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

                                   FORM 10-KSB
MARK ONE:
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
               OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

COMMISSION FILE NUMBER: 0-23723

                               AMBIENT CORPORATION
        (Exact name of Small Business Issuer as specified in its chapter)

Delaware                                     98-0166007
(State or Other Jurisdiction                 (IRS Employer Identification No.)
of Incorporation)

                 79 CHAPEL STREET, NEWTON, MASSACHUSETTS, 02458
                    (Address of Principal Executive Offices)

                                  617-332-0004
         (Small Business Issuer's Telephone Number, including Area Code)

    Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
      Securities Registered Pursuant to Section 12(g) of the Exchange Act:
                          $.001 Par Value Common Stock

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_

Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|

The issuer's revenues for the year ended December 31, 2004: $0

As of March 20, 2005, there were 161,788,465 outstanding shares of the issuer's
Common Stock. The aggregate market value of the shares of the issuer's Common
Stock held by non-affiliates was approximately $33.3 million. Such market value
was calculated using the closing price of such Common Stock as of such date as
quoted on the OTC Electronic Bulletin Board.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits hereto have been specifically incorporated by reference herein
in Item 13 under Part III hereof. Certain portions of issuer's definitive proxy
statement, which will be filed with the Securities and Exchange Commission in
connection with the issuer's 2005 annual meeting of stockholders, are
incorporated by reference in Items 9-12 and 14 of Part III hereof.

Transitional Small Business Disclosure Format (Check one): Yes |_|  No |X|

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                           FORWARD LOOKING STATEMENTS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-KSB. 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 CONTINUING IN BUSINESS; 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 INABILITY TO CONTINUE OPERATIONS; THE
COMPANY'S INABILITY TO OBTAIN NECESSARY FINANCING; THE EFFECT OF A GOING CONCERN
STATEMENT BY THE COMPANY'S AUDITORS; 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.

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

        Ambient Corporation is a development stage company engaged in the
design, development and marketing of equipment and technologies designed to
utilize existing electrical medium voltage and low voltage distribution systems
as a medium for the delivery of broadband and other services to electric
utilities and consumers. The use of an electric utility's distribution system as
a high-speed communications medium is commonly referred to as power line
communications (PLC) and/or broadband over power lines (BPL). The proprietary
equipment, components and related technologies and power line communications
networks that we are designing, developing testing, and marketing will be
referred to throughout this Annual Report as the "PLC Technologies."

        A slower version of power line communications has been used by utilities
for several decades for basic internal utility operations, primarily system
control and information feedback over the medium voltage distribution grid.
However, distribution transformers that are primarily used to reduce the medium
voltage on the distribution circuits to the lower voltage levels normally
delivered to households and businesses effectively block the transmission of
high-speed data signals. We have designed, developed and successfully tested, on
a limited basis, our proprietary and patent protected technology and equipment
designed to overcome these limitations. We are currently working with leading
utilities and technology companies in the further development and testing of the
principal equipment, components and technologies that comprise our PLC
Technologies. Prototypes of these components and technologies presently are
being evaluated in field trials and pilots. Ambient's PLC Technologies includes
proprietary technology that is designed to take advantage of the existing
utility distribution network architecture by overlaying a communications network
that is scalable and adaptable, thereby delivering a wide variety of
applications and services to a diverse population.

        Our goal is to become a leading designer, developer and systems
integrator for commercially deployed PLC networks that focus on the provision of
broadband services to utility customers, as well as on maximizing internal
utility functions (i.e. efficient systems control and monitoring). We intend to
generate revenues from the design and management of PLC systems, as well as from
the sale, support, and installation of the equipment and technologies comprising
the PLC Technologies. Our business and strategy are subject to many risks. See
"Risk Factors."

GENERAL BACKGROUND

        Since the onset of the Internet revolution, significant resources have
been invested in the design and implementation of technologies designed to
deliver ever greater amounts of data to end users. The rising demand from
consumers, business, and governments for dependable and cost effective
high-speed communications services has spawned the introduction of several
broadband technologies. The term "broadband" generally refers to technologies
that can enable network connections in excess of the standard dial-up 56
Kilobytes per second (Kbps) rate limit of the traditional telephone lines.

        The growing consumer and business demand for high-speed communications,
as well as local and federal governments' desire to offer Internet availability
to citizens, has dramatically

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changed the communications industry. Based on published reports, the number of
households in the United States with broadband Internet access is currently
estimated at 34.3 million and by the 2008 that figure is estimated to reach
approximately 69.4 million subscribers.

        Traditionally, technology advances have been first implemented in what
is called "the core" of a network; that is, where signal traffic from individual
users is grouped together in increasingly larger and larger bundles of traffic,
and transported from one centralized aggregation point to another. For example,
fiber optics was first used in inter-continental transport where a single cable
would carry signals from thousands and thousands of individuals. Typically, the
use of newer transport technologies has reached the access network (or the
"edge" of the network - where the subscribers are located) only at a later point
in time after the costs associated with using the new technologies (at the
subscriber level) had been substantially reduced. Over the last several years,
the cost of deploying different access technologies has generally declined to
the point where telephone companies and cable companies could and have increased
the amount of bandwidth that they provide to their subscribers. For example,
most subscribers previously had access to 28.8 Kbps or up to 56 Kbps over their
analog phone lines for very limited data services. Now, they can access networks
at rates greater than 1.5 Megabits per second (Mbps), enabling voice, data,
music, Internet based multiplayer gaming and some video transfers over the
Internet.

        Consumer demand for high-speed communications has been filled by various
access methods, including modems connected to conventional telephone lines,
higher speed digital subscriber telephone lines (DSL), cable TV with data modems
in set-top boxes and, more recently, wireless networks. However, these currently
deployed high-speed access solutions have encountered certain associated
technology and economic drawbacks. While DSL technology can range from 154 Kbps
to 1.5 Mbps or higher, it requires a dedicated network connection and may be
unavailable for areas that are more than 18,000 feet from the central office.
DSL technology typically requires high implementation costs, as well as high
maintenance cost to prevent the deterioration of bandwidth. Cable speeds can
reach peaks of 1.5 Mbps or higher, but require significant capital investment to
provide the service. Cable is also characterized by individual loss of bandwidth
at various peak times when the number of subscribers reaches critical mass.

        An alternate option more recently pursued in bridging the last mile
problem is broadband wireless technology. The premise behind deploying broadband
wireless technologies is that such technologies use over-the-air transmission
and consequently remove the need to deploy a new wire-line infrastructure to
connect to the end-user. However, wireless solutions suffer from significant
drawbacks, including line of sight limitations, security concerns, weather
effects and the need to acquire licensed spectrum for certain technologies.

RELATIVE BENEFITS OF POWER LINE COMMUNICATIONS

        PLC compares favorably to currently deployable access network
alternatives in terms of bandwidth delivered to the end-user and have, we
believe, the following significant advantages over these alternatives. First,
the initial capital expenditure required to implement the network is expected to
be less costly, due in part to the pervasiveness of the electric distribution
system. This fact could translate to a lower cost service to the end-user.
Second, a power line broadband option is accessed directly through the
end-user's electrical outlet (with an appropriate modem). The impediment of
atmospheric challenges and physical blockage of line of sight ordinarily
associated with wireless communication systems is not an issue with power line
based options. Third, although PLC, similar to cable, would be characterized by
individual loss of bandwidth at various peak times when the number of
subscribers reaches critical mass, alternatives to either re-inject the signal
and or boost the signal are available, creating creative opportunities to manage

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such potential challenges. Fourth, the opportunity becomes available for
utilities to potentially gain significant operations and efficiency benefits
from a communications network on their infrastructure. PLC could open up new
control and communications potential for utility uses, such as demand side
management, proactive management of distribution systems and devices, and
enhanced remote meter reading enabling time-of-use pricing tariffs, as well as
real-time identifications of pinpoint line breakage during outages. These
potential uses could enable utilities to significantly reduce operating costs
while improving customer service.

        A commercially deployable PLC network could extend broadband to
thousands of rural consumers in North America as well as broadband and telephony
services to large segments of the world population that currently do not have
access to cable, DSL or traditional telephone lines. PLC networks could
potentially also provide an additional lower priced alternative for services in
urban areas that do have access to cable and or DSL.

        While some utilities may be reluctant to become Internet service
providers or otherwise directly engage in the provision of broadband services to
their customers, recent action taken by the Federal Communications Commission
(FCC) may potentially encourage Internet service providers (ISPs) and other
network service provider (NSPs) to examine the option of reselling BPL services
to end-users in partnership with utility landlords.

STATUS OF POWER LINE COMMUNICATIONS

        Utilities have historically used low speed PLC to satisfy certain
monitoring and control functions. During the past decade, certain utilities and
technology companies continued to experiment with higher-bandwidth data transfer
via electric distribution systems in Europe, South America and the United
States. The recent advances in PLC technology allow for the delivery of
high-speed communications over medium and low voltage power lines.
Internationally many utilities are conducting commercial pilots, with a few
utilities already offering limited commercial services.

        Fueled by recognition of the potential financial, operational and public
benefits derived from deploying PLC technologies, interest in PLC has grown
significantly over the past few years. Conferences on the subject are frequent,
and attended by regulators, electric power providers, and those from other
relevant fields including telecommunications and networking. PLC technologies
and modems for in-house networking are maturing, and a number of companies are
vying for the in-house market.

        Historically, overcoming certain technical limitations inherent in
existing electric distribution grids has been one of the primary hindrances to
utilities' acceptance and implementation of high-speed PLC over their
distribution infrastructure - the so called "last mile." Additionally, data
signals, which travel in energy waves, can disrupt, and be disrupted by,
licensed radio and mobile communications transmissions. Emerging PLC
technologies and solutions have addressed and are increasingly solving these
problems. An additional principal technical hurdle had been the distribution
transformer that converts medium voltage to the low voltages that is delivered
to commercial and residential premises.

        Distribution transformers attenuate or interfere with the transmission
of high frequency data signals, and therefore, this technical hurdle must be
addressed to effectively deploy a PLC network. The use of capacitive couplers
was initially believed to be the only or best solution for

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bypassing the distribution transformers. Capacitive coupling was found to have
severe limitations for use on overhead medium voltage power lines. Instead, our
patent protected method has proven to be a breakthrough, allowing efficient
exploitation of overhead and other lines for broadband PLC. This is done by
allowing the inductive coupling of data signals from medium voltage power lines,
to bypass the distribution transformer, and coupling these signals to low
voltage lines. Such medium voltage inductive couplers provide a practical method
for bypassing the distribution transformer, in a safe and acceptable manner to
utilities and line crews.

AMBIENT'S SOLUTION--OUR PLC TECHNOLOGIES

        We have developed and successfully tested on 15kV class medium voltage
distribution lines our patented coupling technology that is designed to achieve
high-speed data transfer to and from the medium and low voltage distribution
lines, without the need to establish an electrical connection to the medium
voltage line. Our couplers have been designed to clamp around energized
electrical lines and to slip around overhead low or medium voltage distribution
wires without having to make or break hard connections. Our couplers are
designed to be part of a bypass path for data signals to avoid distribution
transformers. Our Medium Voltage Inductive Coupler (MV-IC) is placed on the
medium voltage lines, establishing communications between the data backbone feed
point and each distribution transformer location. At the transformers, a
repeater receives the data stream and retransmits it onto low voltage lines that
feed the premises' power outlets. We believe that the cost and installation
method of the MV-IC, a key component in the overall system, represents a
significant milestone in the development of an economically viable PLC solution.

        We anticipate that the implementation costs of our coupler technology
will be lower in comparison to the conventional solutions that attempt to use
capacitive coupler products on the medium voltage lines. We further anticipate
that other alternative choke-based coupling technologies, disclosed in
applications to the United States Patent and Trademark Office ("USPTO") Ambient
would provide less efficient coupling and higher production costs. Therefore, we
believe that inductive couplers offer a preferred, cost effective and
technologically feasible option to overcoming the technical hurdles that have
delayed the widespread adoption by utilities of PLC. In September 2002, the
USPTO issued to Ambient a patent with a priority date of December 1999,
primarily covering inductive coupling of data signals onto overhead and
underground power distribution cables. Subsequently, the USPTO issued to Ambient
three additional patents covering methods for using medium voltage distribution
cable for carrying high-speed data. Our expanding patent portfolio includes six
patents issued or allowed by the USPTO and several pending patent applications
in the United States and worldwide.

        In addition to the couplers, our PLC Technologies utilize nodes, or
communications controllers, that enable the transmission of high frequency
signals over electrical lines. The nodes are designed for installation at
strategic locations throughout the electrical distribution system, thereby
establishing the PLC network. Together, the couplers and the nodes comprise the
principal components of Ambient's PLC Technologies. A typical PLC network
utilizing PLC Technologies is shown in Figure 1, below. The "backhaul network"
illustrated at the substation represents the broadband connection. This network
architecture is particularly convenient because, should utilities have fiber
assets (as many do), the fiber capability would typically be located at
substations.

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                        AMBIENT PLC SYSTEM ARCHITECTURE




                               [PICTURE OMITTED]




        FIGURE 1 representation of both an overhead and underground PLC network.
Our PLC Technologies have been developed to be deployed on both the overhead and
the underground distribution systems.

        We anticipate that utilization of the PLC Technologies in an existing
power line distribution system will be able to provide initial data transfer
rates of over 10 Mbps on the medium voltage portion of the network, and we
believe that this can be upgraded to several times that speed with future
developments in hardware and software. Future modems are expected to use more
sophisticated modulation techniques that allow the same frequency band to carry
at least three times more data.

PILOTS AND DEPLOYMENTS / OTHER COOPERATIVE ARRANGEMENTS

        Our PLC Technologies are premised on the commercial deployment by
electric utilities and or other potential customers of a PLC network and the
integration of our PLC Technologies into such commercially deployed network. To
advance the development and deployment of our PLC Technologies, we have entered
into a strategic testing and development agreement with Consolidated Edison Inc.
("Con Edison"), a leading utility service provider. Additionally we have
contracted with EarthLink, Inc. ("EarthLink"), a leading ISP, to participate and
support our trials with Con Edison. In the course of the past two years, we have
conducted limited field trials and joint cooperation efforts with several other
electric utilities.

        CONSOLIDATED EDISON INC. / EARTHLINK: In February 2002, we entered into
a testing and development agreement with Con Edison, pursuant to which we
continue to cooperate in the research, development, testing of our PLC
Technologies with the goal of commercialization of this technology. Under the
agreement with Con Edison, we have sole rights to any jointly developed PLC
technology.

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        The principal components underlying the PLC Technologies are currently
deployed in various pilots and settings on Con Edison's electric distribution
system. Our proprietary coupler and the other components have been deployed
since May 2002 in a small field trial on Con Edison's medium and low voltage
lines constituting a complete end-to-end network in a live environment. In July
2002, we successfully demonstrated the technical viability of our PLC
Technologies on Con Edison's overhead electric distribution system in
Westchester County, New York. In this demonstration, our end-to-end network
spans a distance of approximately one mile between the furthest points on the
medium voltage line, and included connectivity to branches in between. We have
achieved speed rates from 10 to 16 Mbps over the medium voltage lines and 3.5
Mbps to 7 Mbps of bandwidth delivered to the customers' premises. Throughout
2004, together with Con Edison and EarthLink, we have expanded the small field
trial to a larger area.

        In June 2004, the New York State Energy Research and Development
Authority (NYSERDA) agreed, subject to preparation and execution of a binding
agreement, to fund up to $200,000 for purposes of enhancing the Westchester
pilot. NYSERDA is a public benefit corporation created by the New York State
Legislature to administer the State's energy program. As of March 30, 2004 the
Company and NYSERDA are discussing and negotiating the terms of the award. The
contemplated enhancements to the Westchester Pilot are nonetheless being
implemented.

        In early 2004, we installed a PLC network at Con Edison's Orange and
Rockland Utilities. The network spans a distance of approximately one and one
half mile and is utilized as a pilot to demonstrate substation telemetry to an
energy control center facility and other potential core utility applications.

        During 2004, we installed a system in Con Edison's new First Avenue
steam tunnel in Manhattan in New York City. The network is utilized in Con
Edison's new tunnel to monitor environmental conditions, the state of the steam
main, and to provide telephony service in the tunnel utilizing the voice over
Internet protocol (VoIP) technology. This single network is an effective
solution that as implemented provides a variety of services that would
traditionally have required multiple technologies and wiring systems. Con
Edison's steam system is unique to Manhattan. It serves about 1,800 customers
from 105 miles of steam mains, stretching from lower Manhattan to 96th Street.

        In March 2005, we activated, on a pilot basis, our PLC Technologies in a
large residential multi-dwelling building on the Upper West Side of Manhattan in
New York City. The pilot initially includes the provision of Internet services
by EarthLink.

        TOYO COMMUNICATIONS EQUIPMENT CO., LTD.: In February 2005, we entered
into an alliance and distribution agreement with Toyo Communication Equipment
Co. Ltd. ("TOYOCOM") of Japan, a leading PLC company, pursuant to which the two
entities intend to pool their resources for the joint development,
implementation and commercialization of our respective PLC Technologies. The
alliance strengthens production capabilities providing for potential economy of
scale, and pools the companies' individual trial experience from project
involvement in various regions of the world. TOYOCOM is a publicly traded
company on the Tokyo Stock Exchange and is a related company of the computer,
networking, semiconductor, and component giant, NEC. TOYOCOM has been a licensee
of DS2 technologies since 2002, and their equipment and technologies have been
deployed in large scale PLC pilots in Spain and Portugal. See "Production and
Supplies" below for a discussion of DS2.

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OUR STRATEGY

        Our goal is to become a leading designer, developer and systems
integrator for commercially deployed PLC technologies and networks that focus on
the provision of broadband services to utility customers, as well as maximizing
internal utility functions (i.e. efficient grid systems control and monitoring).
We intend to generate revenues from the design of PLC networks, as well as the
sale, installation and support of the equipment and technologies comprising the
PLC Technologies.

        After raising approximately $4.5 million in 2004 from the sale of common
stock and the exercise of outstanding options and warrants, we have been
aggressively pursuing our business plan with respect to product development/
enhancement and testing. With the additional $5.2 million in net proceeds that
we raised in our private placements in 2004, we intensified our development /
testing and commercialization efforts. However, our existing cash resources may
not be sufficient to support the commercial introduction, production and
delivery of our PLC Technologies as contemplated in our business plan and we may
need to raise additional capital for that purpose. See "Risk Factors"

        To achieve our objectives, the key elements of our strategy include the
following:

        o       EXPAND STRATEGIC RELATIONSHIPS. To date, we have established and
                continue to work with Con Edison and EarthLink to further
                develop and test the components used in our PLC network. Some of
                the components that we use have been developed by DS2, a leading
                technology company whose products have been deployed in large
                scale PLC projects, of which we are a licensee. Additionally, we
                intend to further develop our alliance with TOYOCOM by pooling
                our respective resources to further develop and commercialize
                our respective PLC Technologies. We will continue to seek out
                strategic and commercial relationships with other utilities and
                technology companies, and strengthen our already existing
                relationships.

        o       EXPAND RANGE OF CONSUMER AND UTILITY APPLICATIONS. We anticipate
                that the initial contemplated consumer products will include
                high-speed Internet access via existing electrical wiring,
                offering both broadband and telephony to the end consumer with
                streaming video, alarm monitoring and other potential services
                to follow. In addition to consumer oriented applications and
                services, utilities will also be able to benefit from PLC
                Technologies in enabling such services as automatic meter
                reading, real time outage reporting and load
                balancing/switching. These applications are intended to enable
                utilities to enhance their service offerings to their
                industrial, commercial and residential customers thus optimizing
                their investment. We intend to work with other technology
                companies, as appropriate to expand the range of applications
                provided by the PLC Technologies to include these and other
                applications.

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        o       PURSUE ROLE AS A LEADING SYSTEMS INTEGRATOR. We intend to
                actively seek to serve as a leading systems integrator and
                coordinator for commercially deployed PLC systems, and seek to
                generate revenue from the design of PLC networks, as well as
                from the sale and installation of related components and
                technologies.

        o       PROTECT PATENT POSITION. We believe that our future success
                depends, in part, on the continued protection of our proprietary
                technologies. Our expanding patent portfolio includes six
                patents issued or allowed by the USPTO and several pending
                patent applications in the United States and other
                jurisdictions. We intend to continue to expand our patent
                portfolio and aggressively protect our proprietary
                technologies.

        o       INDUSTRY STANDARDIZATION. Ambient is a founding member of the
                Universal Powerline Association, an association of industry
                players created to promote PLC global interoperability
                standards. Additionally, members of the Company's engineering
                staff hold key positions on various working groups of the
                Institute of Electrical and Electronics Engineers (IEEE),
                assisting in the development of Safety, Electromagnetic
                Compatibility and System Interoperability standards for access
                and in-building Broadband over Power Line (BPL) technologies. We
                intend to continue pursuing an active role in raising market
                consciousness of PLC through the establishment of global
                standards.

        No assurance can be provided that we will be successful in marketing our
PLC Technologies (including all of the integral components/technologies to be
created by third parties) or further developing and designing these technologies
to meet market demands, or that the PLC Technologies can or will be integrated
into a commercially deployed PLC network. Our business and strategy are subject
to many risk factors. See "RISK FACTORS."

PRODUCTION AND SUPPLIES

        The principal components of our PLC Technologies are our proprietary
couplers and the network communications controllers or nodes.

        Our proprietary couplers utilize special magnetic materials and high
voltage weatherproof plastics, as well as standard components that are
obtainable from local sources. We have identified potential suppliers for
various components and processes of the coupler and expect to retain all
assembly aspects of the product in house for the foreseeable future We expect
that we will be able to produce the necessary couplers at competitive market
costs.

        In 2001, we entered into an initial license agreement with Design of
Systems on Silicon ("DS2 "), a leading Spanish silicon design company, whereby
we are entitled to incorporate DS2 chipsets

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into the design of the PLC Technologies, and purchase appropriate equipment or
components for inclusion into our PLC Technologies. Effective January 2004, we
entered into a renewed licensing agreement with DS2 pertaining to the DS2 second
generation chipset technology.

        As our PLC Technologies become available for integration into a
commercially deployed PLC network, we expect that we will be able to have these
components manufactured at competitive market costs from these or alternative
sources. All future suppliers and assemblers will be certified to recognized
international quality assurance standards.

MARKETING PLAN

        To date our efforts have been devoted primarily to the design,
development, testing and certification of the technologies and components
comprising the PLC Technologies as well as raising the capital needed to
maintain our business. As a result of recent capital raises, our development and
testing, as well as marketing efforts have significantly increased in scope and
magnitude to approach the levels contemplated in our business plan.

        We anticipate that we will be able to generate revenue principally from,
but not limited to, one or more of the following: PLC network design,
engineering and installation, sale and support of the underlying components and
potential license and related maintenance fees collected from utilities,
technology companies or ISPs. We have identified initial opportunities to focus
our business development efforts and will be able to refine our strategy and the
potential and likely sources of revenue as the industry approaches significant
commercial deployment.

        We presently have no agreement with any utility, ISP or reseller or
other party respecting any revenue generating arrangement for our PLC
Technologies and no assurance can be provided that we will in fact be able to
enter into such agreements or arrangements on terms that are commercially
acceptable to us. Our success in concluding any revenue generating commercial
agreements is premised, in part, on the integration by one or more leading
utilities or other potential customers of our PLC Technologies into a
commercially deployed PLC network.

        Our principal target customers will continue to remain utilities in
North America, as well as key national utilities that have been developing the
potential for PLC in their respective markets and other technology companies
that compliment the PLC Technologies. We continue to strive to develop relations
with industry and other participants in order to expand the awareness and reach
of the PLC Technologies.

COMPETING TECHNOLOGIES

        The competition for our PLC Technologies originates primarily from
non-power line based providers of broadband capability and, to a lesser extent,
from other providers of power line based capability. Management believes that
many of the providers of this high-speed communications services have
substantially greater financial, technological, marketing, personnel and
research and development resources than we possess. We expect significant
competition from the following:

        POWER LINE COMMUNICATIONS

        Certain companies, including some with greater resources than we
possess, claim to provide partial or full power line based high-speed solutions.

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        There have been announcements by companies focusing on PLC technology of
commercial deployments in limited geographical areas.

        Management believes that our core strategy, which attempts principally
to collaborate with appropriate parties in the communications and service
technology areas as well as utilities and other providers of equipment, will
enable us to provide the most viable power line communications based high-speed
solution. Additionally, we believe that our proprietary and patented
technologies may provide to us a distinct advantage and may enable us to
generate additional licensing revenue.

        INCUMBENT TELEPHONE (DSL) SERVICE PROVIDERS.

        We face competition from other providers of telephony transmission
services. Many of the existing providers of telephony services, such as regional
Bell operating companies have greater financial and other resources than we
have, with more established brand awareness in their service areas. However, we
expect to be able to distinguish our company from these competitors by offering
competitive speeds for connectivity at lower costs and, together with our
existing and prospective utility collaborators, we envision being able to
compensate for the brand awareness and the financial resources of the
competitors.

        In addition, we expect that our proposed solution will provide to
utilities and electricity distribution operators a host of cost-effective, core
utility benefits not offered by these alternative communications providers.

        WIRELESS AND SATELLITE SERVICE PROVIDERS.

        Especially in underserved areas, we face competition from fixed-wireless
and satellite service providers for voice and high-speed data customers in
businesses and residences. Many of these competitors are offering, or may soon
offer, technologies and services that will compete with some or all of our
service offerings. However, services based on these technologies historically
offer communication speeds lower than those supplied by DSL, cable systems, and
anticipated speeds from our solution.

        SUBSCRIPTION TELEVISION HARDWIRE CABLE.

        Traditional hardwire cable operators are also competitors. Hardwire
cable companies generally are well established and known to potential customers
of PLC. In addition, these competitors are also bundling additional services
with their cable TV services, such as high-speed Internet access and VoIP, to
enhance their products. In order to provide such services, however, the current
cable infrastructure requires, in many instances, significant capital
expenditures.

PROPRIETARY RIGHTS

        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 the technologies used in the PLC Technologies and other
proprietary information. However, such methods may not afford complete
protection and there can be no assurance that other competitors will not
independently develop such processes, concepts, ideas and documentation. We have
filed several provisional and formal patent applications in the United States
with respect to the

                                       11
<PAGE>

different applications on the medium and low voltage overhead distribution grid
and building wiring, as well as underground distribution infrastructures.
Beginning with our initial filing for the inductive coupling of a data signal to
a power transmission cable with the USPTO in 1999, we have made several
additional filing in the United States and internationally to protect our
technology and enhancements. Between September 2002, and January 2005, the USPTO
issued us four patents with respect to the technology employed in our PLC
Technologies.

        Our policy is to require our employees, consultants, other advisors, as
well as utility and design collaborators, to execute confidentiality 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 provide that all inventions conceived by the individual in the course
of their employment or consulting relationship shall be our exclusive property.

EMPLOYEES

        We currently employ 32 employees, all of who work out of our offices in
Newton, Massachusetts and Briarcliff Manor, New York. Our future performance
depends highly upon the continued retention and service of certain members of
our management team. We believe that our future success will also depend upon
our continuing ability to identify, attract, train and retain other highly
skilled managerial, technical, business development and marketing personnel.
Hiring for such personnel is competitive.

RESEARCH AND DEVELOPMENT

        From the date of inception through December 31, 2004, we have expended
approximately $9.5 million on research and development. During each of our
fiscal calendar years 2004 and 2003, we expended approximately $2.5 million and
$1 million, respectively, on the research and development of the PLC
Technologies.

GOVERNMENT REGULATIONS

        Utilities and other providers of electric power are subject to
significant governmental oversight and regulations, on both the state and
federal level. Foreign utilities and other providers of electric power are also
subject to significant governmental oversight and regulations in their
respective home countries. In certain countries, there may be regulations
restricting the transmission of high frequency over power lines, necessitating
governmental permission. These regulations may inhibit, delay or preclude the
provision of PLC Technologies or to require modifications thereto. In addition,
regulations in the telecommunications field may also adversely affect the
provision of the PLC Technologies. We are addressing these regulatory
challenges.

        In October 2004, the FCC adopted changes to Part 15 of its Rules to
encourage the development of Access Broadband over Power Line (Access BPL)
systems while safeguarding existing licensed services against harmful
interference. The FCC took this important step in order to increase the
availability of broadband services because power lines reach virtually every
home and community. The FCC also acknowledged important benefits for electric
utilities to enable them to dynamically manage the power grid itself, thereby
increasing network reliability by remote diagnosis of electrical system
failures. Specifically, the FCC adopted a framework including: (1) new
operational requirements for Access BPL to promote avoidance and

                                       12
<PAGE>

resolution of harmful interference; (2) new administrative requirements to aid
in identifying Access BPL installations; and (3) specific measurement guidelines
and certification requirements to ensure accurate and repeatable evaluations of
emissions from Access BPL and all other carrier current systems. The foregoing
changes in the FCC's rules took effect in February 2005. That month, petitions
for Reconsideration were filed by ARRL, American Petroleum Institute, Cohen,
Dippell and Everist, P.C. and ARINC challenging the FCC's October rulemaking and
requesting expanded interference protection rights for Amateurs, Critical
Infrastructure licensees, television broadcasters and aeronautical mobile
licensees. Petitions were also filed by members of the BPL industry requesting
modifications to the FCC's mandated interference mitigation requirements and to
aspects of its BPL equipment compliance rules. The FCC's new rules remain
subject to challenge and possible modification by the FCC as a result of the
filing of the foregoing petitions and, in addition, remain subject to challenge
in court.

        There is no assurance that any changes proposed by the FCC will be
ultimately favorable to us in our effort to commercialize the PLC Technologies,
nor is the likelihood of the adoption of changes by the FCC to these new rules,
or the timing thereof, predictable at this time.

        BPL deployment could also eventually require the resolution of
additional issues by federal and state regulatory authorities arising from the
regulation of electric companies and from the regulation of communications
provided over BPL networks. The FCC did not address a number of these regulatory
issues in its October 2004 rulemaking which it could revisit in future
proceedings. It also has proceedings open relating to the regulation of
broadband information and telecommunications services over other non-BPL
technologies which could be made applicable to broadband services provided over
BPL technologies. In addition, while few states have formal dockets open to
examine BPL regulatory issues, the National Association of Regulatory Utility
Commissioners is sponsoring a task force comprised of state regulators which it
has formed to research BPL regulatory issues and to advise state regulators on
its findings which could result in new or expanded state regulation of the
deployment of BPL.

                                       13
<PAGE>

ADVISORY BOARD

        We have an advisory board for the purpose of obtaining the advice of
experienced, knowledgeable business people and professionals on an as needed
basis in areas in which may require assistance. The advisory board has no
control or direct influence over our policies, management or board of directors.
The chairman of our advisory board is Senator J. Bennett Johnston. Senator
Johnston is a former Chairman of the U.S. Senate's Energy and Natural Resources
Committee (1986 - 1992) and former Chairman of the Energy Appropriations
sub-committee. He served for 24 years in the U.S. Senate (1972 - 1996) and
served his entire career on the Energy and Natural Resources Committee, chairing
it from 1986 - 1992. During this period, Senator Johnston chaired or was a
ranking member of the Energy and Water Appropriations Sub-Committee. In this
dual assignment, Senator Johnston was author and principal sponsor of literally
hundreds of energy bills and legislation. Senator Johnston was the principal
sponsor of the Natural Gas De-regulation Act and authored the first Electricity
Re-structuring legislation of the United States Energy Policy Act of 1992.

        In February 2004, a representative of EarthLink joined the Advisory
Board. Other members of the Advisory Board include individuals with experience
in finance, government regulatory relations and utility engineering.

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 Securities
and Exchange Commission ("SEC") at the SEC's Public Reference Room at 450 Fifth
Street, N.W., 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.

                                  RISK FACTORS

Our business and strategy are subject to many risks discussed below. If any of
these risks occurs, our business, financial condition or operating results could
be adversely affected.

                          RISKS CONCERNING OUR BUSINESS

WE HAVE INCURRED NET LOSSES IN EVERY QUARTER AND YEAR SINCE INCEPTION AND WE
EXPECT OUR NET LOSSES TO CONTINUE THROUGH THE FORESEEABLE FUTURE.

We are a development stage company and, to date, have not generated any
significant revenues. For the year ended December 31, 2004, we incurred a net
loss of $7,514,113 and we reported net losses of $5,235,962 and $3,480,373 for
the years ended December 31, 2003 and 2002, respectively. From inception through
December 31, 2004, we reported an accumulated deficit of approximately $75
million. We expect to continue to incur net losses through 2005 and for the
foreseeable future as we continue to further develop and test the PLC
Technologies and to intensify our commercialization efforts. To date we have
funded our operations through the sale of our securities continue doing so for
the foreseeable future. We will need to generate significant revenue to achieve
profitability. Our ability to generate and sustain

                                       14
<PAGE>

significant additional revenues or achieve profitability will depend upon the
factors discussed elsewhere in this "Risk Factors" section, as well as numerous
other factors outside of our control, including the development and marketing of
competing broadband technologies, including non-power line based broadband
alternatives, that may be more effective or less costly than the implementation
of the PLC Technologies.

It is possible that we may never achieve profitability and, even if we do
achieve profitability, we may not sustain or increase profitability in the
future.

WE HAVE A LIMITED OPERATING HISTORY.

We were incorporated in June 1996 and have been engaged since 1999 in the PLC
field. We are subject to all of the risks inherent in the establishment of a new
business enterprise in a nascent and evolving field. Our limited operating
history makes it difficult to evaluate our financial performance and prospects.
No assurance can be made at this time that we will operate profitably or that we
will have adequate working capital to meet our obligations as they become due.

IF WE ARE UNABLE TO OBTAIN SUFFICIENT FUNDS WHEN NEEDED, AND INCUR A CASH FLOW
DEFICIT, OUR BUSINESS COULD SUFFER.

Although we believe that available cash-on-hand will be sufficient for our needs
at least through December 31, 2005, our existing resources may not be sufficient
to support the full commercial introduction, production and delivery of our PLC
Technologies. We may be unable to obtain additional funds in a timely manner or
on acceptable terms, which would render us unable to fund our commercialization
efforts or expand our business. If we are unable to obtain capital when needed,
we may have to restructure our business or delay or abandon our development and
expansion plans. Although we have been successful in the past in obtaining
financing for working capital, we will have ongoing capital needs as we
intensify our commercialization efforts and expand our business. If we raise
additional funds through the sale of equity or convertible securities, your
ownership percentage and the value of your Common Stock will be diluted. We may
have to issue securities that have rights, preferences and privileges senior to
our Common Stock. The terms of any additional indebtedness may include
restrictive financial and operating covenants that would limit our ability to
compete and expand.

The independent registered accounting firm's reports for our financial
statements for the years ended December 31, 2004 and 2003, respectively, include
explanatory paragraphs regarding substantial doubt about our ability to continue
as a going concern. This "going concern" paragraph may have an adverse effect on
our ability to obtain financing for operations and to further develop and market
products. If we do not receive additional capital in the amounts needed in the
near future, our ability to continue as a going concern is in substantial doubt.

                                       15
<PAGE>

OUR COMMERCIAL SUCCESS IS CONTINGENT UPON THE INTEGRATION OF OUR PLC
TECHNOLOGIES BEING COMMERCIALLY DEPLOYED OVER THE UTILITIES DISTRIBUTION
NETWORK.

Our activities to date have primarily focused on the design, development and
marketing of our PLC Technologies. We have established contractual relationships
with leading technology companies and utilities for the design, development,
evaluation and testing of the PLC Technologies. No assurance can be given that
these arrangements will achieve their intended results or that they will result
in our PLC Technologies being commercially deployed over an electrical power
distribution network. Our PLC Technologies are integrated with various other
complementary and necessary technologies. While our couplers and the other
principal equipment and components comprising the PLC Technologies have been
successfully tested in limited field trials, no assurance can be given that
these components or technologies will be successfully deployed or
technologically feasible for deployment on a commercial scale over a utilities
distribution network. In addition, the costs of developing and commercializing
the PLC Technologies may far outweigh the revenue stream from such
commercialization.

The nature of PLC Technologies requires us to market them, at least initially,
primarily to electric utilities. Our success is dependent, initially, on the
deployment by electric utilities and / or their network operator partners of a
communications network over their powerline distribution system utilizing the
PLC Technologies. If a significant number of electric utilities and providers
ultimately elect not to commercially deploy a PLC system or utilize our PLC
Technologies or to favor other technologies or providers of similar services,
our business may be adversely affected and we may be required to cease
operations.

Moreover, the PLC Technologies may not achieve or sustain market acceptance
under emerging industry standards or may not meet, or continue to meet, the
changing demands of the media access and technology service companies. If the
market for our PLC Technologies does not develop or expand as we anticipate, our
business, financial condition and results of operations would be materially
adversely affected and we may be required to cease operations.

GOVERNMENTAL REGULATIONS MAY DELAY OR PRECLUDE COMMERCIAL DEPLOYMENT OF A POWER
LINE COMMUNICATIONS NETWORK.

Federal, state and foreign regulations of utilities and electric power
providers, as well as regulations in the telecommunications field, may inhibit,
delay or preclude the commercial deployment of PLC networks or the utilization
of the PLC Technologies.

While the FCC recently adopted rules and regulations which we believe are
favorable to the development of BPL, these rules are being challenged and no
assurance can be given that these regulations will not be modified by FCC or
will become subject to legal challenges.

IF WE FAIL TO PROPERLY MANAGE OUR GROWTH, OUR BUSINESS AND OPERATIONS WOULD BE
HARMED.

We intend to expand management, design and development, testing, quality
control, marketing, sales and service and support operations, as well as
financial and accounting controls, in order to further the commercialization of
the PLC Technologies. The pace of our anticipated expansion, together with the
level of expertise and technological sophistication required to provide
implementation and support services, will demand an unusual amount of focus on
the operational needs of our future prospective customers for quality and
reliability. We anticipate that this

                                       16
<PAGE>

development may strain our existing managerial, operational and financial
resources.

We may be unable to develop and expand our business and operations for one or
more of the following reasons:

        o       We may not be able to locate or hire at reasonable compensation
                rates qualified and experienced sales staff and other employees
                necessary to expand our capacity on a timely basis;

        o       We may not be able to integrate new management and employees
                into our overall operations; and

        o       We may not be able to successfully integrate our internal
                operations with the operations of product manufacturers and
                suppliers to produce and market commercially viable products or
                solutions.

If we cannot manage our growth effectively, our business and operating results
will suffer.

WE HAVE NO AGREEMENT RELATING TO REVENUE GENERATING ACTIVITIES.

We presently have no agreement or understanding with any electric utility as to
commercial exploitation of the PLC Technologies, and no assurance can be
provided that we will be successful in concluding any significant-revenue
generating agreement on terms commercially acceptable to us.

WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL.

We are highly dependent on the principal members of our management and
technology staff. The loss of their services might significantly delay or
prevent the achievement of development or strategic objectives. Our success
depends on our ability to retain key employees and to attract additional
qualified employees. We make no assurance that we will be able to retain
existing personnel or attract and retain additional highly qualified employees
in the future.

RISKS CONCERNING THE PLC TECHNOLOGIES

AN INTERRUPTION IN THE SUPPLY OF COMPONENTS AND SERVICES THAT WE OBTAIN FROM
THIRD PARTIES COULD HAMPER OR IMPEDE THE COMMERCIALIZATION OF OUR PLC
TECHNOLOGIES.

The principal components comprising the PLC Technologies include our proprietary
and patent protected couplers, which we design and develop in-house, and the
nodes or communications controllers that are designed to interface with the
existing power lines. To manufacture and assemble our end products and
components, we depend on third parties to deliver and support reliable
components, enhance their current products and components, develop new
components on a timely and cost-effective basis and respond to emerging industry
standards and other technological changes. Any significant interruption in the
supply of any of these components, products or services could hamper or impede
our commercialization efforts and, following commercialization, if occurs, may
cause a decline in sales of our products and services, unless and until we are
able to replace the functionality provided by these suppliers and services.

                                       17
<PAGE>

WE FACE COMPETITION FROM SEVERAL SOURCES.

Certain companies engaged in the field of power line communications have
announced limited commercial deployment in specified geographic locations.
Additionally, as we are proposing an alternative broadband option, the
competition for the PLC Technologies also includes non-power line based
providers of broadband transmission and, to a lesser extent, other providers of
power line based solutions. Some of the providers of BPL have substantially
greater financial resources, technological and marketing personnel, and research
and development resources than we do.

Numerous companies claim to provide non-power line based high-speed data
transmission. In particular, ISPs provide Internet access over existing networks
and have nationwide marketing presence and strategic or commercial licenses with
telecom carriers. Wireless and satellite service providers have announced plans
to expand fixed-wireless networks for high-speed data customers. Cellular
operators are establishing portals facilitating access to web and information
services.

Certain companies, including some with significantly greater resources than we
have, provide partial or complete power line based solutions. We believe that
our core strategy, which attempts principally to collaborate with appropriate
parties in the communications and service technology areas as well as utilities,
provides the most viable prospect for deploying a commercially viable power line
communications network. However, there can be no assurance that this market
strategy will be successful or that we will be able to compete successfully in
this market

There can also be no assurance that other companies will not enter the market in
the future. There can be no assurance that development by others of similar or
more effective technologies or solutions will not render our PLC Technologies
non-competitive or obsolete.

In addition, the PLC Technologies may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or more
of our competitors.

WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS.

We have filed with the USPTO and in other regions and countries patent
applications with respect to the different PLC Technologies and applications on
the medium and low voltage distribution grid and for in-building wiring. Our
expanding patent portfolio includes six patents issued or allowed by the USPTO
and several pending patent applications in the United States and other
jurisdictions

While we rely on a combination of copyright and trade secret laws, nondisclosure
and other contractual provisions, and technical measures to protect our
intellectual property rights, it is possible that our rights relating to the PLC
Technologies may be challenged and invalidated or circumvented. Further,
effective intellectual property protection may be unavailable or limited in
certain foreign countries. Despite efforts to protect our proprietary rights,
unauthorized parties may attempt to copy 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

                                       18
<PAGE>

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.

Litigation may be necessary in the future to enforce our patent portfolio and
intellectual property rights, to protect trade secrets, or to determine the
validity and scope of the proprietary rights of others. There can be no
assurance that any such litigation will be successful. Litigation could result
in substantial costs, including indemnification of customers and diversion of
resources and could have a material adverse effect on our business, financial
condition and results of operations, whether or not this litigation is
determined adversely to us. In the event of an adverse ruling in any litigation,
we might be required to pay substantial damages, discontinue the use and sale of
infringing products, and expend significant resources to develop non-infringing
technology or obtain licenses to infringed technology.

NEW CORPORATE GOVERNANCE REQUIREMENTS ARE LIKELY TO INCREASE OUR COSTS AND MAKE
IT MORE DIFFICULT TO ATTRACT QUALIFIED DIRECTORS.

We face new corporate governance requirements under the Sarbanes-Oxley Act of
2002, as well as rules adopted thereunder by the SEC. We expect that these laws,
rules and regulations will increase our legal and financial compliance costs and
make some activities more difficult, time-consuming and costly. We also expect
that these new requirements may make it more difficult and more expensive for us
to obtain director and officer liability insurance. We may be required to accept
reduced coverage or incur significantly higher costs to obtain coverage. These
new requirements may also make it more difficult for us to attract and retain
qualified individuals to serve as members of our board of directors or
committees of the board.

                     RISKS CONCERNING OUR CAPITAL STRUCTURE

CONSOLIDATED EDISON, INC., AN AFFILIATE OF THE CONSOLIDATED EDISON COMPANY OF
NEW YORK, INC. OUR PRINCIPAL UTILITY COLLABORATOR, CONTROLS A SIGNIFICANT
PORTION OF OUR COMMON STOCK AND COULD CONTROL OR INFLUENCE OUR ACTIONS IN A
MANNER THAT CONFLICTS WITH OUR INTERESTS AND THE INTERESTS OF OTHER
STOCKHOLDERS.

As of March 30, 2005, Consolidated Edison, Inc. our leading utility development
collaborator, beneficially owned approximately 22% of the outstanding shares of
our Common Stock (prior to the exercise of outstanding warrants and options). In
addition, Con Edison is contractually entitled to designate a member of our
board of directors, so long as it continues to beneficially hold, in the
aggregate, 20% of Ambient's issued and outstanding equity capital. As of the
date of this Annual Report, Con Edison has not exercised this right. When and if
this right is exercised, Con Edison may be able to exercise considerable
influence over matters requiring approval by our stockholders, including the
election of directors and the sale of our company. Such a concentration of
ownership may also have the effect of delaying or preventing a change in control
of our company, including transactions in which our stockholders might otherwise
receive a premium for their shares over then current market prices. Any of these
events could decrease the market price of our Common Stock.

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

                                       19
<PAGE>

As of March 30, 2005, we had 161,788,465 shares of Common Stock outstanding. An
additional 66,647,872 shares of Common Stock are issuable upon the exercise of
outstanding stock options and warrants and upon conversion of the remaining
approximately $1.5 million principal amount of our 6% three year convertible
debentures (hereinafter, the "2004 Debentures") issued in December 2004
(convertible at a per share exercise price of $0.25). Substantially all of the
shares underlying these outstanding options and warrants will, when issued upon
exercise thereof, be available for immediate resale in the public market
pursuant to either a currently effective registration statement under the
Securities Act of 1933, as amended, or pursuant to Rule 144 promulgated
thereunder.

On January 19, 2005, we filed with the SEC a registration statement covering
114,224,626 shares of our Common Stock, a substantial portion of which are
underlying the 2004 Debentures and related warrants. This registration statement
became effective on February 1, 2005.

Availability of a significant number of additional shares of our Common Stock
for future sale and issuance could depress the price of our Common Stock.

              IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.

Provisions of Delaware law, as well as the presence of Con Edison, our largest
stockholder, could make it more difficult for a third party to acquire us, even
if such acquisition would be beneficial to our stockholders.

FLUCTUATION IN OUR STOCK PRICE VOLATILITY OF TRADING MARKET MAY AFFECT YOUR
INVESTMENT.

We cannot guarantee that you will be able to resell the shares of our Common
Stock at or above your purchase, exercise or conversion price. The market price
of our Common Stock may fluctuate significantly in response to a number of
factors, some of which are beyond our control. These factors include:

        o       The progress or perceived progress of our research, development,
                marketing and commercialization efforts;
        o       Changes in accounting treatments or principles;
        o       Announcements by us or our competitors of new product and
                service offerings, significant contracts, acquisitions or
                strategic relationships;
        o       Additions or departures of key personnel;
        o       Future public and private offerings or resale of our Common
                Stock or other securities;
        o       Stock market price and volume fluctuations of publicly-traded
                companies in general and development companies in particular;
                and
        o       General political, economic and market conditions.

The market price for our Common Stock is highly volatile. The factors enumerated
above, as well as various factors affecting the telecommunications and broadband
industry generally, and price and volume volatility unrelated to operating
performance affecting small and emerging growth

                                       20
<PAGE>

companies generally, may have a significant impact on the market price of our
Common Stock.

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 or quoted on the
NASDAQ system, 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; this restricts the market.

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 2. DESCRIPTION OF PROPERTY

        We do not own any real property. Our corporate office in Newton,
Massachusetts is comprised of approximately 11,000 square feet leased at a
monthly rental of approximately $11,700 with a scheduled expiration date of
August 31, 2006. We have improved this facility to meet our design and
development activities. We believe that this facility is sufficient to meet our
current requirements and that we would be able to renew our present lease or
obtain suitable replacement facilities. We also rent office space in Briarcliff,
New York at a monthly rental of $750 with a scheduled expiration date of July
15, 2005.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        No matters were submitted to a vote of stockholders during the
three-month period ended December 31, 2004.

                                       21
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our Common Stock is quoted on the OTC Electronic 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.

        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
Electronic 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 March 28, 2005,
was $0.28 per share.

                                                      LOW       HIGH
                                                      ----      ----
         Year Ended December 31, 2004
            First Quarter                            $ 0.12    $0.48
            Second Quarter                           $ 0.25    $0.40
            Third Quarter                            $ 0.195   $0.275
            Fourth Quarter                           $ 0.225   $0.505

         Year Ended December 31, 2003
             First Quarter                           $ 0.06    $0.135
             Second Quarter                          $ 0.07    $0.395
             Third Quarter                           $ 0.15    $0.36
             Fourth Quarter                          $ 0.14    $0.325

        As of March 28, 2005, there were 160 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

        The Company has paid no dividends on its Common Stock and does 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 the
Company. The declaration and payment of dividends in the future will be
determined by the Board based upon the Company's earnings, financial condition,
capital requirements and such other factors as the Board may deem relevant. The
Company is not under any contractual restriction as to its present or future
ability to pay dividends.

EQUITY COMPENSATION PLAN INFORMATION

        The following table sets forth, as of December 31, 2004, certain
required information relating to the shares of Common Stock issuable on an
aggregated basis under the Company's 2000 Equity Incentive Plan and the 2002
Non-Employee Directors' Stock Option Plan.

                                       22
<PAGE>
<TABLE>
<CAPTION>
                                EQUITY COMPENSATION PLAN INFORMATION


            Plan Category                    Number of         Weighted-          Number of
                                           securities to        average           securities
                                             be issued      exercise price of     remaining
                                               upon           outstanding      available for
                                            exercise of        options,           future
                                            outstanding        warrants           issuance.
                                             options,         and rights
             ESOP                          warrants and
                                              rights
                                                (a)               (b)               (c)
<S>                                          <C>                 <C>             <C>
Equity compensation plan approved by
         security holders                    14,627,000          $.38            1,726,750

Equity compensation plans not approved
         by security holders                  4,690,000          $.72

               Total                         19,317,000          $.46            1,726,750
</TABLE>

ITEM 6. PLAN OF OPERATIONS

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 is engaged in the design, development and marketing
of equipment and technologies designed to utilize existing electrical power
medium voltage and low voltage distribution lines as a medium for the delivery
of broadband and other services. We are currently working with leading electric
utilities and technology companies in the development and testing of the
principal equipment, components and technologies that comprise our PLC
Technologies. Prototypes of these components and technologies presently are
being evaluated and deployed in field trials and pilot programs. Our objective
over the next twelve months is to intensify our commercialization efforts and
continue the design, development and testing of enhanced versions of the
equipment and components comprising the PLC Technologies.

        We are a development stage company that has generated significant losses
since our inception, and we expect to continue to incur substantial losses for
the foreseeable future. To date, we have devoted substantially all of our
efforts towards research and development activities and initial marketing
efforts. As of December 31, 2004, we had an accumulated deficit of

                                       23
<PAGE>

approximately $75 million (which includes approximately $34 million in stock
based charges and other non cash charges.)

        We are aggressively pursuing our business plan with respect to product
development and enhancement and field testing, as well as initial marketing
efforts. Over the past twelve months we have significantly increased our
in-house personnel, primarily in product development and testing, expanded the
scope of our pilots with the participation of Con Edison and EarthLink and
entered into new collaborative arrangements with leading companies engaged in
the PLC field relating to the joint development and commercialization of the PLC
Technologies. We intend to continue with these efforts over the next twelve
months, as well as expand our internal management and administrative capacities.

MANAGEMENT DISCUSSION AND ANALYSIS

        REVENUES. We recorded first time revenues of $123,000 for the year ended
December 31, 2003, representing trial and consulting fees. No revenues were
recorded for the year ended December 31, 2004.

        We presently have no agreements with any electric utility or Internet
service provider or reseller or other party regarding any revenue generating
arrangement with respect to our PLC Technologies.

        If and when the PLC Technologies are commercially deployed in a PLC
system, we anticipate that we will be able to generate revenue principally from
one or more of the following: PLC network design and installation, sale and
support of the underlying components and potential license fees collected from
utilities, technology companies or Internet service providers. Our management
believes that we will be able to refine our strategy and the potential sources
of revenue as the industry nears significant commercial deployment.

        RESEARCH AND DEVELOPMENT EXPENSES. Research and development cash
expenses consist of expenses incurred primarily in designing, developing and
field testing our PLC Technologies. These expenses consist primarily of salaries
and related expenses for personnel, contract design and testing services,
supplies used and consulting and license fees paid to third parties cash
expenditures. Research and development expenses for the years ended December 31,
2004 and 2003 were approximately $2.5 million and $1 million, respectively. The
increase in research and development expenses in 2004 compared to 2003 is
primarily attributable to an increase in the product design and development
efforts.

        GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and other related costs for personnel in executive
and other functions. Other significant costs include professional fees for
legal, accounting and other services. General and administrative expenses for
the year ended December 31, 2004 and 2003 were approximately $2.4 million and
$1.4 million, respectively. We expect that our general and administrative
expenses will increase over the next twelve months as we increase our efforts to
market and commercialize our PLC Technologies.

        A portion of our operating expenses are attributable to non-cash charges
associated with the compensation of consultants and senior personnel 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.

                                       24
<PAGE>

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.

VALUATION OF STOCK-BASED COMPENSATION

        The Company accounts for stock-based compensation (see Note 2 of the
Notes to the Consolidated Financial statements) in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and FASB Interpretation 44,
"Accounting for Certain Transactions Involving Stock Compensation." Pursuant to
these accounting standards, the Company records deferred compensation for share
options granted to employees at the date of grant based on the difference
between the exercise price of the options and the market value of the underlying
shares at that date. Deferred compensation is amortized to compensation expense
over the vesting period of the underlying options. No compensation expense is
recorded for fixed stock options that are granted to employees and directors at
an exercise price equal to the fair market value of the common stock at the time
of the grant.

        Stock options granted to non-employees are recorded at their fair value,
as determined in accordance with SFAS No. 123 and Emerging Issues Task Force
Consensus No. 96-18, and recognized over the related service period. Deferred
charges for options granted to non-employees are periodically re-measured as the
options vest.

        We use the Black-Scholes option-pricing model to estimate the fair value
of options we have granted for purposes of making the disclosure required by
SFAS 123. In order to calculate the fair value of the options, assumptions are
made for certain components of the model, including risk-free interest rate,
volatility, expected dividend yield rate and expected option life. Although we
use available resources and information when setting these assumptions, changes
to the assumptions could cause significant adjustments to the valuation.

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, 2004, our deferred
income tax assets consisted primarily of net operating loss carry forwards and

                                       25
<PAGE>

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.

LIQUIDITY AND CAPITAL RESOURCES

        From inception through December 31, 2004, we have funded our operations
primarily through the issuance of our securities. Our recent financings are
discussed below.

        In June 2003, we raised net proceeds of $595,000 from a private
placement of 5,187,500 shares of our Common Stock to private investors.

        In September 2003, we raised $400,000 from the sale of a 6% Convertible
Debenture due October 31, 2003 (the "Bridge Financing"). The outstanding amount
on this debenture was repaid from the proceeds of the October 2003 Financing
(discussed below).

        In October and November 2003, we sold $4,655,000 aggregate principal
amount of our convertible debentures (the "October 2003 Financing") in a private
placement in which we received net proceeds of approximately $3.8 million (after
deducting approximately $700,000 in respect of the repayment of the Bridge
Financing, fees, and commissions). In connection with the October 2003
Financing, we issued warrants to purchase up to 19,395,833 shares of our Common
Stock at a per share exercise price of $0.25. Throughout 2004, warrants for
approximately 22.3 shares of Common Stock were exercised, resulting in
additional net cash proceeds to Ambient during such period of approximately $4.3
million.

        In February 2004, EarthLink invested $500,000 in Ambient though the
purchase of (i) a three-year convertible debenture in the aggregate amount of
$250,000 and (ii) 2,083,333 shares of Common Stock. In March 2004, the
outstanding principal amount and accrued interest on EarthLink's debenture were
converted into 2,087,100 shares of Common Stock.

        In December 2004, we sold $5,500,000 aggregate principal amount of our
convertible debentures and warrants, receiving net proceeds of approximately
$4.9 million after the payment of offering related fees and expenses.

        At December 31, 2004, cash and cash equivalents were approximately $7
million. Our cash and cash equivalents are held in a variety of interest bearing
instruments with institutions that have a minimum investment grade rating of
Moody's A1, Standard and Poor A, or Fitch A+.

        Net cash used in operating activities during the year ended December 31,
2004 was approximately $4.9 million and is primarily attributable to ongoing
research and development and general and administrative expenses. To facilitate
the expansion of ongoing pilots and to further prepare for the commercialization
phase of our PLC Technologies, we have inventory of approximately $355,000 as of
December 31, 2004.

        Management believes that our existing cash and cash equivalents will be
sufficient to fund our operations through December 31, 2005. However, our
existing resources may not be sufficient to support the commercial introduction,
production and delivery of our technologies and we may need to raise additional
capital for such purposes. At the present time, we have no commitments for any
such financing, and there can be no assurance that additional capital will be
available to us on commercially acceptable terms or at all. Our auditors have
included a "going concern" qualification in their auditors' report for the year
ended December 31, 2004. Such

                                       26
<PAGE>

a "going concern" qualification may make it more difficult for us to raise funds
when needed.

        Additional equity financings may be dilutive to holders of our Common
Stock and debt financing, if available, may involve significant payment
obligations and covenants that restrict how we operate our business.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In December 2003, the Financial Accounting Standards Board ("FASB")
issued a revised Interpretation No. 46, "Consolidation of Variable Interest
Entities - An Interpretation of ARB No. 51," which provides guidance on the
identification of and reporting for variable interest entities for consideration
in determining whether a variable interest entity should be consolidated.
Interpretation No. 46, as revised, is effective for the Company in the third
quarter of fiscal 2004. The adoption of Interpretation No. 46 had no impact on
the Company's results of operations for the year ended December 31, 2004, or its
financial condition at that date, nor is it expected to have a significant
impact in the future.

        As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB No. 25's intrinsic value method and,
as such, generally recognizes no compensation expenses for employee stock
options. Accordingly, the adoption of SFAS No. 123(R)'s, SHARE-BASED PAYMENT
("SFAS No. 123(R)") fair value method could have an impact on our results of
operations, although it will have no impact on our overall financial position.
The impact of adoption of SFAS No. 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future,
however, had we adopted SFAS No. 123(R) in prior periods, the impact of the
standard would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma loss and net loss per share in Note 2 to our
consolidated financial statements. This statement is effective for public
companies qualifying as SEC small business issuers, as of the first interim
period or fiscal year beginning after December 15, 2005.

        In December 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets an amendment of APB Opinion No. 29." This Statement
precludes companies from using the "similar productive assets" criteria to
account for non-monetary exchanges at book value with no gain or loss being
recognized. Effective for fiscal periods beginning after June 15, 2005, all
companies will be required to use fair value for most non-monetary exchanges,
recognizing gain or loss, if the transaction meets commercial, substance
criteria. The Company does not expect this Standard to have a significant impact
on its current financial statements.

        In November 2004, the FASB issued Statement No. 151, "Inventory Costs,
an amendment of ARB 43, Chapter 4" ("SFAS 151"), to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage). ARB 43 allowed some of these "abnormal costs" to be
carried as inventory, whereas the new Standard requires that these costs be
expensed as incurred. This Statement is effective for fiscal years beginning
after June 15, 2005. The Company does not expect this Standard to have a
significant impact on its current financial statements.

        In December 2004, the FASB issued FSP FAS 109-1, "Application of FASB
Statement No. 109, "Accounting for Income Taxes," to the "Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004" to provide accounting guidance on the appropriate treatment of tax
benefits generated by the enactment of the Act. The FSP requires that the
manufacturer's deduction be treated as a special deduction in accordance with
SFAS 109 and not as a tax rate reduction. The Company is awaiting final tax
regulations from the IRS before completing its assessment of the impact of
adopting FSP FAS 109-1 on its current financial statements.

ITEM 7. FINANCIAL STATEMENTS

        The information called for by this Item 7 is included following the
"Index to Financial Statements" contained in this Annual Report on Form 10-KSB.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

        Brightman Almagor & Co, a member of Deloitte Touche & Tohmatsu located
in Tel Aviv, Israel ("Brightman"), independent auditors, audited our
consolidated financial statements for the years ended December 31, 2001 and
2002.

        During the fiscal years ended December 31, 2001 and 2002 and from
January 1, through May 12, 2003 there were no disagreements between the Company
and Brightman on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures.

        On January 21, 2004, the audit committee of our board of directors (the
"Audit Committee") engaged Rotenberg Meril Solomon Bertiger Guittilla, P.C.
located in Saddle Brook, NJ ("RMSB&G") to serve as our independent public
accountants for the audit of our consolidated financial statements for the year
ended December 31, 2003. The Audit Committee engaged RMSB&G in May 2003 to
review our periodic reports on Form 10-QSB for 2003.

ITEM 8A. 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

                                       27
<PAGE>

and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-14(c).

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 Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
December 31, 2004, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.

ITEM 8B. OTHER INFORMATION

None

                                    PART III

The information called for by Items 9, 10, 11, 12 and 14 will be contained in
the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended December 31,
2004 and such information is incorporated herein by reference.

ITEM 13. EXHIBITS

The following exhibits are incorporated herein by reference or are filed with
this report as indicated below.

3.1   Certificate of Incorporation of Ambient Corporation, as amended (1)
3.2   Bylaws of Ambient, as amended (1)
4.1   Specimen Stock Certificate (1)
4.2   Form of Ambient Promissory Note (3)
4.3   Form of Ambient Warrant (3)
4.4   Form of Two Year Ambient Warrant issued on or about June 2003 (6)
4.5   Form of Three Year Warrant issued to the Holders of the 6% Convertible
Debentures in October - November 2003  (7)
4.6   Form of 6% Three Year Convertible Debenture issued by Ambient Corporation
on December 23, 2004 (8)
4.7   Form of Common Stock Purchase Warrant issued by Ambient Corporation to
certain investors on December 23, 2004. (8)
10.1  Form of the Company's 2000 Equity Incentive Plan (5)
10.2  Restated Employment Agreement between Ambient Corporation and Dr. Yehuda
Cern dated December 31, 2001 (2) +
10.3  Stock Purchase Agreement dated as of September 30, 2002 between Ambient
and Consolidated  Edison, Inc. (4)
10.4  Form of Ambient's 2002 Non-Employee Directors' stock Option Plan (5)
10.5  Amended and Restated Employment Agreement effective as of May 22, 2004
between Ambient Corporation and John Joyce. (9) +

                                       28
<PAGE>

10.6  Amended and Restated Employment Agreement effective as of August 11, 2004
between Ambient Corporation and Ramdas Rao. (9) +
10.7  Form of Securities Purchase Agreement dated as of December 23, 2004, among
Ambient Corporation and certain investors. (8)
10.8  Form of Registration Rights Agreement dated as of December 23, 2004, among
Ambient Corporation and certain investors. (8)
14    Code of Conduct and Ethics (10)
23.1  Consent of Independent Registered Accounting Firm
31.1  Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2  Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1  Section 1350 Certification
32.2  Section 1350 Certification

        (1) Filed as an Exhibit to Ambient's Registration Statement on Form
SB-2, No. 33-40045, and incorporated herein by reference.

        (2) Filed as an Exhibit to Ambient's Report on Form 10-KSB for the year
ended December 31, 2001 and incorporated herein by reference.

        (3) Filed as an Exhibit to Ambient's Report on Form 10-QSB for the three
month period ended June 30, 2002 and incorporated herein by reference.

        (4) Filed as an Exhibit to Ambient's Report on Form 10-QSB for the three
month period ended September 30, 2002 and incorporated herein by reference.

        (5) Filed as an Exhibit to Ambient's Definitive Proxy Statement on Form
14-A filed on December 10, 2002 and incorporated herein by reference.

        (6) Filed as an Exhibit to Ambient's Report on Form 10-QSB for the three
month period ended June 30, 2003 and incorporated herein by reference.

        (7) Filed as an Exhibit to Ambient's Registration Statement on Form
SB-2, No. 333-110112, and incorporated herein by reference.

        (8) Filed as an Exhibit to the Current Report on Form 8-K filed by
Ambient on December 27, 2004.

        (9) Filed as an Exhibit to Ambient's Report on Form 10-QSB for the three
month period ended June 30, 2004 and incorporated herein by reference.

        (10) Filed as an Exhibit to Ambient's Report on Form 10-KSB for the year
ended December 31, 2003 and incorporated herein by reference.

+ Management Agreement

                                       29
<PAGE>

                                   SIGNATURES

        In accordance with the requirements of the Exchange Act, the issuer
caused this report to be signed by the undersigned thereunto duly authorized.


                                          /S/ JOHN J. JOYCE

DATE: MARCH 31, 2005                      JOHN J. JOYCE
                                          CHIEF EXECUTIVE OFFICER AND DIRECTOR


        In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the issuer and in the capacities and on
the dates indicated.

SIGNATURE                  TITLE                             DATE

/S/ JOHN JOYCE             CHIEF EXECUTIVE OFFICER,
JOHN JOYCE                 DIRECTOR                          MARCH 31, 2005

/S/ LAUREN FARRELL         CHIEF FINANCIAL OFFICER           MARCH 31, 2005
LAUREN FARRELL

/S/  MICHAEL WIDLAND       DIRECTOR                          MARCH 31, 2005
MICHAEL WIDLAND

/S/ HENRY SEDUSKI          DIRECTOR                          MARCH 31, 2005
HENRY SEDUSKI

/S/ D. HOWARD PIERCE       DIRECTOR                          MARCH 31, 2005
D. HOWARD PIERCE




                                       30

<PAGE>

                               AMBIENT CORPORATION

                          (A DEVELOPMENT STAGE COMPANY)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            PAGE


REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM ........................    F-1

CONSOLIDATED FINANCIAL STATEMENTS:

   Balance Sheets .......................................................    F-2

   Statements of Operations .............................................    F-3

   Statement of Changes in Stockholders' Equity (Deficit) ...............    F-4

   Statements of Cash Flows .............................................    F-5

   Notes to Financial Statements ........................................    F-6

<PAGE>

                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 Subsidiaries (a development stage company) (the "Company") as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years then ended and for the period from June 1, 1996 (date of inception)
through December 31, 2004. 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.

The consolidated financial statements of the Company for the period from June 1,
1996 (date of inception) through December 31, 2002 were audited by other
auditors whose report dated March 25, 2003 on those statements expressed an
unqualified opinion and included an explanatory paragraph regarding the
Company's ability to continue as a going concern. The consolidated financial
statements for the period June 1, 1996 (date of inception) through December 31,
2002 reflected a net loss of $60,408,511. The other auditors' report has been
previously furnished to us, and our opinion, insofar as it related to the
amounts included for such periods, is based solely on the report of such other
auditors.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). These standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2004
and 2003 and the results of their operations and cash flows for the years then
ended and for the period from June 1, 1996 (date of inception) to December 31,
2004, in conformity with accounting principles generally accepted in the United
States of America.

The financial statements referred to above have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company's recurring losses and negative
cash flows from operations raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 3. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/Rotenberg Meril Solomon Bertiger & Guttilla, P.C.

ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.

Saddle Brook, New Jersey

February 25, 2005


                                       F-1

<PAGE>
<TABLE>
<CAPTION>
                                          AMBIENT CORPORATION
                                     (A Development Stage Company)
                                      CONSOLIDATED BALANCE SHEETS

                                                                                 December 31,
                                                                             2004           2003
                                                                             ----           ----
<S>                                                                     <C>             <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                            $   6,954,512   $   2,621,643
   Accounts receivable                                                         12,487          53,134
   Inventory                                                                  354,497         141,695
   Prepaid expenses and other current assets                                  198,639          84,422
                                                                        -------------   -------------

          Total current assets                                              7,520,135       2,900,894

Property and equipment, net                                                   343,407          84,456
Prepaid licensing fees                                                        316,808               -
                                                                        -------------   -------------

          Total assets                                                  $   8,180,350   $   2,985,350
                                                                        =============   =============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable                                                     $     654,223   $     468,590
   Accrued expenses and other current liabilities                             242,752         195,818
   Advance from stockholder                                                   325,000         325,000
                                                                        -------------   -------------

          Total current liabilities                                         1,221,975         989,408

NON-CURRENT LIABILITIES
   Convertible debentures (net of discount of $5,459,813
     and $2,254,923)                                                           40,187         135,077
                                                                        -------------   -------------

          Total liabilities                                                 1,262,162       1,124,485
                                                                        -------------   -------------

STOCKHOLDERS' EQUITY
   Common stock, $.001 par value;
     300,000,000 shares authorized; 146,639,766 and 97,222,247
     issued; 145,639,766 and 96,222,247 outstanding, respectively             146,640          97,222
   Additional paid-in capital                                              82,031,660      69,428,975
   Deficit accumulated during the development stage                       (74,979,445)    (67,465,332)
   Less: deferred compensation                                                (80,667)              -
    Less: treasury stock; 1,000,000 shares at cost                           (200,000)       (200,000)
                                                                        -------------   -------------

          Total stockholders' equity                                        6,918,188       1,860,865
                                                                        -------------   -------------

          Total liabilities and stockholders' equity                    $   8,180,350   $   2,985,350
                                                                        =============   =============


                            See Notes to Consolidated Financial Statements.

                                                  F-2
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                          AMBIENT CORPORATION
                                     (A Development Stage Company)
                                 CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                 Cumulative
                                                              Year              From Inception
                                                             Ended                   to
                                                          December 31,           December 31,
                                                              2004           2003           2004
                                                              ----           ----           ----

<S>                                                     <C>             <C>             <C>
Revenues                                                $    -          $      123,000  $      123,000

Expenses
    Research and development (1)                             2,522,522         954,918       9,494,666
    Less - Participation by the Office of the
      Chief Scientist of the State of Israel                 -                 -               558,195
                                                        --------------  --------------  --------------
                                                             2,522,522         954,918       8,936,471

Operating, general and administrative expenses (1)           2,387,598       1,379,499      16,708,177
Stock based compensation - net                                  80,464         178,509      17,525,637
                                                        --------------  --------------  --------------

Total expenses                                               4,990,584       2,512,926      43,170,285
                                                        --------------  --------------  --------------

Operating loss                                              (4,990,584)     (2,389,926)    (43,047,285)


Interest expense                                               (31,451)        (29,569)       (736,533)
Amortization of beneficial conversion feature of
  convertible debt                                             (19,810)       (217,416)     (4,115,486)
Amortization of deferred financing costs                    (2,525,295)     (2,603,864)    (10,930,492)
Interest income                                                 53,027           4,813         379,084
Legal settlement                                             -                 -            (1,512,500)
Noncash financing expense                                    -                 -            (1,600,000)
Write-off of convertible note receivable                     -                 -              (490,000)
Company's share in net losses of affiliate                   -                 -            (1,352,207)
                                                        --------------  --------------  --------------

Loss before minority interest and extraordinary item        (7,514,113)     (5,235,962)    (63,405,419)

Minority interest in subsidiary loss                         -                 -                25,000
                                                        --------------  --------------  --------------

Loss before extraordinary item                              (7,514,113)     (5,235,962)    (63,380,419)

Extraordinary item - loss on extinguishment of debt          -                 -            (9,778,167)
                                                        --------------  --------------  --------------

Net loss                                                    (7,514,113)     (5,235,962)    (73,158,586)

Deemed dividends on convertible preferred stock              -                 -            (1,820,859)
                                                        --------------  --------------  --------------

Net loss attributable to common stockholders            $   (7,514,113) $   (5,235,962) $  (74,979,445)
                                                        ==============  ==============  ==============

Basic and diluted loss per share:
      Loss before extraordinary item                    $        (0.06) $        (0.07)
      Extraordinary loss from extinguishment of debt         -                 -
                                                        --------------  --------------

   Net loss                                             $        (0.06) $        (0.07)
                                                        ==============  ==============

Weighted average number of shares outstanding              135,252,696      75,428,708
                                                        ==============  ==============

(1) Excludes non-cash,  stock based compensation
      expense as follows:
    Research and development, net                       $    -          $       23,855  $    1,454,192
    Operating, general and administrative, net                  80,464         154,654      16,071,445
                                                        --------------  --------------  --------------

                                                        $       80,464  $      178,509  $   17,525,637
                                                        ==============  ==============  ==============

                            See Notes to Consolidated Financial Statements.

                                                  F-3
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                         AMBIENT CORPORATION
                                                    (A Development Stage Company)
                                 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)




                                                                                                 Convertible
                                                                                               Preferred Stock
                                                                                          Shares                Amount
                                                                                  -----------------------  ------------------
<S>                                                                               <C>                      <C>
Issuance of common stock to founders for nominal consideration - July 1996                                 $
Issuance of common stock to employees for services - September 1996
Issuance of common stock to employees for services - October 1996
Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 1996                                                                 -                      -

Issuance of common stock to employees for services - March 1997
Issuance of common stock to employees for services - August 1997
Stock issued in connection with private placement of notes - September 1997
Issuance of common stock to advisor for services - September 1997
Stock issued in connection with private placement of notes - October 1997
Amortization of deferred stock - based compensation
Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 1997                                                                 -                      -

Stock issued pursuant to consulting agreement
Initial public offering in February 1998
Stock issued in connection with short-term debt financing
Additional stock pursuant to founders agreement for nominal consideration
Warrants issued pursuant to private placement of units
Options granted pursuant to consulting agreement
Amortization of deferred stock - based compensation
Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 1998                                                                 -                      -

Stock issued pursuant to consulting agreement - January 1999
Stock issued pursuant to consulting agreement - February 1999
Stock issued pursuant to consulting agreement - February 1999
Stock issued pursuant to consulting agreement - April 1999
Warrants issued pursuant to consulting agreement - April 1999
Amortization of deferred stock - based compensation
Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 1999                                                                 -                      -


Stock issued in respect of extinguishment of debt - February 2000
Stock issued pursuant to consulting agreement - February 2000
Stock issued pursuant to consulting agreement - February 2000
Stock issued pursuant to consulting agreement - February 2000
Stock issued pursuant to consulting agreement - February 2000
Warrants issued pursuant to consulting agreement - February 2000
Warrants issued to convertible debenture holders - February, April and November 2000
Stock issued pursuant to consulting agreement - February 2000
Stock issued pursuant to consulting agreement - February 2000
Stock issued pursuant to consulting agreement - March 2000
Stock issued pursuant to consulting agreement - March 2000
Stock issued pursuant to consulting agreement - March 2000
Stock issued pursuant to consulting agreement - March 2000
Stock issued for services - May 2000
Stock issued pursuant to settlement agreement
Common stock issued in private placement, net of offering costs - July 2000
Preferred stock issued in private placement, net of offering costs - August 200                1,125,000               1,125
Warrants issued to convertible debenture holders - July  through September 2000
Warrants issued in connection with private placement  - September 2000
Stock and stock options issued pursuant to severance agreement - September 2000
Stock issued upon conversion of debentures -  September and November 2000
Stock issued upon conversion of debentures - November 2000
Stock issued upon conversion of preferred stock -  November 2000                              (1,125,000)             (1,125)
Stock options issued to employees
Stock options issued to consultants
Stock options and warrants exercised
Beneficial conversion feature of debentures issued
Deemed dividend on convertible preferred stock
Amortization of deferred stock - based compensation
Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 2000                                                                 -                      -

Common stock issued in private placement, net of offering costs - March 2001
Common stock issued for purchase of minority interest
Stock issued pursuant to consulting agreement - March 2001
Stock issued pursuant to consulting agreement - April 2001
Common stock issued in private placement, net of offering costs - June 2001
Stock issued as finders fee - June 2001
Warrants issued pursuant to consulting agreement - June 2001
Warrants issued pursuant to consulting agreement - August 2001
Warrants issued pursuant to consulting agreements - November 2001
Stock issued for services - November 2001
Warrants issued pursuant to consulting agreements - December 2001
Common stock issued for note receivable - December 2001
Re-measurement of deferred compensation
Cancellation of options and warrants
Amortization of deferred stock - based compensation
Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 2001                                                                 -                      -

Stock and warrants issued for rent reduction - April - December 2002
Stock and warrants issued in private placement - July 2002
Stock and warrants issued as repayment of loans - September 2002
Stock issued as payment accrued salaries  - September 2002
Stock and warrants issued upon conversion of debt - September 2002
Common stock issued for cash - September 2002
Stock issued upon conversion of debt - October 2002
Common stock issued for cash - October 2002
Common stock issued for cash - November 2002
Stock issued upon conversion of debt - November 2002
Stock issued upon conversion of debt - December 2002
Common stock issued for cash - December 2002
Exercise of warrants
Options and warrants issued
Amortization of deferred stock - based compensation
Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 2002                                                                 -              $       -

Common stock issued for cash - Jan  - Feb 2003
Common stock issued for cash - June 2003
Stock issued upon conversion of debt - June 2003
Stock and warrants issued for rent reduction - Jan  - June 2003
Warrants issued as reduction in accounts payable June 2003
Issuance of warrants in connection with convertible debentures - September 2003
Issuance of warrants in connection with convertible debentures -
                               October 2003 and November 2003
Stock issued upon conversion of debentures -  November and December 2003
Cashless exercise of warrants - November 2003
Options and warrants issued
Exercise of stock options
Amortization of deferred stock - based compensation
Beneficial conversion feature of debentures issued
Cancelation of note receivable

Net loss
                                                                                  -----------------------  ------------------

Balance - December 31, 2003                                                                 -                      -

Common stock issued for amounts payable - Jan. 2004
Warrants issued as reduction in accounts payable Jan 2004
Common stock and warrants issued for cash - Jan. 2004
Issuance of warrants in connection with convertible debentures - Jan 2004
Stock issued upon conversion of debentures and interest - Jan - Mar 2004
Stock issued upon exercise of warrants - Jan - Mar 2004
Stock issued upon conversion of debentures and interest - Apr - June 2004
Stock issued upon exercise of warrants - Apr - June 2004
Stock issued upon exercise of warrants - October - December 2004
Issuance of warrants in connection with convertible debentures - December 2004
Beneficial conversion feature of debentures issued - December 2004
Options issued
Exercise of stock options
Amortization of deferred stock - based compensation
Net loss

                                                                                  -----------------------  ------------------
Balance - December 31, 2004                                                                 -              $       -
                                                                                  =======================  ==================



                                                                                                     Common Stock
                                                                                             Shares               Amount
                                                                                        -----------------    ------------------

Issuance of common stock to founders for nominal consideration - July 1996                     2,028,833     $           2,029
Issuance of common stock to employees for services - September 1996                                5,000                     5
Issuance of common stock to employees for services - October 1996                                195,333                   195
Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 1996                                                                    2,229,166                 2,229

Issuance of common stock to employees for services - March 1997                                   20,000                    20
Issuance of common stock to employees for services - August 1997                                  84,167                    84
Stock issued in connection with private placement of notes - September 1997                       60,000                    60
Issuance of common stock to advisor for services - September 1997                                  6,000                     6
Stock issued in connection with private placement of notes - October 1997                         20,000                    20
Amortization of deferred stock - based compensation
Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 1997                                                                    2,419,333                 2,419

Stock issued pursuant to consulting agreement                                                     75,000                    75
Initial public offering in February 1998                                                         525,000                   525
Stock issued in connection with short-term debt financing                                         20,000                    20
Additional stock pursuant to founders agreement for nominal consideration                         35,000                    35
Warrants issued pursuant to private placement of units
Options granted pursuant to consulting agreement
Amortization of deferred stock - based compensation
Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 1998                                                                    3,074,333                 3,074

Stock issued pursuant to consulting agreement - January 1999                                       4,000                     4
Stock issued pursuant to consulting agreement - February 1999                                     15,000                    15
Stock issued pursuant to consulting agreement - February 1999                                     22,500                    23
Stock issued pursuant to consulting agreement - April 1999                                        15,000                    15
Warrants issued pursuant to consulting agreement - April 1999
Amortization of deferred stock - based compensation
Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 1999                                                                    3,130,833                 3,131


Stock issued in respect of extinguishment of debt - February 2000                              3,490,000                 3,490
Stock issued pursuant to consulting agreement - February 2000                                    700,000                   700
Stock issued pursuant to consulting agreement - February 2000                                    180,000                   180
Stock issued pursuant to consulting agreement - February 2000                                     70,000                    70
Stock issued pursuant to consulting agreement - February 2000                                     25,000                    25
Warrants issued pursuant to consulting agreement - February 2000
Warrants issued to convertible debenture holders - February, April and November 2000
Stock issued pursuant to consulting agreement - February 2000                                    589,750                   590
Stock issued pursuant to consulting agreement - February 2000                                    300,000                   300
Stock issued pursuant to consulting agreement - March 2000                                       250,000                   250
Stock issued pursuant to consulting agreement - March 2000                                       100,000                   100
Stock issued pursuant to consulting agreement - March 2000                                       346,250                   346
Stock issued pursuant to consulting agreement - March 2000                                       200,000                   200
Stock issued for services - May 2000                                                              67,250                    67
Stock issued pursuant to settlement agreement                                                    250,000                   250
Common stock issued in private placement, net of offering costs - July 2000                    1,000,000                 1,000
Preferred stock issued in private placement, net of offering costs - August 200
Warrants issued to convertible debenture holders - July  through September 2000
Warrants issued in connection with private placement  - September 2000
Stock and stock options issued pursuant to severance agreement - September 2000                  200,000                   200
Stock issued upon conversion of debentures -  September and November 2000                      5,000,000                 5,000
Stock issued upon conversion of debentures - November 2000                                     3,711,711                 3,712
Stock issued upon conversion of preferred stock -  November 2000                               1,125,000                 1,125
Stock options issued to employees
Stock options issued to consultants
Stock options and warrants exercised                                                             640,000                   640
Beneficial conversion feature of debentures issued
Deemed dividend on convertible preferred stock
Amortization of deferred stock - based compensation
Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 2000                                                                   21,375,794                21,376

Common stock issued in private placement, net of offering costs - March 2001                     350,000                   350
Common stock issued for purchase of minority interest                                            400,000                   400
Stock issued pursuant to consulting agreement - March 2001                                       650,000                   650
Stock issued pursuant to consulting agreement - April 2001                                       202,500                   203
Common stock issued in private placement, net of offering costs - June 2001                    1,299,090                 1,299
Stock issued as finders fee - June 2001                                                          250,000                   250
Warrants issued pursuant to consulting agreement - June 2001
Warrants issued pursuant to consulting agreement - August 2001
Warrants issued pursuant to consulting agreements - November 2001
Stock issued for services - November 2001                                                        650,000                   650
Warrants issued pursuant to consulting agreements - December 2001
Common stock issued for note receivable - December 2001                                        1,000,000                 1,000
Re-measurement of deferred compensation
Cancellation of options and warrants
Amortization of deferred stock - based compensation
Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 2001                                                                   26,177,384                26,178

Stock and warrants issued for rent reduction - April - December 2002                             562,500                   563
Stock and warrants issued in private placement - July 2002                                       400,000                   400
Stock and warrants issued as repayment of loans - September 2002                               1,500,000                 1,500
Stock issued as payment accrued salaries  - September 2002                                     4,104,000                 4,104
Stock and warrants issued upon conversion of debt - September 2002                             1,332,833                 1,333
Common stock issued for cash - September 2002                                                 12,250,000                12,250
Stock issued upon conversion of debt - October 2002                                            1,000,000                 1,000
Common stock issued for cash - October 2002                                                    5,000,000                 5,000
Common stock issued for cash - November 2002                                                   5,000,000                 5,000
Stock issued upon conversion of debt - November 2002                                             183,334                   183
Stock issued upon conversion of debt - December 2002                                              83,333                    83
Common stock issued for cash - December 2002                                                   5,000,000                 5,000
Exercise of warrants                                                                           1,125,000                 1,125
Options and warrants issued
Amortization of deferred stock - based compensation
Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 2002                                                             $     63,718,384     $          63,719

Common stock issued for cash - Jan  - Feb 2003                                                 7,750,000                 7,750
Common stock issued for cash - June 2003                                                       5,289,062                 5,289
Stock issued upon conversion of debt - June 2003                                                 100,000                   100
Stock and warrants issued for rent reduction - Jan  - June 2003                                  532,888                   533
Warrants issued as reduction in accounts payable June 2003
Issuance of warrants in connection with convertible debentures - September 2003
Issuance of warrants in connection with convertible debentures -
                               October 2003 and November 2003
Stock issued upon conversion of debentures -  November and December 2003                      18,918,192                18,918
Cashless exercise of warrants - November 2003                                                    883,721                   884
Options and warrants issued
Exercise of stock options                                                                         30,000                    30
Amortization of deferred stock - based compensation
Beneficial conversion feature of debentures issued
Cancelation of note receivable

Net loss
                                                                                        -----------------    ------------------

Balance - December 31, 2003                                                                   97,222,247                97,222

Common stock issued for amounts payable - Jan. 2004                                              964,286                   964
Warrants issued as reduction in accounts payable Jan 2004
Common stock and warrants issued for cash - Jan. 2004                                          2,083,333                 2,083
Issuance of warrants in connection with convertible debentures - Jan 2004
Stock issued upon conversion of debentures and interest - Jan - Mar 2004                      20,250,530                20,251
Stock issued upon exercise of warrants - Jan - Mar 2004                                       19,129,948                19,130
Stock issued upon conversion of debentures and interest - Apr - June 2004                      2,107,248                 2,107
Stock issued upon exercise of warrants - Apr - June 2004                                       2,472,328                 2,472
Stock issued upon exercise of warrants - October - December 2004                               1,764,096                 1,764


Issuance of warrants in connection with convertible debentures - December 2004
Beneficial conversion feature of debentures issued - December 2004
Options issued
Exercise of stock options                                                                        645,750                   646
Amortization of deferred stock - based compensation
Net loss

                                                                                        -----------------    ------------------
Balance - December 31, 2004                                                                  146,639,766     $         146,640
                                                                                        =================    ==================





                                                                                           Additional             Note
                                                                                             Paid-in           Receivable
                                                                                             Capital          Stockholder
                                                                                        ------------------    -------------

Issuance of common stock to founders for nominal consideration - July 1996              $                     $
Issuance of common stock to employees for services - September 1996
Issuance of common stock to employees for services - October 1996
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1996                                                                     -                  -

Issuance of common stock to employees for services - March 1997                                    50,000
Issuance of common stock to employees for services - August 1997                                  336,668
Stock issued in connection with private placement of notes - September 1997                       239,940
Issuance of common stock to advisor for services - September 1997                                  23,994
Stock issued in connection with private placement of notes - October 1997                          79,980
Amortization of deferred stock - based compensation
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1997                                                                       730,582          -

Stock issued pursuant to consulting agreement                                                     654,925
Initial public offering in February 1998                                                        3,432,502
Stock issued in connection with short-term debt financing                                          99,980
Additional stock pursuant to founders agreement for nominal consideration
Warrants issued pursuant to private placement of units                                             21,600
Options granted pursuant to consulting agreement                                                    1,600
Amortization of deferred stock - based compensation
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1998                                                                     4,941,189          -

Stock issued pursuant to consulting agreement - January 1999                                        7,996
Stock issued pursuant to consulting agreement - February 1999
Stock issued pursuant to consulting agreement - February 1999                                      69,977
Stock issued pursuant to consulting agreement - April 1999                                         12,173
Warrants issued pursuant to consulting agreement - April 1999                                      10,260
Amortization of deferred stock - based compensation
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1999                                                                     5,041,595          -

                                                                                                   75,328
Stock issued in respect of extinguishment of debt - February 2000                              10,466,510
Stock issued pursuant to consulting agreement - February 2000                                   2,099,300
Stock issued pursuant to consulting agreement - February 2000                                     539,820
Stock issued pursuant to consulting agreement - February 2000                                     192,430
Stock issued pursuant to consulting agreement - February 2000                                      68,725
Warrants issued pursuant to consulting agreement - February 2000                                1,500,000
Warrants issued to convertible debenture holders - February, April and November 2000            1,144,805
Stock issued pursuant to consulting agreement - February 2000                                   1,768,660
Stock issued pursuant to consulting agreement - February 2000                                   1,246,560
Stock issued pursuant to consulting agreement - March 2000                                      1,499,750
Stock issued pursuant to consulting agreement - March 2000                                        587,400
Stock issued pursuant to consulting agreement - March 2000                                      2,033,873
Stock issued pursuant to consulting agreement - March 2000                                      1,149,800
Stock issued for services - May 2000                                                              130,196
Stock issued pursuant to settlement agreement                                                   1,312,250
Common stock issued in private placement, net of offering costs - July 2000                     1,799,000
Preferred stock issued in private placement, net of offering costs - August 200                 1,819,734
Warrants issued to convertible debenture holders - July  through September 2000                 3,447,147
Warrants issued in connection with private placement  - September 2000                            410,495
Stock and stock options issued pursuant to severance agreement - September 2000                 1,756,042
Stock issued upon conversion of debentures -  September and November 2000                         795,680
Stock issued upon conversion of debentures - November 2000                                      8,490,545
Stock issued upon conversion of preferred stock -  November 2000
Stock options issued to employees                                                               4,059,080
Stock options issued to consultants                                                             1,999,329
Stock options and warrants exercised
Beneficial conversion feature of debentures issued                                              3,878,260
Deemed dividend on convertible preferred stock                                                  1,820,859
Amortization of deferred stock - based compensation
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2000                                                                    61,133,173          -

Common stock issued in private placement, net of offering costs - March 2001                      308,153
Common stock issued for purchase of minority interest                                             862,000
Stock issued pursuant to consulting agreement - March 2001                                        992,413
Stock issued pursuant to consulting agreement - April 2001                                        309,623
Common stock issued in private placement, net of offering costs - June 2001                     1,133,531
Stock issued as finders fee - June 2001                                                              (250)
Warrants issued pursuant to consulting agreement - June 2001                                       90,648
Warrants issued pursuant to consulting agreement - August 2001                                     12,553
Warrants issued pursuant to consulting agreements - November 2001                                  13,087
Stock issued for services - November 2001                                                         109,850
Warrants issued pursuant to consulting agreements - December 2001                                   4,355
Common stock issued for note receivable - December 2001                                           199,000         (200,000)
Re-measurement of deferred compensation                                                        (5,235,512)
Cancellation of options and warrants                                                             (614,941)
Amortization of deferred stock - based compensation
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2001                                                                    59,317,682         (200,000)

Stock and warrants issued for rent reduction - April - December 2002                               44,438
Stock and warrants issued in private placement - July 2002                                         68,918
Stock and warrants issued as repayment of loans - September 2002                                   98,500
Stock issued as payment accrued salaries  - September 2002                                        201,096
Stock and warrants issued upon conversion of debt - September 2002                                186,107
Common stock issued for cash - September 2002                                                     537,750
Stock issued upon conversion of debt - October 2002                                               119,000
Common stock issued for cash - October 2002                                                       195,000
Common stock issued for cash - November 2002                                                      195,000
Stock issued upon conversion of debt - November 2002                                               21,817
Stock issued upon conversion of debt - December 2002                                                9,917
Common stock issued for cash - December 2002                                                      195,000
Exercise of warrants                                                                               10,125
Options and warrants issued                                                                       296,955
Amortization of deferred stock - based compensation
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2002                                                             $      61,497,304     $   (200,000)

Common stock issued for cash - Jan  - Feb 2003                                                    302,250
Common stock issued for cash - June 2003                                                          590,023
Stock issued upon conversion of debt - June 2003                                                    9,900
Stock and warrants issued for rent reduction - Jan  - June 2003                                    42,098
Warrants issued as reduction in accounts payable June 2003                                        120,000
Issuance of warrants in connection with convertible debentures - September 2003                   163,787
Issuance of warrants in connection with convertible debentures -
                               October 2003 and November 2003                                   4,151,906
Stock issued upon conversion of debentures -  November and December 2003                        2,251,265
Cashless exercise of warrants - November 2003                                                        (884)
Options and warrants issued                                                                        83,639
Exercise of stock options                                                                             270
Amortization of deferred stock - based compensation
Beneficial conversion feature of debentures issued                                                217,416
Cancelation of note receivable                                                                                     200,000

Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2003                                                                    69,428,975                0

Common stock issued for amounts payable - Jan. 2004                                               134,036
Warrants issued as reduction in accounts payable Jan 2004                                          15,000
Common stock and warrants issued for cash - Jan. 2004                                             247,917
Issuance of warrants in connection with convertible debentures - Jan 2004                         250,000
Stock issued upon conversion of debentures and interest - Jan - Mar 2004                        2,204,083
Stock issued upon exercise of warrants - Jan - Mar 2004                                         4,212,462
Stock issued upon conversion of debentures and interest - Apr - June 2004                         177,859
Stock issued upon exercise of warrants - Apr - June 2004                                          179,693
Stock issued upon exercise of warrants - October - December 2004                                   (1,764)
Issuance of warrants in connection with convertible debentures - December 2004                  2,193,411
Beneficial conversion feature of debentures issued - December 2004                              2,711,554
Options issued                                                                                    161,131
Exercise of stock options                                                                         117,304
Amortization of deferred stock - based compensation
Net loss

                                                                                        ------------------    -------------
Balance - December 31, 2004                                                             $      82,031,660     $          0
                                                                                        ==================    =============






                                                                                            Deferred            Treasury
                                                                                          Compensation           Stock
                                                                                        ------------------    -------------

Issuance of common stock to founders for nominal consideration - July 1996              $                     $
Issuance of common stock to employees for services - September 1996
Issuance of common stock to employees for services - October 1996
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1996                                                                     -                  -

Issuance of common stock to employees for services - March 1997                                   (50,000)
Issuance of common stock to employees for services - August 1997                                 (336,668)
Stock issued in connection with private placement of notes - September 1997
Issuance of common stock to advisor for services - September 1997
Stock issued in connection with private placement of notes - October 1997
Amortization of deferred stock - based compensation                                               145,556
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1997                                                                      (241,112)         -

Stock issued pursuant to consulting agreement                                                    (655,000)
Initial public offering in February 1998
Stock issued in connection with short-term debt financing
Additional stock pursuant to founders agreement for nominal consideration
Warrants issued pursuant to private placement of units
Options granted pursuant to consulting agreement                                                   (1,600)
Amortization of deferred stock - based compensation                                               658,029
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1998                                                                      (239,683)         -

Stock issued pursuant to consulting agreement - January 1999                                       (8,000)
Stock issued pursuant to consulting agreement - February 1999
Stock issued pursuant to consulting agreement - February 1999                                     (70,000)
Stock issued pursuant to consulting agreement - April 1999                                        (12,188)
Warrants issued pursuant to consulting agreement - April 1999
Amortization of deferred stock - based compensation                                               325,808
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 1999                                                                        (4,063)         -


Stock issued in respect of extinguishment of debt - February 2000
Stock issued pursuant to consulting agreement - February 2000                                  (2,100,000)
Stock issued pursuant to consulting agreement - February 2000                                    (540,000)
Stock issued pursuant to consulting agreement - February 2000                                    (192,500)
Stock issued pursuant to consulting agreement - February 2000                                     (68,750)
Warrants issued pursuant to consulting agreement - February 2000                               (1,500,000)
Warrants issued to convertible debenture holders - February, April and November 2000
Stock issued pursuant to consulting agreement - February 2000                                  (1,769,250)
Stock issued pursuant to consulting agreement - February 2000                                  (1,246,860)
Stock issued pursuant to consulting agreement - March 2000                                     (1,500,000)
Stock issued pursuant to consulting agreement - March 2000                                       (587,500)
Stock issued pursuant to consulting agreement - March 2000                                     (2,034,219)
Stock issued pursuant to consulting agreement - March 2000                                     (1,150,000)
Stock issued for services - May 2000
Stock issued pursuant to settlement agreement
Common stock issued in private placement, net of offering costs - July 2000
Preferred stock issued in private placement, net of offering costs - August 200
Warrants issued to convertible debenture holders - July  through September 2000
Warrants issued in connection with private placement  - September 2000
Stock and stock options issued pursuant to severance agreement - September 2000                (1,756,242)
Stock issued upon conversion of debentures -  September and November 2000
Stock issued upon conversion of debentures - November 2000
Stock issued upon conversion of preferred stock -  November 2000
Stock options issued to employees                                                              (4,059,080)
Stock options issued to consultants                                                            (1,999,329)
Stock options and warrants exercised
Beneficial conversion feature of debentures issued
Deemed dividend on convertible preferred stock
Amortization of deferred stock - based compensation                                            16,067,085
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2000                                                                    (4,440,708)         -

Common stock issued in private placement, net of offering costs - March 2001
Common stock issued for purchase of minority interest                                            (862,400)
Stock issued pursuant to consulting agreement - March 2001                                       (993,063)
Stock issued pursuant to consulting agreement - April 2001                                       (309,825)
Common stock issued in private placement, net of offering costs - June 2001
Stock issued as finders fee - June 2001
Warrants issued pursuant to consulting agreement - June 2001                                      (90,648)
Warrants issued pursuant to consulting agreement - August 2001                                    (12,553)
Warrants issued pursuant to consulting agreements - November 2001                                 (13,087)
Stock issued for services - November 2001                                                        (110,500)
Warrants issued pursuant to consulting agreements - December 2001                                  (4,355)
Common stock issued for note receivable - December 2001
Re-measurement of deferred compensation                                                         3,526,232
Cancellation of options and warrants                                                              614,941
Amortization of deferred stock - based compensation                                             2,122,931
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2001                                                                      (573,035)         -

Stock and warrants issued for rent reduction - April - December 2002
Stock and warrants issued in private placement - July 2002
Stock and warrants issued as repayment of loans - September 2002
Stock issued as payment accrued salaries  - September 2002
Stock and warrants issued upon conversion of debt - September 2002
Common stock issued for cash - September 2002
Stock issued upon conversion of debt - October 2002
Common stock issued for cash - October 2002
Common stock issued for cash - November 2002
Stock issued upon conversion of debt - November 2002
Stock issued upon conversion of debt - December 2002
Common stock issued for cash - December 2002
Exercise of warrants
Options and warrants issued                                                                      (296,955)
Amortization of deferred stock - based compensation                                               817,751
Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2002                                                             $         (52,239)    $    -

Common stock issued for cash - Jan  - Feb 2003
Common stock issued for cash - June 2003
Stock issued upon conversion of debt - June 2003
Stock and warrants issued for rent reduction - Jan  - June 2003
Warrants issued as reduction in accounts payable June 2003
Issuance of warrants in connection with convertible debentures - September 2003
Issuance of warrants in connection with convertible debentures -
                               October 2003 and November 2003
Stock issued upon conversion of debentures -  November and December 2003
Cashless exercise of warrants - November 2003
Options and warrants issued                                                                       (83,639)
Exercise of stock options
Amortization of deferred stock - based compensation                                               135,878
Beneficial conversion feature of debentures issued
Cancelation of note receivable                                                                                    (200,000)

Net loss
                                                                                        ------------------    -------------

Balance - December 31, 2003                                                                             0         (200,000)

Common stock issued for amounts payable - Jan. 2004
Warrants issued as reduction in accounts payable Jan 2004
Common stock and warrants issued for cash - Jan. 2004
Issuance of warrants in connection with convertible debentures - Jan 2004
Stock issued upon conversion of debentures and interest - Jan - Mar 2004
Stock issued upon exercise of warrants - Jan - Mar 2004
Stock issued upon conversion of debentures and interest - Apr - June 2004
Stock issued upon exercise of warrants - Apr - June 2004
Stock issued upon exercise of warrants - October - December 2004
Issuance of warrants in connection with convertible debentures - December 2004
Beneficial conversion feature of debentures issued - December 2004
Options issued                                                                                   (161,131)
Exercise of stock options
Amortization of deferred stock - based compensation                                                80,464
Net loss

                                                                                        ------------------    -------------
Balance - December 31, 2004                                                             $         (80,667)    $   (200,000)
                                                                                        ==================    =============



                                                                                            Deficit
                                                                                          Accumulated
                                                                                             During
                                                                                          Development
                                                                                             Stage              Total
                                                                                        -----------------  -----------------

Issuance of common stock to founders for nominal consideration - July 1996                                 $          2,029
Issuance of common stock to employees for services - September 1996                                                       5
Issuance of common stock to employees for services - October 1996                                                       195
Net loss                                                                                        (693,995)          (693,995)
                                                                                        -----------------  -----------------

Balance - December 31, 1996                                                                     (693,995)          (691,766)

Issuance of common stock to employees for services - March 1997                                                          20
Issuance of common stock to employees for services - August 1997                                                         84
Stock issued in connection with private placement of notes - September 1997                                         240,000
Issuance of common stock to advisor for services - September 1997                                                    24,000
Stock issued in connection with private placement of notes - October 1997                                            80,000
Amortization of deferred stock - based compensation                                                                 145,556
Net loss                                                                                      (1,432,815)        (1,432,815)
                                                                                        -----------------  -----------------

Balance - December 31, 1997                                                                   (2,126,810)        (1,634,921)

Stock issued pursuant to consulting agreement                                                                             0
Initial public offering in February 1998                                                                          3,433,027
Stock issued in connection with short-term debt financing                                                           100,000
Additional stock pursuant to founders agreement for nominal consideration                                                35
Warrants issued pursuant to private placement of units                                                               21,600
Options granted pursuant to consulting agreement                                                                          0
Amortization of deferred stock - based compensation                                                                 658,029
Net loss                                                                                      (2,820,314)        (2,820,314)
                                                                                        -----------------  -----------------

Balance - December 31, 1998                                                                   (4,947,124)          (242,544)

Stock issued pursuant to consulting agreement - January 1999                                                              0
Stock issued pursuant to consulting agreement - February 1999                                                            15
Stock issued pursuant to consulting agreement - February 1999                                                             0
Stock issued pursuant to consulting agreement - April 1999                                                                0
Warrants issued pursuant to consulting agreement - April 1999                                                        10,260
Amortization of deferred stock - based compensation                                                                 325,808
Net loss                                                                                      (1,131,404)        (1,131,404)
                                                                                        -----------------  -----------------

Balance - December 31, 1999                                                                   (6,078,528)        (1,037,865)

                                                                                                                     75,328
Stock issued in respect of extinguishment of debt - February 2000                                                10,470,000
Stock issued pursuant to consulting agreement - February 2000                                                             0
Stock issued pursuant to consulting agreement - February 2000                                                             0
Stock issued pursuant to consulting agreement - February 2000                                                             0
Stock issued pursuant to consulting agreement - February 2000                                                             0
Warrants issued pursuant to consulting agreement - February 2000                                                          0
Warrants issued to convertible debenture holders - February, April and November 2000                              1,144,805
Stock issued pursuant to consulting agreement - February 2000                                                             0
Stock issued pursuant to consulting agreement - February 2000                                                             0
Stock issued pursuant to consulting agreement - March 2000                                                                0
Stock issued pursuant to consulting agreement - March 2000                                                                0
Stock issued pursuant to consulting agreement - March 2000                                                                0
Stock issued pursuant to consulting agreement - March 2000                                                                0
Stock issued for services - May 2000                                                                                130,263
Stock issued pursuant to settlement agreement                                                                     1,312,500
Common stock issued in private placement, net of offering costs - July 2000                                       1,800,000
Preferred stock issued in private placement, net of offering costs - August 200                                   1,820,859
Warrants issued to convertible debenture holders - July  through September 2000                                   3,447,147
Warrants issued in connection with private placement  - September 2000                                              410,495
Stock and stock options issued pursuant to severance agreement - September 2000                                           0
Stock issued upon conversion of debentures -  September and November 2000                                           800,680
Stock issued upon conversion of debentures - November 2000                                                        8,494,257
Stock issued upon conversion of preferred stock -  November 2000                                                          0
Stock options issued to employees                                                                                         0
Stock options issued to consultants                                                                                       0
Stock options and warrants exercised                                                                                    640
Beneficial conversion feature of debentures issued                                                                3,878,260
Deemed dividend on convertible preferred stock                                                                    1,820,859
Amortization of deferred stock - based compensation                                                              16,067,085
Net loss                                                                                     (42,640,886)       (42,640,886)
                                                                                        -----------------  -----------------

Balance - December 31, 2000                                                                  (48,719,414)         7,994,427

Common stock issued in private placement, net of offering costs - March 2001                                        308,503
Common stock issued for purchase of minority interest                                                                     0
Stock issued pursuant to consulting agreement - March 2001                                                                0
Stock issued pursuant to consulting agreement - April 2001                                                                0
Common stock issued in private placement, net of offering costs - June 2001                                       1,134,830
Stock issued as finders fee - June 2001                                                                                   0
Warrants issued pursuant to consulting agreement - June 2001                                                              0
Warrants issued pursuant to consulting agreement - August 2001                                                            0
Warrants issued pursuant to consulting agreements - November 2001                                                         0
Stock issued for services - November 2001                                                                                 0
Warrants issued pursuant to consulting agreements - December 2001                                                         0
Common stock issued for note receivable - December 2001                                                                   0
Re-measurement of deferred compensation                                                                          (1,709,280)
Cancellation of options and warrants                                                                                      0
Amortization of deferred stock - based compensation                                                               2,122,931
Net loss                                                                                     (10,029,583)       (10,029,583)
                                                                                        -----------------  -----------------

Balance - December 31, 2001                                                                  (58,748,997)          (178,172)

Stock and warrants issued for rent reduction - April - December 2002                                                 45,000
Stock and warrants issued in private placement - July 2002                                                           69,318
Stock and warrants issued as repayment of loans - September 2002                                                    100,000
Stock issued as payment accrued salaries  - September 2002                                                          205,200
Stock and warrants issued upon conversion of debt - September 2002                                                  187,440
Common stock issued for cash - September 2002                                                                       550,000
Stock issued upon conversion of debt - October 2002                                                                 120,000
Common stock issued for cash - October 2002                                                                         200,000
Common stock issued for cash - November 2002                                                                        200,000
Stock issued upon conversion of debt - November 2002                                                                 22,000
Stock issued upon conversion of debt - December 2002                                                                 10,000
Common stock issued for cash - December 2002                                                                        200,000
Exercise of warrants                                                                                                 11,250
Options and warrants issued                                                                                               0
Amortization of deferred stock - based compensation                                                                 817,751
Net loss                                                                                      (3,480,373)        (3,480,373)
                                                                                        -----------------  -----------------

Balance - December 31, 2002                                                                  (62,229,370)  $       (920,586)

Common stock issued for cash - Jan  - Feb 2003                                                                      310,000
Common stock issued for cash - June 2003                                                                            595,312
Stock issued upon conversion of debt - June 2003                                                                     10,000
Stock and warrants issued for rent reduction - Jan  - June 2003                                                      42,631
Warrants issued as reduction in accounts payable June 2003                                                          120,000
Issuance of warrants in connection with convertible debentures - September 2003                                     163,787
Issuance of warrants in connection with convertible debentures -
                               October 2003 and November 2003                                                     4,151,906
Stock issued upon conversion of debentures -  November and December 2003                                          2,270,183
Cashless exercise of warrants - November 2003
Options and warrants issued
Exercise of stock options                                                                                               300
Amortization of deferred stock - based compensation                                                                 135,878
Beneficial conversion feature of debentures issued                                                                  217,416
Cancelation of note receivable

Net loss                                                                                      (5,235,962)        (5,235,962)
                                                                                        -----------------  -----------------

Balance - December 31, 2003                                                                  (67,465,332)         1,860,865

Common stock issued for amounts payable - Jan. 2004                                                                 135,000
Warrants issued as reduction in accounts payable Jan 2004                                                            15,000
Common stock and warrants issued for cash - Jan. 2004                                                               250,000
Issuance of warrants in connection with convertible debentures - Jan 2004                                           250,000
Stock issued upon conversion of debentures and interest - Jan - Mar 2004                                          2,224,334
Stock issued upon exercise of warrants - Jan - Mar 2004                                                           4,231,592
Stock issued upon conversion of debentures and interest - Apr - June 2004                                           179,966
Stock issued upon exercise of warrants - Apr - June 2004                                                            182,165
Stock issued upon exercise of warrants - October - December 2004                                                      -
Issuance of warrants in connection with convertible debentures - December 2004                                    2,193,411
Beneficial conversion feature of debentures issued - December 2004                                                2,711,554
Options issued                                                                                                        -
Exercise of stock options                                                                                           117,950
Amortization of deferred stock - based compensation                                                                  80,464
Net loss                                                                                      (7,514,113)        (7,514,113)

                                                                                        -----------------  -----------------
Balance - December 31, 2004                                                             $    (74,979,445)  $      6,918,188
                                                                                        =================  =================


                                           See Notes to Consolidated Financial Statements.
</TABLE>
                                                                 F-4

<PAGE>
<TABLE>
<CAPTION>
                                                    AMBIENT CORPORATION
                                               (A Development Stage Company)
                                           CONSOLIDATED STATEMENT OF CASH FLOWS

                                                                                                             Cumulative
                                                                                        Year               From Inception
                                                                                        Ended                    to
                                                                                      December 31,           December 31,
                                                                                  2004           2003            2004
                                                                                  ----           ----            ----

<S>                                                                         <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                                  $   (7,514,113) $   (5,235,962) $  (74,979,445)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
      Depreciation and amortization                                                 89,737          52,705         556,887
      Amortization of note discount                                              2,525,295       2,603,864      10,285,621
      Beneficial conversion feature of convertible debt                             19,810         217,416       4,115,486
      Financing,  consulting and other expenses paid via the
         issuance of common stock and warrants                                     123,402         183,692      30,917,636
      Cancellation of officer loans in settlement of employment co-tract         -               -                 724,447
      Loss on sale of fixed assets                                               -               -                  20,135
      Deemed dividends on convertible preferred stock                            -               -               1,820,859
      Increase in net liability for severance pay                                -               -                  15,141
      Accrued interest on loans and notes payable                                -               -                 210,016
      Company's share in net losses of affiliates                                -               -               1,352,207
      Minority interest in subsidiary loss                                       -               -                 (25,000)
      Write-off of convertible note receivable                                   -               -                 400,000
      Write-down of long term investment                                         -               -                 835,000
      Write-off of fixed assets                                                  -               -                 136,066
      Increase (decrease) in cash attributable to changes in assets
       and liabilities
         Accounts receivables                                                       40,647         (32,609)          8,038
         Inventory                                                                (212,802)      -                (354,497)
         Prepaid expenses and other current assets                                (114,217)       (218,102)       (129,934)
         Prepaid licensing fees                                                   (181,808)      -                (181,808)
         Accounts payable                                                          200,633         (65,870)        930,517
         Accrued expenses and other current liabilities                             46,934          69,318         393,408
                                                                            --------------  --------------  --------------

Net cash used in operating activities                                           (4,976,482)     (2,425,548)    (22,949,220)
                                                                            --------------  --------------  --------------

CASH FLOWS FROM  INVESTING ACTIVITIES
      Loan provided to another company                                           -               -                (835,000)
      Purchase of convertible promissory note                                    -               -                (400,000)
      Investment in affiliated company                                           -               -                (375,000)
      Additions to property and equipment                                         (348,688)        (55,578)     (1,097,730)
      Proceeds from disposal of fixed assets                                     -               -                  42,100
      Loans to officers                                                          -               -              (2,137,677)
      Repayment of loans to Officer                                              -               -               1,431,226
                                                                            --------------  --------------  --------------

Net cash used in investing activities                                             (348,688)        (55,578)     (3,372,081)
                                                                            --------------  --------------  --------------

CASH FLOWS FROM FINANCING ACTIVITIES
      Net proceeds from issuance of share capital                                4,503,074         915,612      11,163,253
      Proceeds from loans and advances                                           -               -                 690,000
      Proceeds from issuance of notes payable                                    -                 360,000       1,360,000
      Net proceeds from issuance of convertible debentures                       5,154,965       4,151,906      18,455,133
      Repayment of notes payable                                                 -                (400,000)       (800,000)
      Proceeds of loans from shareholders, net                                   -               -                 919,600
      Repayment of loans from shareholders                                       -               -                (968,000)
      Proceeds from long-term bank credit                                        -               -                  95,969
      Repayment of long-term bank credit                                         -               -                 (87,996)
      Increase (decrease) in short term bank credit                              -               -                 (32,004)
      Public offering of common stock                                            -               -               3,433,027
      Repayment of short-term debt                                               -               -                (250,000)
      Proceeds from short-term debt                                              -               -                 274,038
      Loans to affiliate                                                         -               -                (977,207)
                                                                            --------------  --------------  --------------

Net cash provided by financing activities                                        9,658,039       5,027,518      33,275,813
                                                                            --------------  --------------  --------------

INCREASE IN CASH AND CASH EQUIVALENTS                                            4,332,869       2,546,392       6,954,512

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                                    2,621,643          75,251       -
                                                                            --------------  --------------  --------------

CASH AND CASH EQUIVALENTS - END OF YEAR                                     $    6,954,512  $    2,621,643  $    6,954,512
                                                                            ==============  ==============  ==============

Noncash financing and investing activities:
      Issuance of common stock and warrants in respect of amount payable    $      150,000  $      120,000
                                                                            ==============  ==============
      Issuance of common stock upon conversion of debentures and accrued
       interest                                                             $    2,682,933  $    2,270,183
                                                                            ==============  ==============


                                      See Notes to Consolidated Financial Statements.

                                                           F-5
</TABLE>

<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


NOTE 1 - DESCRIPTION OF BUSINESS

        Ambient Corporation ("the Company" or "Ambient"), was incorporated under
        the laws of the State of Delaware in June 1996. The Company is engaged
        in the design, development and marketing of equipment and technologies
        designed to utilize existing electrical medium voltage and low voltage
        distribution systems as a medium for the delivery of broadband and other
        services to electric utilities. Prototypes of the components and
        technologies underlying Ambient's solution presently are being evaluated
        in field trials and pilots. The Company's technologies are designed to
        be used with a commercially deployed power line communications ("PLC")
        network to enable the delivery of information to consumers at the higher
        speeds necessary to obtain broadband e-mail and web browsing services as
        well as telephony Voice Over Internet (VOIP) through modem devices that
        are plugged into a standard electrical wall outlet.

        The Company is a development stage company and its success is subject to
        risks and uncertainties frequently encountered by development stage
        companies in new and rapidly evolving markets. These risks primarily
        include the technological feasibility of the Company's equipment and
        technologies, the commercial viability of the equipment and technology
        as well as its adoption by utilities and or other potential customers.

        To date, the Company has funded operations through the sale of its
        securities. Business activities to date have primarily focused on
        research and development and raising of capital and financing. The
        Company anticipates that it will continue to incur significant operating
        costs and losses in connection with the development of its products and
        intensified marketing efforts as it approaches commercialization.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of the
        Company and its wholly owned subsidiaries, Ambient Ltd. and Insulated
        Connections Corporation Limited. These subsidiaries have 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 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. Cash and cash equivalents are carried at cost, which
        approximates market value.


                                      F-6
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        FAIR VALUE OF FINANCIAL INSTRUMENTS

        Substantially all of the Company's financial instruments, consisting
        primarily of cash equivalents, account receivables, accounts payable,
        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.

        STOCK-BASED COMPENSATION

        The Company accounts for stock-based compensation in accordance with APB
        Opinion No. 25, "Accounting for Stock Issued to Employees" and FASB
        Interpretation 44, "Accounting for Certain Transactions Involving Stock
        Compensation." Pursuant to these accounting standards, the Company
        records deferred compensation for share options granted to employees at
        the date of grant based on the difference between the exercise price of
        the options and the market value of the underlying shares at that date.
        Deferred compensation is amortized to compensation expense over the
        vesting period of the underlying options. No compensation expense is
        recorded for fixed stock options that are granted to employees and
        directors at an exercise price equal to the fair market value of the
        common stock at the time of the grant.

        Stock options granted to non-employees are recorded at their fair value,
        as determined in accordance with SFAS No. 123 and Emerging Issues Task
        Force Consensus No. 96-18, and recognized over the related service
        period. Deferred charges for options granted to non-employees are
        periodically re-measured as the options vest.

        The following table illustrates the effect on net loss and loss per
        share if the Company had applied the fair value recognition provisions
        of SFAS No. 123 to stock options issued to employees:

<TABLE>
<CAPTION>

                                                                        Year ended
                                                                        December 31,
                                                                    2004           2003
                                                               -------------  -------------
<S>                                                             <C>             <C>
            Net loss, as reported                               ($7,514,113)    ($5,235,962)
            Add: Stock based compensation
                   expense, as reported, net                             --              --
            Deduct: Total stock-based compensation
                   expense determined under the fair
                   value based method for all awards, net          (850,313)       (587,457)
                                                                -----------     -----------

            Pro forma net loss                                  ($8,346,426)    ($5,823,419)
                                                                ===========     ===========

            Basic and diluted loss per share, as reported            ($0.06)         ($0.07)
            Basic and diluted loss per share, pro forma              ($0.06)         ($0.08)
</TABLE>

                                      F-7
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        For the purpose of providing pro forma disclosures, the fair values of
        stock options granted were estimated using the Black-Scholes
        option-pricing model with the following weighted-average assumptions
        used for grants in 2004 and 2003, respectively: a risk-free interest
        rate of 3.65% and 3.88%; an expected life of 8 and 8 years; an expected
        volatility of 116% and 150%; and no expected dividends.

        NET LOSS PER SHARE

        Basic earnings (loss) per share EPS is computed by dividing net income
        (loss) applicable to common shares by the weighted-average of common
        shares outstanding during the period. Diluted earnings (loss) per share
        adjusts basic earnings (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 antidilutive.

                                                          2004         2003
                                                          ----         ----
               Stock options                          19,317,000    11,342,000
               Warrants                               41,479,072    46,029,781
               Convertible debentures                 22,000,000    19,916,667

        PROPERTY AND EQUIPMENT

        Property and equipment are recorded at cost and depreciated using the
        straight-line method over the estimated useful lives of the assets,
        which range from two to five years.

        RESEARCH AND DEVELOPMENT AND PATENT COSTS

        Both research and development and patent costs are charged to operations
        as incurred.

        INCOME TAXES

        The Company uses the liability method to determine its income tax. This
        method requires the establishment of a deferred tax asset or liability
        for the recognition of future deductible or taxable amounts and
        operating loss carry forwards. Deferred tax expense or benefit is
        recognized as a result of the changes in the assets and liabilities
        during the year. Valuation allowances are established when necessary, to
        reduce deferred tax assets, if it is more likely than not that all or a
        portion of it will not be realized.

        CONCENTRATIONS

        Cash and cash equivalents are maintained with major financial
        institutions in the United States. Deposits held with these banks at
        times exceed the amount of insurance provided on such deposits.
        Generally these deposits may be redeemed upon demand and therefore, bear
        minimal risk.


                                      F-8
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        IMPAIRMENT OF LONG-LIVED ASSETS

        The Company adopted the provisions of SFAS No. 144 "Accounting for
        Impairment of Disposal 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.

        RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In December 2003, the Financial Accounting Standards Board ("FASB")
        issued a revised Interpretation No. 46, "Consolidation of Variable
        Interest Entities - An Interpretation of ARB No. 51," which provides
        guidance on the identification of and reporting for variable interest
        entities for consideration in determining whether a variable interest
        entity should be consolidated. Interpretation No. 46, as revised, is
        effective for the Company in the third quarter of fiscal 2004. The
        adoption of Interpretation No. 46 had no impact on the Company's results
        of operations for the year ended December 31, 2004, or its financial
        condition at that date, nor is it expected to have a significant impact
        in the future.

        As permitted by SFAS No. 123, the Company currently accounts for
        share-based payments to employees using APB No. 25's intrinsic value
        method and, as such, generally recognizes no compensation expenses for
        employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s,
        SHARE-BASED PAYMENT ("SFAS No. 123(R)") fair value method could have an
        impact on our results of operations, although it will have no impact on
        our overall financial position. The impact of adoption of SFAS No.
        123(R) cannot be predicted at this time because it will depend on levels
        of share-based payments granted in the future, however, had we adopted
        SFAS No. 123(R) in prior periods, the impact of the standard would have
        approximated the impact of SFAS No. 123 as described in the disclosure
        of pro forma loss and net loss per share in Note 2 to our consolidated
        financial statements. This statement is effective for public companies
        qualifying as SEC small business issuers, as of the first interim period
        or fiscal year beginning after December 15, 2005.

        In December 2004, the FASB issued SFAS No. 153, "Exchange of
        Non-monetary Assets an amendment of APB Opinion No. 29." This Statement
        precludes companies from using the "similar productive assets" criteria
        to account for non-monetary exchanges at book value with no gain or loss
        being recognized. Effective for fiscal periods beginning after June 15,
        2005, all companies will be required to use fair value for most
        non-monetary exchanges, recognizing gain or loss, if the transaction
        meets commercial, substance criteria. The Company does not expect this
        Standard to have a significant impact on its current financial
        statements.

        In November 2004, the FASB issued Statement No. 151, "Inventory Costs,
        an amendment of ARB 43, Chapter 4" ("SFAS 151"), to clarify the
        accounting for abnormal amounts of idle facility expense, freight,
        handling costs, and wasted materials (spoilage). ARB 43 allowed some of
        these "abnormal costs" to be carried as inventory, whereas the new
        Standard requires that these costs be expensed as incurred. This
        Statement is effective for


                                       F-9
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        fiscal years beginning after June 15, 2005. The Company does not expect
        this Standard to have a significant impact on its current financial
        statements.

        In December 2004, the FASB issued FSP FAS 109-1, "Application of FASB
        Statement No. 109, "Accounting for Income Taxes," to the "Tax Deduction
        on Qualified Production Activities Provided by the American Jobs
        Creation Act of 2004" to provide accounting guidance on the appropriate
        treatment of tax benefits generated by the enactment of the Act. The FSP
        requires that the manufacturer's deduction be treated as a special
        deduction in accordance with SFAS 109 and not as a tax rate reduction.
        The Company is awaiting final tax regulations from the IRS before
        completing its assessment of the impact of adopting FSP FAS 109-1 on its
        current financial statements.

NOTE 3 - BASIS OF PRESENTATION

        The accompanying financial statements have been prepared assuming that
        the Company will continue as a going concern. The Company is in the
        development stage and has not generated any significant revenues as of
        December 31, 2004. As a result, the Company incurred net losses of
        $7,514,113, $5,235,962, and $74,979,445 and negative cash flows from
        operating activities of $4,976,482, $2,425,548 and $22,949,220 for the
        years ended December 31, 2004, December 31, 2003 and for the period from
        June 1, 1996 (date of inception) to December 31, 2004, respectively. In
        addition, management believes that the Company will continue to incur
        net losses and cash flow deficiencies from operating activities through
        at least December 31, 2005.

        During 2004, the Company received approximately $4.5 million of net cash
        proceeds from the sale of Common Stock and the exercise of outstanding
        options and warrants and approximately $5.2 million of net cash proceeds
        from the private placement of Convertible Debt.

        Management believes that the cash on hand as of December 31, 2004 will
        enable the Company to sustain operations at least through December 31,
        2005.

        To better enable the Company to sustain its operations through at least
        December 31, 2005 and ultimately complete its marketing and development
        program and achieve profitability, management may plan to seek
        additional financing for the Company through the sale of debt and equity
        securities.

        However, the Company's existing resources may not be sufficient to
        support the full commercial introduction, production and delivery of any
        of its technologies. The Company may need to raise additional funds
        through public or private equity offerings, debt financings or
        additional corporate collaboration and licensing arrangements. The
        Company cannot predict whether additional financing will be available
        when needed or, if available, will be on acceptable or favorable terms
        to it or its stockholders.


                                      F-10
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


NOTE 4 - PROPERTY AND EQUIPMENT

                                                             December 31,
                                                             ------------
                                                          2004         2003
                                                          ----         ----

           Computers                                    $231,687     $118,913
           Machinery and equipment                       256,918       93,522
           Furniture and office equipment                158,731      101,756
                                                        --------     --------
                                                         647,336      314,191
           Less - accumulated depreciation               303,929      229,735
                                                        --------     --------
                                                        $343,407     $ 84,456
                                                        ========     ========

        Depreciation expense was $89,737 and $52,705 for the years ended
        December 31, 2004 and 2003, respectively.

NOTE 5 - PREPAID LICENSING FEES

        Effective January 31, 2004, the Company, entered into a five-year
        licensing agreement with Design of Systems on Silicon ("DS2"), a
        supplier of components of the Company's PLC, pursuant to which DS2 has
        granted Ambient a license of the DS2 power line related technology on a
        world wide nonexclusive basis. The license fee is being amortized over
        the five year term on a straight-line basis. Amortization for the year
        ended December 31, 2004 was $79,200

NOTE 6 - OTHER CURRENT LIABILITIES

                                                             December 31,
                                                             ------------
                                                          2004         2003
                                                          ----         ----

           Accrued professional fees                    $158,146     $ 84,992
           Accrued licensing fees                         52,752            -
           Accrued liabilities                            24,621       24,999
           Accrued interest                                7,233       20,429
           Accrued payroll and payroll taxes                   -       65,398
                                                        --------     --------
                                                        $242,752     $195,818
                                                        ========     ========

NOTE 7 - CONVERTIBLE DEBENTURES

   o    In September 2003, the Company raised $400,000 from the sale to a
        private investor of its 6% Convertible Debentures and warrants to
        purchase 800,000 shares of the Company's common stock, par value $0.001
        per share (the "Common Stock"). In October 2003, the outstanding
        principal and accrued interest on the debenture was repaid.

        For financial reporting purposes, the Company recorded a discount of
        $133,638 to reflect the value of the warrants. In addition, in
        accordance with EITF No. 00-27, the Company recorded additional discount
        on convertible debentures of $217,416 to reflect the beneficial
        conversion feature of the debenture.

   o    In October and November 2003, the Company raised net proceeds of $4.2
        million in a private placement of $4,655,000 in principal amount of its
        three-year 6% Convertible Debentures (the "2003 Debentures"). The

                                      F-11
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        2003 Debentures are convertible into shares of Common Stock at a
        conversion rate of $0.12 per share. In November and December 2003,
        $2,270,000 of principal and accrued interest of the 2003 Debentures was
        converted into approximately 18.9 million shares of Common Stock. In
        January through June 2004, the remaining principal of $2,385,000 and
        accrued interest was converted into approximately 22.4 million shares of
        Common Stock.

        For financial reporting purposes, the Company recorded a discount of
        $4,638,470 to reflect the value of the Warrants and amortized this
        amount to the date of maturity. In addition, in accordance with EITF No.
        00-27, the Company recorded additional discount on the 2003 Debentures
        of $11,664 to reflect the beneficial conversion feature of the Warrants.
        Accordingly, all of the proceeds from this financing have been credited
        to stockholders' equity.

   o    In December 2004, the Company raised net proceeds of $4.9 million in a
        private placement of $5,500,000 in principal amount of its three-year 6%
        Convertible Debentures (the "2004 Debentures") The 2004 Debentures are
        convertible into shares of Common Stock at a conversion rate of $0.25
        per share (subject to adjustment if there are certain capital
        adjustments or similar transactions, such as a stock split or merger).
        In January through March 28, 2005, $4,037,050 of principal of the 2004
        Debentures were converted into approximately 16.1 million shares of
        Common Stock.

        For financial reporting purposes, the Company recorded a discount of
        $2,193,411 to reflect the value of the 2004 Warrants and the 2004
        Placement Warrants issued with the 2004 Debentures and in accordance
        with EITF No. 00-27, and an additional discount on the 2004 Debentures
        of $2,711,554 to reflect the beneficial conversion feature of the 2004
        Debentures. Accordingly, all of the net proceeds from this financing
        have been credited to stockholders' equity. The discounts are being
        amortized to the date of maturity unless converted earlier.

NOTE 8 - INCOME TAXES

        At December 31, 2004, the Company had available $43.8 million of net
        operating loss carry forwards for U.S. income tax purposes which expire
        in the years 2016 through 2024. However, the use of the U.S. net
        operating loss carry forwards will be severely limited under Section 382
        of the Internal Revenue Code pertaining to changes in stock ownership.
        As such, approximately $32 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
        carryforwards.

        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:


                                      F-12
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


                                                             December 31,
                                                             ------------
                                                          2004         2003
                                                          ----         ----

           Net operating loss carry forwards          $4,907,180   $2,290,722
           Stock based compensation                      239,597      751,174
           Others                                        282,986            -
                                                      ----------   ----------
              Total deferred tax assets                5,429,763    3,041,896
              Valuation allowance                     (5,429,763)  (3,041,896)
                                                      ----------   ----------

              Net deferred tax assets                 $       --   $       --
                                                      ==========   ---=======

NOTE 9 - STOCKHOLDERS' EQUITY

        STOCK OPTION PLANS

        In November 2000, the Company adopted the 2000 Equity Incentive Plan
        (the "2000 Incentive Plan"). A total of 5 million shares of Common Stock
        have been reserved for issuance under 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. In December 2002, the number of
        shares of Common Stock reserved for issuance under the 2000 Incentive
        Plan was increased, with the approval of the Company's stockholders,
        from 5,000,000 to 15,000,000.

        The Compensation Committee of the Board of Directors is responsible for
        determining the type of award, when and to who 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 up to 2,000,000 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

        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.

                                      F-13
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        Option activity for 2004 and 2003 is summarized as follows:

<TABLE>
<CAPTION>

                                                                                            Weighted
                                                                                            Average
                                                                        Options             Exercise
                                                        Plans      Non-plan      Total       Price
                                                        -----      --------      -----       -----
<S>                                                 <C>           <C>          <C>              <C>
         Options outstanding, January 1, 2003        5,302,000    5,590,000    10,892,000       .73
             Granted                                   480,000            -       480,000       .09
             Exercised                                 (30,000)           -       (30,000)      .01
             Forfeited                                       -            -             -         -
                                                    ----------   ----------    ----------      ----
         Options outstanding, December 31, 2003      5,752,000    5,590,000    11,342,000       .68

             Granted                                10,275,000      200,000    10,475,000       .28
             Exercised                                (646,250)           -      (646,250)      .18
             Forfeited                                (753,750)  (1,100,000)   (1,853,750)      .76
                                                    ----------   ----------    ----------      ----

         Options outstanding, December 31, 2004     14,627,000    4,690,000    19,317,000      $.46
                                                    ==========   ==========    ==========      ====

         Shares of Common Stock available for
           Future grant under the plan               1,577,750
                                                    ==========
</TABLE>

        The following table summarizes information about stock options
        outstanding at December 31, 2004:

<TABLE>
<CAPTION>

                                      Weighted Average            Options Exercisable
                                                                    Weighted Average
                                   Remaining
                      Number      Contractual    Exercise        Number        Exercise
Ranges of price    Outstanding       Life          Price       Exercisable       Price

<C>                  <C>             <C>           <C>           <C>             <C>
$0.01                   90,000       5.75          $0.01            90,000       $0.01
$0.10 - $0.12          715,000       6.85           0.11           715,000        0.11
$0.20 - $0.30        8,312,500       9.18           0.23         4,196,875        0.22
$0.35 - $0.50        7,195,000       7.67           0.47         5,276,250        0.47
$0.75 - $1.00        2,605,000       2.39           1.00         2,605,000        1.00
$2.00 - $2.50          399,500       5.95           2.30           399,500        2.30
                    ----------       ----          -----        ----------       -----

$0.01-$2.50         19,317,000       7.54          $0.46        13,282,625       $0.53
                    ==========       ====          =====        ==========       =====
</TABLE>

        Weighted-average grant date fair value of options granted under the
        Plans in 2004 and 2003, under the Black-Scholes option pricing model,
        was $0.18 and $0.09 per option, respectively.

                                      F-14
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        WARRANTS

        o       In January 2002, in connection with a Testing and Development
                agreement (see Note 10), the Company issued warrants to purchase
                up to 2,684,000 shares of Common Stock, exercisable through
                December 31, 2004 at a per share exercise price of $0.20. In
                August 2002, the agreement was amended whereby the exercise
                price was reduced to $0.12 per share and the number of shares
                issuable under this warrant due to the anti-dilution provisions
                was increased to 4,561,005. In November 2003, under the
                warrants' cashless exercise provision, 2,000,000 warrants were
                exchanged for 883,721 shares of Common Stock. In April 2004,
                under the warrants' cashless exercise provision 2,561,005
                warrants were exchanged for 1,743,662 shares of Common Stock.

        o       In June 2003, in connection with a private placement of Common
                Stock, the Company issued 2.85 million warrants with an exercise
                price of $0.25. These warrants are exercisable through May 31,
                2005. The exercise period of the warrants is subject to
                reduction upon certain events. On December 31, 2004,
                approximately 2.75 million of these warrants were outstanding.

        o       In October and November 2003, in connection with the sale of the
                2003 Debentures (See Note 7, Convertible Debentures), the
                Company issued 19,395,833 three-year warrants with an exercise
                price of $0.25 per share. The Company also issued to placement
                agents three-year warrants to purchase 3,386,666 shares of
                Common Stock at an exercise price of $0.12 per share. The
                exercise period of the warrants is subject to reduction upon
                certain events. As of December 31, 2004, 2,104,167 of these
                warrants were outstanding. From October through December 2004,
                pursuant to the warrants' cashless exercise provision, 3,444,298
                warrants were exchanged for 1,533,397 shares of Common Stock. Of
                the 3,386,666 warrants given to placement agents, 96,875
                warrants were outstanding at December 31, 2004.

        o       In February 2004, in connection with a private placement, the
                Company issued three-year warrants to purchase up to an
                additional 2,083,333 shares of Common Stock. The warrants are
                exercisable at a per share exercise price of $0.25 provided that
                the exercise period may be reduced under certain conditions. As
                of December 31, 2004, all of these warrants were outstanding.

        o       In December 2004, in connection with the sale of its 2004
                Debentures (See Note 7, Convertible Debentures), the Company
                issued 22,000,000 three-year warrants with an exercise price of
                $0.50 per share. The Company also issued to placement agents
                three-year warrants to purchase 4,400,000 shares of Common
                Stock, 2,200,000 with an exercise price of $0.25 per share and
                2,200,000 with an exercise price of $0.50 per share. As of
                December 31, 2004, all of these warrants were outstanding.

        A summary of the warrants outstanding at December 31, 2004 is as
        follows:

                                      F-15
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


                                     Exercise   Expiration
                        Warrants      Price        Date
                        --------      -----        ----

                          546,875     $0.12      2005-2006
                          400,000     $0.15      2005
                          100,000     $0.17      2006
                          100,000     $0.20      2005
                       14,276,197     $0.25      2005-2008
                           40,000     $0.30      2007
                          660,000     $0.40      2005
                       24,256,000     $0.50      2006-2007
                          145,000     $1.00      2006
                          100,000     $1.25      2006
                          140,000     $1.50      2006
                          645,000     $2.00      2005-2006
                           70,000     $2.50      2006
                     ------------

                       41,479,072
                     ============

        STOCK ISSUANCES

        o       In June 2003, the Company realized net proceeds of approximately
                $595,000 from the private placement of 5,187,000 million shares
                of Common Stock and the issuance of warrants to purchase an
                additional 2,594,750 million shares of Common Stock.

        o       In February 2004, the Company raised $500,000 from the private
                sale to EarthLink Inc., of 2,083,333 shares of Common Stock and
                a $250,000 principal amount three-year 6% convertible debenture.
                The debenture was convertible into shares of the Common Stock at
                a per share conversion rate of $0.12. On March 11, 2004, the
                principal and accrued interests on the convertible debenture
                were converted into 2,087,100 shares of Common Stock.

        AUTHORIZED SHARES

        In June 2004, the Company's stockholders voted to increase the
        authorized shares of Common Stock from 200 million to 300 million
        shares.

NOTE 10 - TESTING AND DEVELOPMENT AGREEMENT

        Effective February 7, 2002, the Company and Consolidated Edison, Inc.
        ("Con Edison"), a stockholder of the Company, entered into a Research
        and

                                      F-16
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        Development Agreement to further develop and test the Company's PLC
        technology. Pursuant to the agreement, Con Edison has advanced $325,000
        to the Company, which will only be repayable if the Small Field Trial
        Phase, as defined, is deemed unsuccessful. The Company will have sole
        rights to any jointly developed intellectual property. Con Edison will
        be entitled to a 2.5% royalty, based on the Company's total net revenues
        for a ninety-nine year period. Royalty payments are only due if the
        Company has positive cash flow and will be payable quarterly, in
        arrears, and does not accrue from one quarter to another during periods
        of negative cash flow.

NOTE 11 - COMMITMENTS

        RESEARCH AND DEVELOPMENT GRANTS

        The Company was originally founded to design and develop advanced smart
        card technologies.

        As of December 31, 1999, the Company received grants totaling $558,195
        from the Office of the Chief Scientist of the Government of Israel (OCS)
        in connection with research and development in the smart cards interface
        technology area.

        The refund of the grant is contingent on future sales of products in the
        smart card interface technology area, however the Company has no
        obligation to refund these grants if the sales are not sufficient. The
        Company has ceased all activities in this area and does not expect any
        future revenues from these products. In September 2004, the Company was
        advised by the OCS that based on the Company's representation that it
        does not anticipate developing or transferring the smart card
        technology, the OCS has elected to close the file concerning the project
        funding.

        EMPLOYMENT AGREEMENTS

        On July 8, 2004, the Board of Directors approved an amended and restated
        employment agreement with its Chief Executive Officer. The agreement is
        for an initial term ending December 31, 2007 and provides for an annual
        base salary of $285,000, subject to annual cost of living adjustments.
        Additionally, the Company granted the officer options under the
        Company's 2000 Equity Incentive Plan to purchase 1,000,000 shares of
        Common Stock, 500,000 of which are immediately exercisable at $0.30 per
        share, and 500,000 of which vest in May 2005 and are exercisable at
        $0.50 per share. After expiration of the initial term, the agreement
        will automatically renew for additional one-year terms, unless
        terminated by the Company upon written notice given not less than 90
        days prior to the expiration of the term. The agreement also contains
        certain provisions for early termination, including in the event of a
        change in control, which may result in a severance payment equal to two
        years of base salary then in effect and the continuation of certain
        benefits.

        On August 11, 2004, the Company entered into an amended and restated
        employment agreement with its Chief Network Architect. The agreement is
        for an initial term of two years and provides for an annual base salary
        of $171,000, subject to review. The Company has granted the officer
        options under the Company's 2000 Equity Incentive Plan to purchase
        750,000 shares of the Company's Common Stock, vesting in equal monthly
        installments over 24 months, of which options for 375,000 shares shall
        have an

                                      F-17
<PAGE>

                              Ambient Corporation
                         (A Development Stage Company)
                 Note to the Consolidated Financial Statements
                           December 31, 2004 and 2003


        exercise price equal to $0.30 and options for 375,000 shares have an
        exercise price of $0.50 per share. After expiration of the initial term,
        the agreement provides for the renewal of the agreement for additional
        one-year terms, unless terminated in accordance with the agreement upon
        60 days prior notice. The agreement also contains certain provisions for
        early termination, which may result in a severance payment equal to one
        year of base salary then in effect.

        OPERATING LEASES

        The Company operates under lease agreements for office space expiring in
        2005 and 2006. Rent expense for 2004 and 2003 was $101,607 and $127,731,
        respectively. Future minimum rentals under the leases as of December 31,
        2004 are as follows:

             Year ended December 31,
             2005                                                $  98,100
             2006                                                   62,400
                                                                 ---------
             Total                                               $ 160,500
                                                                 =========

                                      F-18