2010 and 2009Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009Notes to Consolidated Financial Statements
 Exhibit

Number

Description3.1

Restated Certificate of Incorporation of the Company, as amended. (1) (Exhibit 3.1), (2) (Exhibit 3.1)3.2

Bylaws of the Company, as amended. (3) (Exhibit 3.2)4.1

Specimen Stock Certificate. (3) (Exhibit 4.1)4.2

Common Stock Purchase Warrant issued by the Company on January 25, 2006. (4) (Exhibit 4.6)4.3

Form of Common Stock Purchase Warrant issued by the Company on May 26, 2006. (5) (Exhibit 4.7)4.4

Secured Convertible Promissory Note due July 31, 2010. (6) (Exhibit 4.1)4.5

Common Stock Purchase Warrant (Series A) (6). (Exhibit 4.2)4.6

Common Stock Purchase Warrant (Series B) (6). (Exhibit 4.3)4.7

Common Stock Purchase Warrant (Series C). (7) (Exhibit 4.2)4.8

Common Stock Purchase Warrant (Series D).  (7) (Exhibit 4.3)4.9

Secured Convertible Promissory Note due January 15, 2011. (8) (Exhibit 4.1)4.10

Common Stock Purchase Warrant (Series E). (8) (Exhibit 4.2)4.11

Warrant issued as of April 23, 2008. (2) (Exhibit 4.1)4.12

Common Stock Purchase Warrant (Series G) (15) (4.1)10.1

Ambient Corporation 2000 Equity Incentive Plan. (9) +  (Appendix A)
 10.2

Ambient Corporation 2002 Non-Employee Directors' Stock Option Plan. (9) (Appendix B)10.3

Amended and Restated Employment Agreement effective as of December 30, 2008 between the Company and John Joyce. (14) (10.4) +10.4

Amended and Restated Employment Agreement effective as of June 2, 2008 between the Company and Ramdas Rao.  (14) (10.5) +10.5

Securities Purchase Agreement dated as of May 26, 2006 among the Company and certain investors.  (5) (Exhibit 10.8)10.6

Registration Rights Agreement dated as of May 26, 2006 among the Company and certain investors.  (5) (Exhibit 10.9)10. 7

Registration Rights Agreement, dated as of July 31, 2007, between Ambient Corporation and Vicis Master Capital Fund.  (6) (Exhibit 10.1)10.8

Securities Purchase Agreement, dated as of July 31, 2007 between Ambient Corporation and Vicis Master Capital Fund.  (6)  (Exhibit 10.2)10.9

Security Agreement, dated as of July 31, 2007 between Ambient Corporation and Vicis Master Capital Fund.  (6) (Exhibit 10.3)10.10

Securities Purchase Agreement dated as of November 1, 2007, between Ambient Corporation and the Vicis Master Fund.  (7) (Exhibit 10.1)
 
 
 27
 
 Exhibit

Number

Description10.11

First Amendment dated as of November 1, 2007 to Registration Rights Agreement, dated as of July 31, 2007, between Ambient and Vicis Master Capital Fund. (7) (Exhibit 10.2)10.12

First Amendment dated as of November 1, 2007 to Securities Purchase Agreement, dated as of July 31, 2007 between Ambient Corporation and Vicis Master Capital Fund. (7) (Exhibit 10.3)10.13

Securities Purchase Agreement dated as of January 15, 2008, between Ambient Corporation and the Vicis Master Capital Fund.  (8) (Exhibit 10.1)10.14

Second Amendment dated as of January 15, 2008 to Registration Rights Agreement, dated as of July 31, 2007, between Ambient Corporation and Vicis Master Capital Fund.  (8) (Exhibit 10.2)10.15

First Amendment dated as of January 15, 2008 to Securities Purchase Agreement, dated as of November 1, 2007 between Ambient Corporation and Vicis Master Capital Fund.  (8) (Exhibit 10.3)10.16

Second Amendment dated as of January 15, 2008 to Securities Purchase Agreement, dated as of July 31, 2007 between Ambient Corporation and Vicis Master Capital Fund.  (8) (Exhibit 10.4)10.17

Securities Purchase Agreement dated as of April 23, 2008 between Ambient Corporation and Vicis Capital Master Fund. (2) (Exhibit 10.1)10.18

Amendment and Waiver dated as of April 23, 2008 between Ambient Corporation and Vicis Capital Master Fund. (2) (Exhibit 10.2)10.19

Debenture Amendment Agreement dated as of November 21, 2008 between Ambient Corporation and Vicis Capital Master Fund.  (11) (Exhibit 10.1)10.20

Commercial Deployment Agreement dated as of March 31, 2008 between Ambient Corporation and Duke Energy Carolinas, LLC.  (13 ) (10.1)  (Pursuant to Rule 24 b-2 under the Securities Exchange Act of 1934, the registrant has requested confidential treatment of the portion of this exhibit deleted from the filed copy).10.21

Product Sales, Services & Software Agreement between Ambient Corporation and Duke Energy business Services LLC on its own behalf and as agent for and on behalf of Duke Energy Carolinas, LLC, Duke Energy Indiana, Inc, Duke Energy Ohio, Inc., Duke Energy Kentucky, Inc., and certain after acquired affiliates (Pursuant to Rule 24b-2 under the Exchange Act, the registrant has requested confidential treatment of portions of this exhibit deleted from the filed copy.) (15) (10.1)10.22

Securities Purchase Agreement, dated as of November 16, 2009 between Ambient Corporation and Vicis Master Capital Fund (15) (10.2)10.23

Registration Rights Agreement, dated as of November 16, 2009 between Ambient Corporation and Vicis Master Capital Fund. (15)(10.3)10.24

Office Lease Agreement dated as of May 21, 2009, between Ambient Corporation and NS 7/57 Acquisition LLC (16) (10.1)10.25

Amendment to Securities Purchase Agreement dated as of January 15, 2010, between Ambient and Vicis Master Capital Fund. (17) (10.26)14

Code of Conduct and Ethics.  (12) (Exhibit 14)21

Subsidiaries23.1*

February 23, 2011 Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. to the Company’s Registration Statement on Form S-8 (No 333-112569)31

RULE 13a-14(a) / 15d-14(a) CERTIFICATION32

SECTION 1350 CERTIFICATION
 ———————
 *  Filed herewith+  Management Agreement(1) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007 and incorporated herein by reference.(2) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Quarterly Report on Form 10-Q for the three month period ended June 30, 2008 and incorporated herein by reference.(3) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Registration Statement on Form SB-2 (File No. 333-40045) and incorporated herein by reference.(4) Filed as an exhibit (the number of which is indicated in parentheses) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005 and incorporated herein by reference.(5) Filed as an exhibit (the number of which is indicated in apprentices) to the Company’s Registration Statement on Form SB-2 (File No. 33-134872) and incorporated by reference.(6) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Current Report on Form 8-K filed on July 31, 2007 and incorporated herein by reference.(7)  Filed as an exhibit (the number of which is indicated in parentheses) to the Company's Current Report on Form 8-K filed on November 5, 2007 and incorporated herein by reference.(8) Filed as an exhibit (the number of which is indicated in parentheses) to the Company's Current Report on Form 8-K filed on January 17, 2008 and incorporated herein by reference.(9) Filed as an appendix to the Company’s Definitive Information Statement on Form 14C filed on December 24, 2009 and incorporated herein by reference.(10) Filed as an exhibit (the number of which is indicated in parentheses) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007 and incorporated herein by reference.(11) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Current Report on Form 8-K filed on November 24, 2008 and incorporated herein by reference.(12) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated herein by reference.(13) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Quarterly Report on Form 10-Q for the three month period ended March 31, 2008 and incorporated herein by reference.(14) Filed as an exhibit (the number of which is indicated in parentheses) to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference.(15) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Quarterly Report on Form 10-Q for the three month period ended September 30, 2009 and incorporated herein by reference.(16) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Quarterly Report on Form 10-Q for the three month period ended June 30, 2009 and incorporated herein by reference.(17) Filed as an exhibit (the number of which is indicated in parentheses) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference.
  28
  SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 Date: February 23, 2011
 By:
/s/ J OHN J. J OYCEJOHN J. JOYCEPRESIDENT AND CHIEF EXECUTIVE OFFICER

(PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL

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

Title

Date/s/  JOHN J. J OYCE

PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE

February 23, 2011JOHN J. JOYCE

OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)/s/ MICHAEL WIDLAND

DIRECTOR

February 23, 2011MICHAEL WIDLAND/s/ D. HOWARD PIERCE

DIRECTOR

February 23, 2011D. HOWARD PIERCE/s/ THOMAS MICHAEL HIGGINS

DIRECTOR

February 23, 2011THOMAS MICHAEL HIGGINS/s/ SHAD STASTNEY

DIRECTOR

February 23, 2011SHAD STASTNEY
 
 29
 
 AMBIENT CORPORATION
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReport of Independent Registered Accounting Firm


F-2Consolidated Financial StatementsConsolidated Balance Sheets


F-3Consolidated Statements of Operations


F-4Consolidated Statement of Changes in Stockholders’ Equity (Deficit)


F-5Consolidated Statements of Cash Flows


F-6Notes to Consolidated Financial Statements


F-7
 F-1
 
 
 REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
 
 
 
 To the Board of Directors and Stockholders of
 
 Ambient Corporation
 
 We have audited the accompanying consolidated balance sheets of Ambient Corporation and Subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the years then ended.  The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009 and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
 /s/  ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
 
 ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
 Saddle Brook, New Jersey
 February 23, 2011
 
 
 
 F-2
 
 AMBIENT CORPORATION
 CONSOLIDATED BALANCE SHEETS
  December 31,


December 31,2010


2009ASSETSCURRENT ASSETSCash and Cash Equivalents

$
6,986,881


$
987,010Accounts receivable


1,731,096



1,238,708Inventory


834,117



361,201Prepaid expenses and other current assets


276,121



202,568Total current assets


9,828,215



2,789,487Property and equipment, net


744,944



603,412Total assets

$
10,573,159


$
3,392,899LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT LIABILITIESAccounts payable

$
3,608,293


$
2,015,771Accrued expenses and other current liabilities (including related party interest


632,994



829,041of $244,262 and $690,027 respectively)Deferred revenue


-



158,686Capital lease obligations, current portion


10,325



11,463Convertible debt, current portion (net of discount of $-0- and $183,609)


-



9,816,391Total current liabilities


4,251,612



12,831,352NON-CURRENT LIABILITIESDeferred rent


185,721



84,906Capital lease obligations, less current portion


-



11,504Total  liabilities


4,437,333



12,927,762STOCKHOLDERS' EQUITY  (DEFICIT)Common stock, $.001 par value;2,000,000,000 and 2,000,000,000 shares authorized in 2010 and 2009;1,649,376,354 and 899,039,687issued; 1,648,376,354 and 898,039,687 outstanding, respectively


1,649,377



899,040Additional paid-in capital


148,114,946



130,008,365Accumulated deficit


(143,428,497
)


(140,242,268
)Less: treasury stock; 1,000,000 shares at cost


(200,000
)


(200,000
)Total stockholders' equity (deficit)


6,135,826



(9,534,863
)Total liabilities and stockholders' equity (deficit)

$
10,573,159


$
3,392,899
  See Notes to Consolidated Financial Statements.
  F-3
 AMBIENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
 Year EndedDecember 31,2010


2009Revenues

$
20,358,040


$
2,193,338Less Cost of goods sold


12,023,332



1,836,546Gross profit


8,334,708



356,792ExpensesResearch and Development


6,072,010



4,585,979Operating, general and administrative expenses


4,755,352



4,054,255Stock based compensation - operating, general and administrative


725,343



967,301Total expenses


11,552,705



9,607,535Loss on disposition of property and equipment


(5,541
)


(31,590
)Operating loss


(3,223,538
)


(9,282,333
)Interest and finance expenses


(215,424
)


(4,992,827
)Gain on conversion of debentures


251,840Interest income


893



28,876Net loss

$
(3,186,229
)

$
(14,246,284
)Basic and diluted loss per share:Net loss

$
(0.00
)

$
(0.02
)Weighted average number of shares outstanding


1,538,475,035



789,088,699
  See Notes to Consolidated Financial Statements.
  F-4
 
 AMBIENT CORPORATION
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
 
 Additional





AccumulatedCommon Stock


Paid-in


Treasury


AccumulatedShares


Amount


Capital


Stock


Deficit


TotalBalance - January 1, 2009


719,980,784


$
719,981


$
132,930,334



(200,000
)

$
(125,995,984
)

$
7,454,331Common stock issued upon exercise of warrants


11,642,236



11,642



940,063











951,705Common stock issued upon exercise of options


750,000



750



23,500











24,250Common stock issued upon conversion of convertible debt


166,666,667



166,667



2,333,333











2,500,000Remeasurement of beneficial conversion feature of convertible promissory note










(8,333,333
)










(8,333,333
)Warrant repricing










1,147,167











1,147,167Share-based compensation expense










967,301











967,301Net loss


















(14,246,284
)


(14,246,284
)Balance - December 31, 2009


899,039,687


$
899,040


$
130,008,365


$
(200,000
)

$
(140,242,268
)

$
(9,534,863
)Common stock issued upon exercise of warrants


2,859,000



2,859



97,206











100,065Common stock issued upon exercise of options


811,000



811



30,699











31,510Proceeds from sale of common stock


80,000,000



80,000



7,920,000











8,000,000Common stock issued upon conversion of convertible debt


666,666,667



666,667



9,333,333











10,000,000Share-based compensation expense










725,343











725,343Net loss


















(3,186,229
)


(3,186,229
)Balance - December 31, 2010


1,649,376,354


$
1,649,377


$
148,114,946


$
(200,000
)

$
(143,428,497
)

$
6,135,826
 
 See Notes to Consolidated Financial Statements.
 F-5
 
 
 
 
 AMBIENT CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year EndedDecember 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(3,186,229
)

$
(14,246,284
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


380,256



302,871Amortization of beneficial conversion feature of convertible debt


183,609



3,228,600Financing costs related to warrant modification


-



1,147,167Financing,  consulting and other expenses paid via theissuance of common stock and warrants


725,343



967,301Gain on conversion of debentures


(251,840
)


-Loss on disposition of property and equipment


5,541



31,590Changes in operating assets and liabilities(Increase) decrease in:Accounts receivables


(492,387
)


430,178Inventory


(472,916
)


(263,157
)Prepaid expenses and other current assets


(73,553
)


(28,143
)Increase (decrease) in:Accounts payable


1,592,521



681,994Deferred rent


100,815



84,906Accrued expenses and other current liabilities


55,792



(107,919
)Deferred revenue


(158,686
)


50,619Net cash used in operating activities


(1,591,734
)


(7,720,277
)CASH FLOWS FROM  INVESTING ACTIVITIESRedemption of marketable securities


-



125,000Additions to property and equipment


(527,329
)


(394,429
)Proceeds from sale of property and equipment


-



460Net cash used in investing activities


(527,329
)


(268,969
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of common stock


8,000,000



975,955Proceeds from exercise of warrants


100,065



-Proceeds from exercise of options


31,510



-Payments of capitalized lease obligations


(12,641
)


(11,463
)Net cash provided by financing activities


8,118,934



964,492INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


5,999,871



(7,024,754
)CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR


987,010



8,011,764CASH AND CASH EQUIVALENTS - END OF YEAR

$
6,986,881


$
987,010Noncash financing and investing activities:Issuance of common stock in connection with conversion of debt

$
10,000,000


$
-Supplemental disclosures of cash flow information:Cash paid during the year for:Interest

$
225,740


$
675,228
 See Notes to Consolidated Financial Statements.
  F-6
 AMBIENT CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 - DESCRIPTION OF BUSINESS
  Ambient Corporation (“Ambient,” the “Company,” “we or “us”) is a Delaware Corporation incorporated on June 26, 1996 and is a pioneering integrator of smart grid communications platforms, creating high-speed Internet Protocols (IP) based data communications networks for the medium and low-voltage distribution grid. The Ambient smart grid platform, known as Ambient Smart Grid®, facilitates a two-way, real-time communications network designed to modernize the power grid infrastructure, making it more receptive to wide-scale adoption of renewable energy sources and supportive of new energy efficiency technologies and programs. The Ambient Smart Grid® platform facilitates a utility’s ability to implement smart grid applications such as Advanced Metering Infrastructures (AMI), Demand Side Management (DSM), Distribution Monitoring and Automation, direct load control and more. When combined, these applications offer economic, operational and environmental benefits for utilities, and ultimately the utility customers.
 
 Throughout the past five years, Ambient has been a key supplier to Duke Energy’s grid efficiency programs, and the leading supplier of the smart grid communications Nodes for their smart grid deployments. In September 2009, we entered into a long-term agreement, running through 2015 to supply Ambient’s X-3100 Node and to license our management software – AmbientNMS® for deployment throughout the utility’s electric power distribution grid.
 F-7
 
 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 PRINCIPLES OF CONSOLIDATION
 
 The consolidated financial statements include the accounts of the Company and its inactive, wholly-owned subsidiary, Insulated Connections Corporation Limited. The subsidiary has been inactive since 2001. All inter-company balances and transactions have been eliminated in consolidation.
  USE OF ESTIMATES
 
 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements. Actual results may differ from those estimates.
 
 CASH AND CASH EQUIVALENTS
 
 Cash and cash equivalents consist of cash and short-term investments with insignificant interest rate risk and original maturities of 90 days or less.
 
 FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Substantially all of the Company's financial instruments, consisting primarily of cash, accounts receivable, accounts payable and accrued expenses, other current liabilities and convertible debentures, are carried at, or approximate, fair value because of their short-term nature or because they carry market rates of interest.
 
  F-8
 
 STOCK-BASED COMPENSATION
 
 The Company accounts forstock-basedcompensation in accordance with accounting guidance now codified as Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of financial stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option pricing model.


NET LOSS PER SHARE
 
 Basic loss per share (EPS) is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share adjusts basic loss per share for the effects of convertible securities, stock options and other potentially dilutive instruments, only in the periods in which such effect is dilutive. The following securities have been excluded from the calculation of net loss per share, as their effect would be anti-dilutive.
 
 2010

2009Stock options


112,946,500



58,537,000Warrants


155,968,831



78,827,831Convertible debentures


----



666,666,667
 
 PROPERTY AND EQUIPMENT
 
 Equipment, furniture and fixtures are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from one to five years.
 
 REVENUE RECOGNITION
 
 Hardware sales consist of smart grid nodes ("Nodes") as well as system software embedded in the Nodes. System software embedded in Ambient’s Nodes is used solely in connection with the operation of the product.  Upon the sale and shipment of its products, Ambient is not required to update the embedded software for newer versions that are subsequently developed.  In addition, the Company does not offer or provide any free post-contract customer support.  There is an original warranty period, which may run for a period of up to twelve months from sale of product, in which the Company will provide fixes for the Nodes when and if appropriate. As such, we recognize revenue from the sales of the Nodes when products are received by the customer.
 
 The Company’s other proprietary software consists of the AmbientNMS®; an element management product that may be sold on a stand-alone basis.  A purchaser of Ambient’s Nodes is not required to purchase this product, as our Nodes could be managed with independently developed management software. The sale of the AmbientNMS® does not include post-contract customer support, unless the customer enters into a maintenance agreement with the company. As such, Ambient recognizes revenue from the sale of this software product when shipped. Amounts billed to customers before software is shipped are classified as deferred revenue.
 
 The Company offers maintenance service, on a fee basis that entitles the purchasers of its Nodes and NMS® software to benefits including telephone support, as well as updates and upgrades to our products.  Such revenue, when received, will be amortized over the appropriate period based on the terms of individual agreements and contracts.
  F-9
 
 ACCOUNTS RECEIVABLE
 
 Accounts receivable are recorded net of an allowance for doubtful accounts based upon management's analysis of the collectability of the balances. At December 31, 2010 and 2009, management believed that no allowance was necessary.
 
 At December 31, 2010 and 2009, one customer accounted for 100% of accounts receivable. See Note 10.
 
 INVENTORY
 
 Inventory is valued at the lower of cost or market determined on the first-in, first-out (FIFO) basis. Market, with respect to direct materials, is replacement cost and is net realizable value for finished goods. The value of the inventory is adjusted for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
 
 RESEARCH AND DEVELOPMENT AND PATENT COSTS
 
 Both research and development costs and patent costs are charged to operations as incurred.
 
 SOFTWARE DEVELOPMENT COSTS
 
 Costs incurred in the research and development of new software products and enhancements to existing software products have historically been expensed as incurred. After technological feasibility is established, additional development costs are capitalized. No software development costs have been capitalized as of December 31, 2010 and 2009.
 
 LEASED EMPLOYEES
 
 Ambient has a contract with Administaff to provide certain professional employment services such as health, dental and various other types of insurance to its employees at rates that it would not qualify for otherwise and payroll services to its personnel. Pursuant to this contract, the Company’s personnel are employees of, and paid by, Administaff as part of an employee leasing arrangement. The Company leases the services of these employees from Administaff, and reimburses Administaff for the costs of compensation and benefits. All of the employees referred to in the Annual Report are full time employees. For purposes of reporting the number of employees in our Annual Report, the Company considers employees of Administaff covered by this contract to be employees of the Company.
 
 The Company records these payments using the same classifications for which the reimbursement is made (i.e. wage reimbursements are recorded as wage expense).
  F-10
 
 INCOME TAXES
 
 The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
  The Company has adopted the provisions of FASB ASC 740-10-05, “Accounting for Uncertainties in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements.  The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
 
 WARRANTIES
 
 The Company accounts for its warranties under the FASB ASC 450 “Contingencies.” The Company generally warrants that its products are free from defects in material and workmanship for a period of one year from the date of initial acceptance by our customers. The warranty does not cover any losses or damage that occurs as a result of improper installation, misuse or neglect or repair or modification by anyone other than the Company or its authorized repair agent. The Company's policy is to accrue anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. The Company’s repair rate of products under warranty has been minimal, and a historical percentage has not been established. The Company has not provided for any reserves for such warranty liability.
 
 The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if the Company's software products infringe upon a third party's intellectual property rights. The Company has not provided for any reserves for such warranty liabilities.
 
 The Company’s software license agreements also generally include a warranty that the Company's software products will substantially operate as described in the applicable program documentation. The Company also warrants that services the Company performs will be provided in a manner consistent with industry standards. To date, the Company has not incurred any material costs associated with these product and service performance warranties, and as such the Company has not provided for any reserves for any such warranty liabilities in its operating results.
  F-11
 
 IMPAIRMENT OF LONG-LIVED ASSETS
 
 The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the excess, if any, of the carrying value over the fair value of the long-lived assets.  The Company did not record an impairment charge in 2010 and 2009.
 
 FAIR VALUE MEASUREMENTS
 
 FASB ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820"), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
 Level 1
—
Quoted prices in active markets for identical assets or liabilities.Level 2
—
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.Level 3
—
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
 The Financial Accounting Standards Board (FASB) ratified Accounting Statement Update (ASU) 2009-13 (ASU 2009-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” which eliminates the residual method of allocation, and instead requires companies to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists and otherwise using third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, companies shall use their best estimate of the selling price for that deliverable when applying the relative selling price method. ASU 2009-13 shall be effective in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Companies may elect to adopt this guidance prospectively for all revenue arrangements entered into or materially modified after the date of adoption, or retrospectively for all periods presented. The Company will adopt this standard effective January 1, 2011.  The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
  F-12
 
 In April 2010, the FASB issued Accounting Standards Update 2010-17 (ASU 2010-17), "Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition." The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
 Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.
 
 NOTE 3 – INVENTORY
 
 Inventory consisted of the following:
  December 31,2010

2009Raw material

$
138,722


$
137,026Finished goods


695,395



224,175$
834,117


$
361,201
  NOTE 4 - PROPERTY AND EQUIPMENT
  December 31,2010


2009Computers

$
309,191


$
162,768Software


505,199



367,844Software (capital lease)


30,429



30,429Machinery and equipment


626,393



539,005Furniture and office equipment


195,492



161,3941,666,704



1,261,440Less – accumulated depreciation


921,760



658,028$
744,944


$
603,412
 
 Depreciation expense was $380,256 and $302,871 for the years ended December 31, 2010 and 2009, respectively.
 F-13
 
 NOTE 5 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
 December 31,2010

2009Accrued interest

$
244,262


$
690,028Accrued payroll and payroll taxes


139,276



83,070Accrued professional fees


31,440



33,034Accrued liabilities


218,016



22,909$
632,994


$
829,041
 
 Accrued interest represents amounts owed to Vicis Capital Master Fund on secured convertible promissory notes. See Note 7.
 
 NOTE 6 – CAPITAL LEASE OBLIGATION
 
 The Company is the lessee of software under a capital lease expiring in 2011. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The asset is amortized over its estimated productive life. Amortization of assets under capital leases is included in depreciation expense.
 
 Minimum future lease payments under capital leases as of December 31, 2010, were as follows:
  AmountNet minimum lease payments – 2011

$
10,842Amount representing interest


(517
)Present value of net minimum lease payments

$
10,325
 
 The interest rate on the capitalized lease is 9.1%. Interest is computed based on the lower of the Company’s incremental borrowing rate at the inception of lease or the lessor’s implicit rate of return.
  F-14
 
 NOTE 7 – CONVERTIBLE DEBT
  December 31,2010


2009Secured Convertible Promissory note payable - interest at 8%, due July 31, 2010 (i)

$
––


$
7,500,000Secured Convertible Promissory note payable - interest at 8%, due November 1, 2010 (ii)


––



2,500,000Secured Convertible Promissory note payable - interest at 8%, due January 15, 2011 (iii)


––



––Total


––



10,000,000Less: Discount


––



(183,609
)––



9,816,391Less Current Portion


––



9,816,391Total

$
–


$
–
  Securities Purchase Agreements
 
 (i) On July 31, 2007, the Company entered into the Securities Purchase Agreement (the "July 07 Purchase Agreement") with Vicis, pursuant to which the Investor purchased the Company’s Secured Convertible Promissory Note in aggregate principal amount of $7,500,000 (the “July 07 Note”). The July 07 Note had a term of three years and was scheduled to become due on July 31, 2010. The outstanding principal amount of the July 07 Note was convertible at the option of the holder into shares of the Company’s common stock (the “Common Stock”) at an initial conversion price of $0.075 per share, subject to certain adjustments. The conversion price was adjusted to $0.015 in connection with the various Agreements discussed below.  Amounts owing under the July 07 Note were secured by substantially all of the assets of the Company. In January 2010, the July 07 Note was converted into 500,000,000 shares of Common Stock.
  F-15
  (ii) On November 1, 2007, the Company entered into a Securities Purchase Agreement (the "November 07 Purchase Agreement") with the Investor pursuant to which the Investor purchased the Company’s Secured Convertible Promissory Note in the principal amount of $2,500,000 (the “November 07 Note”). The November 07 Note had a term of three years and was scheduled to become due on November 1, 2010. The outstanding principal amount of the November 07 Note was convertible at the option of the holder into shares of Common Stock at an initial conversion price of $0.045 per share. In connection with the Debenture Amendment Agreement discussed below, the conversion price was adjusted to $0.015 per share. Amounts owing under the November 07 Note were secured by substantially all of the assets of the Company. In January 2010, the November 07 Note was converted into 166,666,667 shares of Common Stock.
 
 (iii) On January 15, 2008, the Company entered into a Securities Purchase Agreement (the "January 2008 Purchase Agreement") with the Investor pursuant to which the Investor purchased the Company’s Secured Convertible Promissory Note in the principal amount of $2,500,000 (the “January 08 Note”; together with the November 07 Note and the July 07 Note, the “Notes”). The January 08 Note had a term of three years and was scheduled to become due on January 15, 2011. The outstanding principal amount of the January 08 Note was convertible at the option of the holder into shares of Common Stock at an initial conversion price of $0.035 per share. In connection with the Debenture Amendment Agreement discussed below, the conversion price was adjusted to $0.015 per share. Amounts owing under the January 08 Note were secured by substantially all of the assets of the Company. In August 2009, the January 08 Note was converted into 166,666,667 shares of Common Stock.
  The Company determined and adjusted the amount of accrued interest owed to Vicis after the notes were converted as discussed above. For the year ended December 31, 2010, the Company recorded a gain on the conversion of the debentures totaling $251,840. Such gain represents the reversal of accrued interest recorded in previous periods.
 
 At December 31, 2010 and 2009, accrued interest owed to Vicis amounted to $244,262 and $690,027, respectively. See Note 5.
 
 Debt Modification
 
 On November 21, 2008, the Company and the Investor entered into a Debenture Amendment Agreement (the “Debenture Amendment Agreement”), pursuant to which the Investor invested in the Company an additional $8 million. In consideration of the investment, the Company reduced the conversion price on the Notes referred to above to $0.015 per share. The parties also agreed that in the event that on the trading day immediately preceding June 1, 2009, the closing per share price of the Common Stock was less than $0.10, then the per share conversion price with respect to any amount then outstanding under the Notes would automatically be further adjusted to $0.01.  The price of the Common Stock was greater than $0.10 on the trading day immediately preceding June 1, 2009, and therefore no further adjustment of the conversion price was effected.
 
 The fair value of the Convertible Promissory Notes was determined utilizing Level 3 inputs. The fair value of the Convertible Promissory Notes was calculated utilizing the fully diluted market value of the invested capital of the Company immediately before and after the date of the debt modification. The fair value was determined to be the face value of the Convertible Promissory Notes at the date of the debt modification.
 
 For financial reporting purposes, the Company recorded an initial discount of $12,500,000, based upon a conversion price of $0.01 to reflect the beneficial conversion feature related to the Debenture Modification Agreement. The discount was being amortized to the date of maturity of the various Convertible Promissory Notes unless converted earlier. On June 1, 2009, the beneficial conversion feature was re-measured based on the final conversion price being set at $0.015. This resulted in a reduction in the initial value of the beneficial conversion feature of $8,333,333 and a like reduction to additional paid-in capital.
  F-16
 
 Interest incurred on convertible debt amounted to $28,296 and $614,827 for the years ended December 31, 2010 and 2009, respectively.
 
 On June 30, 2009, the Company agreed to modify the terms of the expiring Class A warrants. Under the new terms the warrants were exercisable through August 31, 2009 and the exercise prices were reduced from $0.20 to $0.15 per share. The resulting charge due to the modification was $1,147,167 and is reflected as additional interest expense in the year ended December 31, 2009 As a result of the debt conversions of the July 07 Note and the January 08 Note in January 2010, the unamortized debt discounts totaling $183,609 were charged to interest expense in fiscal 2010.  Amortization of the discounts related to the convertible notes above totaled $183,609 and $3,228,600 for the years ended December 31, 2010 and 2009.
 
 NOTE 8 - STOCKHOLDERS' EQUITY
 
 SECURITY PURCHASE AGREEEMENT
 
 On November 16, 2009, we and Vicis entered into an agreement, which was subsequently amended in January 2010, pursuant to which Vicis furnished to us access to a $8,000,000 equity based credit line. Pursuant to the arrangement, Vicis deposited into an escrow account $8,000,000. From time to time as our cash resources fall below $1,500,000 (the “ Cash Balance Condition precedent”), we are entitled to receive $500,000 from the account in consideration of which we will issue to Vicis 5,000,000 shares of Common Stock and warrants for a corresponding number of shares of Common Stock. Between January 19 and December 29, 2010, we effected six draw-downs in the amount of the $3,000,000 and issued 30 million shares of our Common Stock.
 On December 30, 2010, we and Vicis further amended the arrangement described above ("2nd amendment") pursuant to which Vicis applied the $5 million then remaining in escrow account to the purchase of Company securities (the “Investment”). Vicis made the Investment despite the fact that the Cash Balance Condition Precedent has not been met.  In consideration of the Investment, the Company issued to Vicis 50,000,000 shares of its Common Stock as well as Series G Warrants to purchase, over a two year period from the date of issuance, an additional 50,000,000 share of Common Stock. Under the terms of the 2nd Amendment, the per share exercise price of the Series G Warrants issuable in connection with the Investment was set at $0.20 (rather than the $0.25 per share exercise price provided under the original terms of the agreement).
 F-17
 
 STOCK OPTION PLANS
 
 In November 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000 Incentive Plan"). The 2000 Incentive Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash obligations, other stock-based awards and performance units. The 2000 Incentive Plan also permits cash payments under certain conditions. As of December 31, 2007, the number of shares of Common Stock reserved for issuance under the 2000 Incentive Plan was 25,000,000. On June 27, 2008, the number of shares reserved for issuance was further increased to 50,000,000 shares. On February 4, 2010, the number of shares reserved for issuance was further increased to 110,000,000 shares
 
 The compensation committee of the Board of Directors is responsible for determining the type of award, when and to whom awards are granted, the number of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to exceed ten years from the date of grant. Vesting periods range from immediately to four years.
 
 In December 2002, the Company adopted the 2002 Non-Employee Directors Stock Option Plan (the "2002 Directors Plan") providing for the issuance of shares of Common Stock to non-employee directors. Under the 2002 Directors Plan, only non-qualified options may be issued, and they will be exercisable for a period of six years from the date of grant. As of December 31, 2007, the number of shares of Common Stock reserved for issuance under the 2002 Directors Plan was 6,000,000 shares. On June 27, 2008, the number of shares reserved for issuance was increased to 12,000,000 shares. On February 4, 2010, the number of shares of Common Stock reserved for issuance was further increased to 25,000,000 shares.
  EMPLOYEE OPTIONS
 
 In February, 2011, the Company issued options to employees from the Company’s 2000 Equity Incentive Plan to purchase up to a total of 300,000 shares of the Company’s Common Stock at an exercise price of $0.10. The options will be fully vested as of February 15, 2013.
 F-18
 
 OTHER OPTION GRANTS
 
 In addition to the options granted under the stock option plans discussed above (the "Plans”), the Company has issued options outside of the Plans, pursuant to various employment, consulting and separation agreements.
 
 Option activity for 2010 and 2009 is summarized as follows:
  WeightedAveragePlan


Nonplan


Total


Exercise

PriceOptions outstanding, January 1, 2009


28,612,000



3,775,000



32,387,000


$
0.17Granted


27,450,000



----



27,450,000



0.04Exercised


(750,000)



––



(750,000)



0.06Forfeited


(400,000
)


(150,000)



(550,000
)


0.13Options outstanding, December 31, 2009


54,912,000



3,625,000



58,537,000



.11Granted


58,145,000



1,500,000



59,645,000



0.104Exercised


(686,000)



––



(686,000)



0.04Forfeited


(4,549,500
)


---



(4,549,500
)


0.13Options outstanding, December 31, 2010


107,821,500



5,125,000



112,946,500


$
0.114Shares of Common Stock available forFuture grant under the plans


24,016,600Aggregate intrinsic value

$
2,268,461
 
 The aggregate intrinsic value was calculated based on the positive difference between the closing market price of the Company’s Common Stock and the exercise price of the underlying options.
  F-19
 
 The following table summarizes information about stock options outstanding at December 31, 2010:
 
 Weighted Average


Options ExercisableRemaining


Weighted AverageNumber

Contractual


Exercise


Number


ExerciseRanges of price

Outstanding

Life


Price


Exercisable


Price$
0.03-.05

35,081,500


6.92


$
0.038



35,081,500


$
0.038$
.06 - .095

300,000


8.64


$
0.083



100,000


$
0.060$
.10 - .12

58,190,000


8.77


$
0.120



6,845,419


$
0.119$
.15 - .20

16,075,000


2.95


$
0.198



15,850,000


$
0.198$
.25 - .30

1,075,000


4.51


$
0.279



1,075,000


$
0.279$
0.50

2,225,000


1.54


$
0.500



2,225,000


$
0.500$
0.03-0.50

112,946,500


7.18


$
0.114



61,176,919


$
0.109
 
 Share based compensation - The fair values of stock options granted were estimated using the Black-Scholes option-pricing model with the following assumptions:
 
 2010


2009Risk free interest rate


.85-2.38
%


1.07- 2.66
%Expected life


3.5 -5.75



3.5 -5.75Expected volatility


155 - 168
%


162 - 169
%Dividend yield


––



––Weighted-average grant date fair value per share

$
0.104


$
0.035
 
 As of December 31, 2010, there was $5,387,846 of unrecognized compensation cost related to non-vested options granted. That cost is expected to be recognized over a weighted-average period of 19.2 months.
  F-20
 
 WARRANTS
  A summary of the warrants outstanding at December 31, 2010 is as follows:
 
 Exercise

ExpirationWarrants


Price

Date38,452,165


$
0.035

2012 - 2013750,000


$
0.075

201250,000,000


$
0.20

201266,766,666


$
0.25

2011- 2012155,968,831
 
 In February 2011, the Company issued 450,000 shares of Common Stock upon the exercise of finder warrants previously issued from an April 2008 funding.
 
 Warrant Modification
 
 In May 2006, the Company raised net proceeds of $8.986 million in a private placement of $10,000,000 in principal amount of its two-year 8% Convertible Debentures (the "2006 Debentures"). The balance was repaid in its entirety by January 2008. Investors in the private placement also received Class A warrants, exercisable through June 30, 2009, to purchase up to 33,333,333 shares of the Company's Common Stock at a per share exercise price of $0.20 and Class B warrants, exercisable through June 30, 2011, to purchase up to 33,333,333 shares of the Company’s Common Stock at a per share exercise price of $0.25.
 
 In connection with the placement of the 2006 Debentures, the Company issued to a registered broker dealer that acted as placement agent warrants consisting of (x) warrants to purchase an aggregate of 6,666,667 shares of Common Stock having an initial exercise price equal to $0.15, (y) warrants to purchase an aggregate of 3,333,333 shares of Common Stock having an initial exercise price equal to $0.20, and (z) warrants to purchase an aggregate of 3,333,333 shares of Common Stock having an initial exercise price equal to $0.25. Except as specifically noted, these warrants otherwise are on substantially the same terms and conditions as the investor warrants.
 
 On June 30, 2009, the Company modified the terms of the expiring Class A warrants. Under the new terms the warrants were exercisable though August 31, 2009 and the exercise prices were reduced from $.20 to $0.15 per share. The Company valued the warrant modification at $1,147,167 using the Black-Scholes pricing model and the following assumptions: contractual term of 0.167 years, an average risk-free interest rate of 0.19% a dividend yield of 0% and volatility of 93%. The resulting of $1,147,167 is reflected in the Statement of Operations for 2009 as interest expense.
 
 Following the modification, Class A warrants for an aggregate of 6,283,333 shares of the Company’s Common Stock have been exercised for total net cash exercise proceeds of $848,250 through August 31, 2009, and 30,383,333 Class A warrants expired.
  F-21
  NOTE 9 - INCOME TAXES
 
 At December 31, 2010, the Company had available $77 million of net operating loss carry forwards, for U.S. income tax purposes which expire in the years 2016 through 2029. However, due to changes in stock ownership, the use of the U.S. net operating loss carry forwards is severely limited under Section 382 of the Internal Revenue Code. As such, approximately $61 million of these net operating loss carry forwards will expire as worthless. The Company has ceased its foreign operations and has abandoned the foreign net operating loss carry forwards.
 
 Due to the uncertainty of their realization, no income tax benefit has been recorded by the Company for these loss carry forwards as valuation allowances have been established for any such benefits.
 
 Significant components of the Company's deferred tax assets for U.S. income taxes are as follows:
  December 31,2010


2009Net operating loss carry forwards

$
6,827,616


$
6,568,369Stock based compensation


1,024,791



734,654Other


615,257



583,860Total deferred tax assets


8,467,664



7,886,883Valuation allowance


(8,467,664
)


(7,886,883
)Net deferred tax assets

$
––


$
––
 
 The increase in the valuation allowance was due to the increases in the items in the table above.
 
 The following is a reconciliation of the federal statutory tax rate of 35% for 2010 and 2009, with the provision for income taxes:
  December 31,2010


2009Statutory tax rate


(35
%)


(35
%)Valuation allowance


35
%


35
%Effective federal tax rate


0
%


0
%
 
 At December 31, 2010 and 2009, the Company had no material unrecognized tax benefits, and no adjustments to liabilities or operations were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company did not recognize any interest or penalties related to uncertain tax positions at December 31, 2010 and 2009.
  F-22
 
 The Company files U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2006 through 2010 tax years generally remain subject to examination by federal and most state tax authorities.
 
 NOTE 10 – CONCENTRATIONS
 
 CASH
 
 Cash is maintained with major financial institutions in the United States. At December 31, 2010 and 2009, no amounts were in excess of insured amounts.
 
 SALES AND MAJOR CUSTOMERS
 
 Revenues for the years ended December 31, 2010 and 2009 were as follows:
 
 December 31,

2010


December 31,

2009Hardware

$
20,282,596


$
2,127,977Software and services


75,444



65,361$
20,358,040


$
2,193,338
 
 Duke Energy accounted for 100% of hardware, software and services revenues for the years ended December 31, 2010 and 2009, respectively.
 
 MAJOR SUPPLIER
 
 In both 2010 and 2009, we utilized one contract manufacturer to produce our Nodes. Should our relationship with the manufacturer deteriorate or terminate or should this supplier lose some or all of its access to the products or components that comprise all or part of the Nodes that we purchase from it performance would be adversely affected.  Under such circumstances, we would be required to seek alternative sources of supply for these products, and there can be no assurance that we would be able to obtain such products from alternative sources on the same terms.  A failure to obtain such products on as favorable terms would have an adverse effect on our revenue and/or gross margin.
 F-23
 
 NOTE 11 - OPERATING LEASES
 
 Ambient does not own any real property. The Company's corporate office in Newton, Massachusetts consists of two floors comprised of approximately 20,242 square feet. The lease term for the premises was scheduled to commence on September 1, 2009 and continues through December 31, 2012. At our request, the landlord agreed that we could commence the lease earlier and we completed the move into our new headquarters in August 2009.
 
 The lease provides for an initial period of the lease to be rent free and includes scheduled rent escalations.  Accounting principals generally accepted in the United States of America require that the total rent expense to be incurred over the term of the lease be recognized on a straight-line basis. Deferred rent represents the cumulative excess of the straight-line expense over the payments made.  The average annual rent expense over the term of the lease is approximately $304,000.
 
 Rent expense for 2010 and 2009 was $304,000 and $290,430, respectively.
 
 Future minimum annual rentals through 2012 are as follows:
 Years ended December 31,2011

$
389,8852012


403,839Total

$
793,724
  NOTE 12 - SUBSEQUENT EVENTS
 
 The Company reviewed subsequent events through the date of this filing.