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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, 2005

   [ ]    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 is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934. | |

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|

Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X].

The issuer's revenues for the year ended December 31, 2005: $236,903

As of February 23, 2006, there were 167,434,381 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 $31,812,532. Such market value was
calculated using the closing price of such Common Stock as of such date as
quoted on the OTC Bulletin Board.

                       DOCUMENTS INCORPORATED BY REFERENCE

<PAGE>

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 2006 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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                               AMBIENT CORPORATION
                         2005 FORM 10-KSB ANNUAL REPORT


                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS...............................................1

ITEM 2.  DESCRIPTION OF PROPERTY..............................................21

ITEM 3.  LEGAL PROCEEDINGS....................................................21

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................21

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND SMALL
         BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.......................21

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............22

ITEM 7.  FINANCIAL STATEMENTS.................................................27

ITEM 8.  CONTROLS AND PROCEDURES..............................................28

ITEM 8A. OTHER INFORMATION....................................................28

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT....................29

ITEM 10. EXECUTIVE COMPENSATION...............................................29

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         AND RELATED STOCKHOLDER MATTERS......................................29

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................29

ITEM 13. EXHIBITS.............................................................29

ITEM 14. PRINCIPAL ACCOUNTANT FEES & SERVICES.................................29

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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 (herein "Ambient" or "the Company") is solely
focused on the design, development, commercialization, and marketing of
Broadband over Power Lines (BPL) equipment, technologies, and services. BPL
technology enables electric utilities and other owners of electrical
distribution systems, and their system operators to deliver a suite of Internet
Protocol (IP) based services using their existing power distribution
infrastructure.

        The proprietary equipment, services, and technologies that compose the
BPL networks that we are designing, developing, testing, and marketing, will be
referred to throughout this Annual Report as the "BPL Solutions."

        A slower version of BPL 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, the distribution
transformers that 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 this limitation. We are
currently working with leading utilities and technology companies to further
develop, test and demonstrate the equipment, components and technologies that
comprise our BPL Solutions. First generation components and technologies
presently are being evaluated in field trials and pilot programs. Our BPL
Solutions are designed to take advantage of the existing utility distribution
network architecture by overlaying a communications network that is scalable,
adaptable and able to deliver 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 BPL networks that focus on providing
broadband services to utility and other customers and maximizing internal
utility functions (i.e. efficient systems control and monitoring.) We intend to
generate revenues from the design and management of BPL systems and from the
sale, support, and installation of the equipment and technologies comprising our
BPL Solutions.

GENERAL BACKGROUND

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

        Growing consumer and business demand for high-speed communications, as
well as the desire of local, state and federal governments to promote Internet
access, has dramatically changed the communications industry. Based on published
reports, the number of subscribers in the United States with broadband Internet
access is currently estimated at 36 million and by 2008 that figure is expected
to increase to approximately 69.4 million.

        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 intercontinental communications, in which a
single cable carried signals

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from thousands and thousands of individuals. Typically, newer communications
technologies have reached the access network (or the "edge" of the network the
so called "last mile" where the subscribers are located) only after the costs
associated with using the new technologies (at the subscriber level) have been
substantially reduced. Over the last several years, the cost of deploying
different broadband 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. Subscribers who
previously had access to only 28.8 Kbps or up to 56 Kbps over their analog phone
lines for very limited data services, now 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 inherent technical 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 is also
typically expensive to implement and to maintain. Cable speeds can reach peaks
of 1.5 Mbps or higher, but cable technology is also expensive to implement.
Cable is also characterized by individual loss of bandwidth at various peak
times when the number of subscribers reaches critical mass.

        Broadband wireless is another access technology that has recently been
pursued to bridge the last mile problem. Broadband wireless technologies use
over-the-air transmission and consequently they require no new wire-line
infrastructure to connect to the end-user. However, wireless solutions also
suffer from significant drawbacks, including line of sight limitations, security
concerns, weather effects, and the need to access licensed radio frequency
spectrum in some cases.

BENEFITS OF BROADBAND OVER POWER LINES

In addition to delivering end-user bandwidth that is competitive to other
broadband technologies, BPL has the following significant advantages:

   o    UNIQUE UTILITY APPLICATIONS. BPL will provide a wide range of
        cost-effective, utility specific applications and benefits not offered
        by other broadband technologies. Utilities can deploy a dedicated BPL
        network, or leverage one deployed for consumer broadband, to provide
        automated meter reading (AMR), remote outage detection, substation
        monitoring, remote re-connect and disconnect, real-time pricing,
        intelligent demand-side management (IDSM), and direct load control.
        These services can enable utilities to significantly reduce operating
        costs while improving customer service.

   o    UBIQUITY. BPL technology can be deployed worldwide, anywhere there is an
        electrical distribution network. A BPL network can extend broadband to
        thousands of rural consumers in North America, as well as to large
        segments of the world's population, that do not have access to cable or
        DSL.

   o    "LAST 100 YARD". In addition to having nearly 100% consumer penetration
        in the United States, and a physical medium conducive to carrying a
        robust signal, power lines provide a direct connection to each and every
        end user. Unlike cable and DSL, there is no additional wiring required
        to the end user's premises, often called the "last 100 yards". Nor is
        there any wiring within the premises - users access the BPL network
        directly through an appropriate modem plugged into virtually any
        electrical outlet.

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   o    ROBUSTNESS. Atmospheric challenges and line of sight requirements
        ordinarily associated with wireless communication systems are not issues
        with power line based options.

   o    NETWORK FLEXIBILITY. As with all networks, a BPL network can experience
        individual loss of bandwidth at times of peak usage. However, the BPL
        network is designed to permit sequential installations and expansions
        corresponding to actual customer demand. To maintain bandwidth at higher
        subscriber densities, the network can be segmented into new cells and
        the signal re-injected at additional wired or wireless backhaul
        connectivity points.

   o    INITIAL EXPENSE. The initial capital expenditure required to implement a
        BPL network is expected to be less than that for other types of
        broadband services, due in part to the existence of the electric
        distribution system. This can translate to a lower cost basis to
        amortize and enable delivery of a lower cost service to the end-user.

CURRENT STATUS OF BPL

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

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

        We believe that utilities have been reluctant to implement high-speed
BPL over their distribution infrastructure primarily because of two technical
limitations inherent to existing electric distribution grids. The first and less
significant limitation is radio interference. Data signals, which travel in
radio waves, can disrupt, and be disrupted by, radio and mobile communications
transmissions that have been licensed by the FCC to operate at specific
frequencies. Emerging BPL technologies and solutions have addressed and are
increasingly solving these problems.

        The second and more significant limitation is that the distribution
transformers that convert medium voltage to the low voltage that is delivered to
commercial and residential premises may also weaken or interfere with the
transmission of high frequency data signals. Other developers of BPL
technologies have tried to solve this problem by using capacitive couplers to
bypass the distribution transformers. Capacitive coupling has been found to be
of severely limited use on overhead medium voltage power lines. We have
addressed many of these limitations and issues by using inductive couplers to
bypass the distribution transformers. Our patent protected method has proven to
be a breakthrough, allowing efficient exploitation of overhead and underground
lines in a manner that is safe and acceptable to utilities and line crews.

        While some utilities may be reluctant to become Internet service
providers (ISPs) or otherwise directly deliver broadband services to their
customers, we believe that action taken by the Federal Communications Commission
(FCC) has encouraged ISPs and other network service providers (NSPs) to examine
the option of reselling BPL services to end-users in partnership with utilities.
See "Government Regulations"

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AMBIENT'S BPL SOLUTIONS

        Our BPL network is overlaid on the medium-voltage and low-voltage
segments of the power distribution system. High-speed backhaul connections can
be brought to the BPL network at substations (where many utilities have already
installed fiber-optic or other high-speed data links), elsewhere along the
medium voltage circuit, or at the curb for in-building BPL networks. The high
speed data is coupled to, and then travels over, the medium voltage line. At
remote locations, it is transferred to the low-voltage segment, or to a wireless
interface, for the final leg to the end user.

A simplified view f our BPL network is shown is Figure 1.




                                   [PICTURE]




                    FIGURE 1 AMBIENT BPL NETWORK ARCHITECTURE

The entire network is built from a few basic components: COUPLERS that transfer
the communications signal to and from power lines, NODES that transmit the
communications signal to, and receive the communications signal from, the
medium- and low-voltage power lines, and MODEMS that transfer the communications
signal to and from end users.

        COUPLERS transfer the communications signal to and from power lines. Our
        proprietary patented inductive coupler technology successfully overcomes
        the longstanding challenges to the commercialization of BPL networks:
        previous technologies were not able to transfer the high speed signal
        through the medium to low voltage transformer, requiring a new line to
        be run from the distribution transformer to the end user. Our coupling
        technology allows the low voltage transformer to be easily bypassed.
        Earlier BPL implementations required the necessary equipment to be
        installed on de-energized lines, seen as a serious deficiency by the
        utility companies. Our equipment is easily installed on energized
        medium-voltage and low-voltage lines by standard utility crews and in
        multiple dwelling unit installations by electricians. Other high speed
        systems implemented to date have involved equipment, installation, and
        maintenance costs that were not in line with the revenue potentials. Our
        development efforts are directed towards improving these economics, and
        the Ambient system now represents a cost-effective implementation of a
        high-speed data network.

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        In September 2002, the USPTO issued our first patent with a priority
        date of December 1999, primarily covering inductive coupling of data
        signals onto overhead and underground power distribution cables.
        Subsequent patents further developed and protected this key technology.
        Our expanding patent portfolio currently includes six patents on the
        core data coupling technology and its application. Several others patent
        applications are either allowed, pending, or under review by the USPTO,
        and we have applied for corresponding patents in key markets worldwide.

        We anticipate that the alternative choke-based coupling technologies
        described in other patent applications will provide less efficient
        coupling, and cost more to produce. We further anticipate that compared
        to the capacitive couplers used in other BPL networks, the production
        and installation costs of our couplers will be lower. Therefore, we
        believe that our inductive couplers offer a preferred, cost effective,
        and technologically advantageous BPL implementation.

        NODES are electronic devices that transmit the signal to and receive the
        signal from the medium- and low-voltage power lines. Our node is a
        modular low cost device that can be configured for different roles. It
        can accept the communications signal from the backhaul network, repeat
        (regenerate) the signal at any point on a network segment, accept
        additional backhaul or end-user connections with an integrated wireless
        (802.11 a/b/g, 900 MHz, etc) access point, and transfer the signal to
        the low voltage line for delivery to the end user wherever a medium to
        low voltage transformer is located. Our standard node is powered from
        the low voltage line and can have an optional battery to allow operation
        in the event of power outages. The node can be remotely accessed over
        the BPL network to detect system status (such as power and low battery
        conditions) and perform management functions.

        MODEMS transmit the signal to and receive the signal from the
        low-voltage power line at the end-user's location. The modem is
        typically connected to either a router or the user's personal computer.
        In addition to an Ethernet interface, some models of our BPL modems
        contain a standard telephone jack for internet telephony applications.
        Our BPL Solutions use modems from Toyo Network Systems, a leading BPL
        company whose equipment and technologies have been deployed in
        large-scale BPL pilots in Spain and Portugal.

Our BPL Solution offers other functional and competitive advantages:

   o    POTENTIAL FOR INCREASE IN BANDWIDTH. Our BPL networks have successfully
        demonstrated consistent delivery of bandwidth of 3 to 5 Mbps to the
        customer. Future network and modem technologies are expected to allow
        the same frequency bands to carry at least three times more data.

   o    A FLEXIBLE AND EXPANDABLE NETWORK ARCHITECTURE. Our BPL Solutions have a
        versatile system build out and expansion capability that permits
        sequential installations and expansions corresponding to actual customer
        demand. This allows the BPL network owner to initially build just the
        capacity it needs, with future expansions requiring little, if any,
        modification of the existing network.

   o    A COMPLETE BPL NETWORK MANAGEMENT SOLUTION. Recognizing the market
        opportunity in the management of deployed BPL networks, in late 2005 we
        began development of our scalable, reliable Network Management System
        software solution ("NMS"). NMS will support auto-discovery of network
        resources, event logging, alerts, and correlation, data collection and
        reporting. The beta release of NMS is scheduled for the second quarter
        of 2006.

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PILOTS, DEPLOYMENTS, AND OTHER COLLABORATIVE ARRANGEMENTS

        We are is currently conducting field trials and pilot demonstrations
that are evaluating the components and technologies that compose our BPL
Solutions. Since 2002 we have had a Research and Development Agreement with
Consolidated Edison Company of New York Inc. ("Con Edison"), a leading utility
service provider and our principle collaborative partner. Under this agreement
we have sole rights to any jointly developed BPL technology, and we are jointly
operating several BPL pilot, trial, and demonstration networks on Con Edison's
electric distribution system. EarthLink, Inc.("EarthLink"), a leading ISP, has
agreed to participate in and support our trials with Con Edison. We are also
conducting limited field trials and joint cooperative efforts with several other
electric utilities. In addition we are working with leading BPL technology
companies, such as Design of Systems on Silicon ("DS2")and Toyo Network
Systems("TNS"), to further develop, deploy, and commercialize our BPL
technology.

   o    A UTILITY APPLICATIONS BPL PILOT NETWORK IN PEARL RIVER, NEW YORK. In
        early 2004, we installed a BPL network that spans approximately one and
        one half miles at Orange and Rockland Utilities, Inc., a Con Edison
        subsidiary headquartered in Pearl River, New York. This network is used
        to demonstrate substation monitoring to an energy control center
        facility and can be used for other potential core utility applications.

   o    AN INDUSTRIAL APPLICATIONS BPL PILOT NETWORK IN MANHATTAN, NEW YORK
        CITY. In 2004, we installed a BPL network in Con Edison's First Avenue
        steam tunnel in Manhattan in New York City. Con Edison uses the network
        to monitor environmental conditions and the state of the steam main and
        to provide telephony service in the tunnel using Voice over Internet
        Protocol (VoIP) technology. This single BPL network provides a variety
        of services that would have otherwise required multiple technologies and
        wiring systems.

   o    A CONSUMER ORIENTED AND UTILITY APPLICATION BPL PILOT DEMONSTRATION
        NETWORK IN WESTCHESTER COUNTY, NEW YORK. In 2002, Ambient and Con Edison
        deployed a BPL network in the Village of Briarcliff Manor, New York, a
        suburb located north of New York City. This network spans a distance of
        approximately one mile and has achieved speed from 10 to 16 Mbps over
        the medium voltage lines and 3.5 to 7 Mbps delivered to consumers. The
        initial pilot now passes over 700 residences, and currently provides
        consumer broadband Internet access to pilot participants and allows for
        video monitoring of a local intersection.

   o    PILOT PHASE OF AN ADVANCED GRID MANAGEMENT TRIAL. Since 2004, Ambient
        and Con Edison have been conducting phased development trials of utility
        service and management applications, and have successfully completed a
        small field trial phase. On January 27, 2006, Con Edison and Ambient
        entered into an agreement with NYSERDA (the New York State Energy
        Research and Development Authority) (the "NYSERDA Agreement") pursuant
        to which they undertook to conduct medium and low voltage electric
        systems monitoring activities to detect incipient or impending failures
        and related activities, for which Con Edison was awarded a $200,000
        grant from NYSERDA. The NYSERDA Agreement necessitated an amendment to
        the Research and Development Agreement to modify the implementation plan
        contained therein to encompass the objectives of the NYSERDA Agreement.
        In the amendment, Con Edison and Ambient certified the completion of the
        Small Field Trial Phase, agreed that the $325,000 advance owing from
        Ambient to Con Edison was subsumed into the revenue royalty granted to
        Con Edison in the Research and Development Agreement, and agreed to move
        forward to an Advanced Grid Management Pilot Phase that encompassed the
        statement of work contained in the NYSERDA Agreement. Additionally, in
        the amendment, Con Edison committed to remit to Ambient not less than
        $180,000 of the grant monies received from NYSERDA to compensate Ambient
        for its equipment and other costs to be incurred in performing the
        Advanced Grid Management Pilot Phase. NYSERDA is a public benefit
        corporation created by the New York State Legislature to administer the
        State's energy program.

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        The $325,000 advance will be recorded as revenue by Ambient during the
        first quarter of 2006.

   o    A CONSUMER ORIENTED MULTIPLE DWELLING UNIT BPL NETWORK IN MANHATTAN, NEW
        YORK CITY. In March 2005, we installed and activated a pilot Multiple
        Dwelling Unit (MDU) BPL network in a 16 floor, 213 unit condominium
        building located on Manhattan's upper west side. This network initially
        offered consumer high-speed Internet service. In October 2005 we
        deployed EarthLink's next generation Voice over Internet Protocol (VoIP)
        service, trueVoice(TM). Video surveillance, intercom services, cached
        video-on-demand capability, and remote load management and control
        applications are currently in development.

   o    BPL NETWORK PILOT WITH SAN DIEGO GAS & ELECTRIC COMPANY. In July 2005,
        we undertook a pilot demonstration with San Diego Gas & Electric Company
        (SDG&E) to install a BPL-network on the SDG&E grid. This pilot will
        allow SDG&E to evaluate several consumer and utility based applications
        including BPL-enabled meter reading, and demonstrate how our solution
        may help to fulfill the California Advanced Metering Initiative (AMI).
        SDG&E has also licensed our new Network Management System (NMS) to
        monitor and manage the BPL network. This pilot was showcased at the
        United Power Line Council (UPLC) conference in February 2006.

   o    BPL NETWORK PILOT IN THE SOUTHEASTERN UNITED STATES. After successful
        completion of a proof of concept phase, in January 2006 we entered into
        a pilot demonstration agreement with a large investor-owned utility in
        the southeastern United States.

        The pilot, which will service approximately 700 homes, is being designed
        to encompass a comprehensive, end-to-end solution for high-speed
        transmission and reception of data and voice services via electric power
        lines for both broadband carrier and core utility applications/services.
        Included in the pilot is a demonstration of the Company's ability to
        simultaneously support utility applications as well as provide an
        infrastructure for the utility to offer its electricity customers a
        choice of multiple ISPs over the same power lines. The network will be
        monitored and managed by the Company Network Management System, a
        proprietary software management system. The pilot is expected to
        continue for approximately 8 weeks, at the conclusion of which the
        parties will separately evaluate the results of the pilot and the
        feasibility of commencing an initial commercial build out and deployment
        of the Company BPL Solutions to approximately 10,000 homes on the
        utility's electrical power distribution system (the "Phase 1
        Deployment").

        The pilot demonstration agreement contemplates that the Company will
        enter into negotiations with the utility regarding an agreement
        respecting the Phase 1 Deployment with the goal of completing this
        agreement on or about the time of the expected completion of the pilot.
        No assurance can be given, however, that the company will in fact agree
        with the utility on the feasibility of proceeding to Phase I Deployment
        or consummate an agreement respecting Phase I Deployment on mutually
        acceptable terms.

        In January and February of 2006, revenue from the pilot program amounted
        to approximately $400,000.

        No assurance can be given that we will agree with the utility on the
        feasibility of proceeding to Phase I Deployment or consummate an
        agreement respecting Phase I Deployment on mutually acceptable terms.

   o    LICENSING AGREEMENT WITH DESIGN OF SYSTEMS ON SILICON. In 2001, we
        entered into an initial licensing agreement with Design of Systems on
        Silicon S.A. (DS2), the world leader in the development of BPL chipset
        products, to incorporate DS2's chipsets and software into our BPL

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        Solution. In January 2004, we entered into a new agreement that
        strengthens and builds upon this relationship. We are now working with
        DS2 to further develop its technology and are integrating DS2's
        next-generation 200 Mbps chipsets, which feature 10 to 40 times faster
        performance than other broadband technologies, integrated support for
        Quality and Class of Service (QoS and CoS) for latency-sensitive and
        bandwidth-intensive services such as delivery of multiple streams of
        video content (HDTV and SDTV), and support for new interoperability
        standards.

   o    ALLIANCE AND DISTRIBUTION AGREEMENT WITH TOYO NETWORK SYSTEMS CO., LTD.:
        In February 2005, we entered into an alliance and distribution agreement
        with Toyo Network Systems ("TNS") of Japan formerly known as Toyo
        Communication Equipment Co. Ltd. TNS is a subsidiary of NEC. This
        agreement is intended to lead to our collaboration with TNS in the
        commercialization of our respective BPL technologies. TNS has been a
        licensee of DS2 technologies since 2002, and its equipment and
        technologies have been deployed in large-scale BPL pilots in Spain and
        Portugal.

        OUR STRATEGY

        Our goal is to become a leading designer, developer and systems
integrator for commercially deployed BPL networks that deliver broadband
services to electric utilities, commercial, governmental, and residential
customers. We intend to generate revenues from the design of these BPL networks,
as well as the sales, installation, and support of the necessary equipment and
technologies and licensing of our Network Management System. Our efforts are
focused on the following:

   o    EXPAND THE RANGE OF UTILITY AND CONSUMER APPLICATIONS. The applications
        create the need for the network, and our goal is to drive the
        development of new applications to create this need. One example is our
        provision of EarthLink's VoIP telephone service over a BPL network
        installed in a New York City multiple dwelling unit ("MDU") in 2005.
        This high-speed network now enables streaming video, alarm monitoring
        and other consumer services. Utility and industrial applications also
        advanced during 2005 include video surveillance sub-station monitoring
        and communications (VoIP).Future utility applications such as BPL
        enabled Automatic Meter Reading (AMR), remote outage detection, and
        Intelligent Demand Side Management (IDSM) may help to make BPL
        deployment cost-effective even in the absence of consumer broadband
        service. We intend to continue to work with other technology companies
        to expand the range of applications that will economically justify BPL
        deployments.

   o    EXPAND OUR STRATEGIC RELATIONSHIPS AS DESCRIBED IN DETAIL UNDER "PILOTS,
        DEPLOYMENTS AND OTHER COLLABORATIVE ARRANGEMENTS." We are currently
        working with several utilities, as well as other technology companies,
        to further develop our BPL Solutions. We will continue to strengthen
        these existing relationships and to seek out new strategic and
        commercial relationships with utilities and other technology companies.

   o    PURSUE OUR ROLE AS A LEADING SYSTEMS INTEGRATOR. During 2005, we further
        developed our role as a leading BPL systems designer, integrator, and
        coordinator. These activities position us to generate revenue from
        systems design in addition to the sale and installation of BPL
        components and technologies.

   o    DEVELOP, DEPLOY, AND LICENSE OUR NETWORK MANAGEMENT SOLUTION.
        Recognizing the market opportunity in the management of deployed BPL
        networks, in late 2005 we began development of our proprietary Network
        Management System software ("NMS") our scalable, reliable BPL network
        management software solution. NMS will support auto-discovery of network
        resources, utility applications, diagnostic tools, event logging and

                                       8
<PAGE>

        correlation alerts, data collection and reporting. The beta release of
        NMS is scheduled for the second quarter of 2006.

   o    DIVERSIFY OUR MARKET OPPORTUNITIES. Although we have identified several
        specific markets and solutions, in 2005 we continued to identify and
        address new opportunities. One example is our MDU installation discussed
        above for which our BPL Solutions have proven to be well suited. Our BPL
        Solutions can utilize a building's existing infrastructure to provide
        high-speed Internet access to commercial, residential, hospitality, and
        other locations. Experience with this installation will enable us to
        further develop and market our BPL Solutions to MDUs. In 2006 we will
        continue our efforts to identify and develop other diversified market
        opportunities.

   o    EXPAND AND PROTECT OUR INTELLECTUAL PROPERTY. We believe that our future
        success depends on the continued development and protection of our
        proprietary technologies. In addition to enabling us to take a leading
        position in the BPL marketplace, a large intellectual property base
        opens up revenue generating licensing possibilities. Our expanding
        patent portfolio increased in size in 2005 and currently includes six
        patents on the core data coupling technology and its application.
        Several others patent applications are either allowed, pending, or under
        review by the USPTO, and we have applied for corresponding patents in
        key markets worldwide. We will continue to expand our patent portfolio
        and, when necessary, aggressively protect our proprietary technologies.

   o    LEAD INDUSTRY STANDARDIZATION EFFORTS. We believe that open standards
        and interoperability will benefit consumers, hasten the deployment of
        BPL technology, and lead to greater success for both the company and the
        industry as a whole. We are a founding member of the Universal Powerline
        Association (UPA), an association of industry players created to promote
        BPL global interoperability standards. John J. Joyce, our President and
        Chief Executive Officer also serves as Vice Chairman of the UPA Board of
        Directors. We are also a member of the United Power Line Council (UPLC),
        an alliance of electric utilities and technology companies working
        together to drive BPL development. Mr. Joyce serves on the UPLC Board
        and Ram Rao, our Chief Network Architect, is Co-chair of the UPLC
        Technical Action Committee. Additionally, our key technical personnel
        currently chair two working groups of the Institute of Electrical and
        Electronics Engineers (IEEE), and participate with one another, to drive
        the development of BPL safety, electromagnetic compatibility and system
        interoperability standards. We intend to continue our active role in the
        establishment of national and international BPL standards and ensure
        that our BPL Solutions conform to these evolving standards.

        No assurance can be provided that we will be successful in our strategic
        efforts in marketing our BPL Solutions (including all of the integral
        components/technologies to be created by third parties) in further
        developing and designing these technologies to meet market demands, or
        that our BPL Solutions can or will be integrated into commercially
        deployed BPL networks. Additionally, we face capital constraints. The
        additional $1.3 million that we raised from the placement of secured
        debt in January 2006 will enable us to continue to initiate and complete
        new and existing pilot programs for the short term. However, our
        existing cash resources are not sufficient to support the commercial
        introduction, production, and delivery of our BPL Solutions as
        contemplated in our business plan and we will need to raise additional
        capital for that purpose on an a immediate basis. In addition, this
        secured debt matures in June 2006. Accordingly our business and strategy
        are subject to many risk factors. See "Risk Factors".


                                       9
<PAGE>

PRODUCTION AND SUPPLIES

        During the past year we have transitioned both our source of supply and
manufacturing processes from lab based to pilot production. We have expanded our
use of local contract manufacturing capabilities and suppliers in positioning
the products and processes to scale with the business. In 2006, we intend to
continue the transition toward a full out-sourced model extending from
electronic manufacturing and testing to include systems and fulfillment
operations.

        Through our pilot efforts we have demonstrated the effectiveness of both
the materials specifications along with manufacturing processes in support of
our propriety couplers. We have cultivated "strategic" relationships with key
suppliers with both the processing expertise and capacity to support our
forecasted needs.

        Our outlook is to continue leveraging technology and distribution
alliances along with value-add manufacturing services to ensure we are
positioned to support the commercial role out of our products.

MARKETING PLAN

        To date our efforts have been devoted primarily to the design,
development, testing and certification of the technologies and components
comprising our BPL Solutions as well as raising the capital needed to maintain
our business and begin to develop the infrastructure to support wider BPL
adoption.

        We anticipate that we will be able to generate revenue principally from,
but not limited to, one or more of the following: BPL network design,
engineering and installation: sale and support of the underlying components;
licensing and support of our NMS; and potential license and related maintenance
fees collected from utilities, technology companies or network operators. We
have identified initial opportunities to focus our business development efforts
with several large Investor Owned Utilities (IOUs) and Multi-Dwelling Unit
(MDUs) landlords and service providers. We will be able to refine our strategy
and the potential and likely sources of revenue as the state regulatory
environments and standards development processes progress and potential
customers refine their respective business models with the introduction of next
generation systems.

        While we have recorded revenues during 2005 in connection with the sale
and license of certain equipment being used in our on-going pilots, we presently
have no agreement with any utility, ISP or reseller or other party respecting
any significant revenue generating arrangement for our BPL Solutions 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 and deployment by one or more leading utilities or
other potential customers of our BPL Solutions into a commercially deployed BPL
network.

        Our principal target customers are electric utilities in North America
and elsewhere that are interested in developing the potential for BPL
communications in their respective markets. However, we are also exploring the
MDU market, including residential landlords, hotels and other commercial
businesses in an effort to expand our addressable market and diversify our
potential revenue base. We also continue to strive to develop relations with
industry and other technology companies to expand the awareness and reach of the
BPL Solutions as enablers of new applications and a viable component of hybrid
communications networks.

                                       10
<PAGE>

COMPETING COMPANIES AND TECHNOLOGIES

        We face significant competition from other providers of power line based
systems, as well as from telephone, wireless, and cable companies.

        BPL PROVIDERS. Several other companies, including some with greater
        resources than us, provide partial or full power line based high-speed
        solutions. We believe that our technology provides a distinct advantage,
        and we believe that our strategy of collaboration with communications,
        technology, and utilities partners will enable us to provide the most
        adaptable and viable BPL solution. Additionally, our proprietary and
        patented technologies may enable us to generate additional revenue from
        these competitors through licensing agreements.

        INCUMBENT TELEPHONE SERVICE PROVIDERS. Many local and regional telephone
        companies have provided several types of DSL technology for over 15
        years and some are now deploying fiber optic service. Many of these
        providers, such as the regional Bell operating companies, have greater
        resources than us and have well established brand awareness in their
        service areas. We expect that our BPL Solutions will provide to
        utilities and electricity distribution operators a host of
        cost-effective, utility specific applications and benefits not offered
        by these competitors. Our alliances with existing and prospective
        utility partners will equalize the resource imbalance and compensate for
        the competitors' brand awareness.

        WIRELESS AND SATELLITE SERVICE PROVIDERS. Several fixed-wireless and
        satellite service providers are currently offering, or planning to
        offer, competing communications services, particularly in underserved
        areas. However, services based on these technologies historically offer
        significantly lower communication speeds than does BPL.

        SUBSCRIPTION TELEVISION HARDWIRE CABLE. Traditional cable television
        operators have offered high speed access for close to ten years, and are
        now starting to bundle services such as VoIP telephony, to enhance their
        offerings. As with some telephone companies, cable television operators
        also have greater resources than us and well established brand
        awareness. Although the technology is mature, older cable systems
        require significant capital expenditures to provide these services. We
        expect our BPL Solutions to compete by offering competitive speeds,
        similar bundled services, and by again leveraging our utility partners'
        resources and brand recognition.

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 our BPL Solutions 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 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 December 31, 2005, the USPTO issued us six patents with respect to the
technology employed in our BPL Solutions.

        Our policy is to require our employees, consultants, other advisors, as
well as utility and design collaborators, to execute confidentiality and
assignment of invention agreements upon the commencement of employment,
consulting or advisory relationships. These agreements generally provide that
all confidential information developed or made known to a party by us during the
course of the party's association with the Company is to be kept confidential
and not to be disclosed to third parties except in

                                       11
<PAGE>

specific circumstances. In the case of employees and consultants, the agreements
also provide that all inventions conceived by the individual in the course of
their employment or consulting relationship will be our exclusive property.

EMPLOYEES

        We currently employ 32 employees, all of whom 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 as well as our 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, 2005, we have expended
approximately $12.1 million on research and development. During our 2005 and
2004 fiscal years, we expended approximately $2.6 million and $2.5 million,
respectively, on the research and development of our BPL Solutions.

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 BPL Solutions or to require modifications thereto. In addition,
regulations in the telecommunications field may also adversely affect the
provision of our BPL Solutions. 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 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 Amateur Radio Relay League (ARRL), American
Petroleum Institute, Cohen, Dippell and Everist, P.C. and Aeronautical Radio
Incorporation (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 BPL Solutions, nor
is the likelihood of the adoption of changes by the FCC to these new rules, or
the timing thereof, predictable at this time.

                                       12
<PAGE>

        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 pending 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.

ADVISORY BOARD

        Our advisory board provides us with the advice of experienced,
knowledgeable business people and professionals on an as needed basis in areas
in which we may require assistance. Our 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 Energy Policy Act of 1992, the first
electricity re-structuring legislation adopted in the United States.

        In February 2004, a representative of EarthLink joined our 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 100 F
Street, N.E., 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

        OUR NEED FOR ADDITIONAL FINANCING IS ACUTE AND FAILURE TO OBTAIN
ADEQUATE FINANCING COULD LEAD TO THE FINANCIAL FAILURE OF OUR COMPANY.

        As of February 24, 2006, we had cash balances of approximately $1
million. We will require

                                       13
<PAGE>

additional funds to repay a $1.62 million secured loan that matures in June
2006, to continue to meet our other liquidity needs throughout 2006 and to
satisfy our current business plan. We will need to raise additional funds on an
ongoing basis to pay existing current liabilities as they come due, as well as
to meet our operating requirements, prior to the receipt of revenues from the
commercialization of our BPL Solutions. At the present time, we have no
commitments for any additional financing, and there can be no assurance that
additional capital will be available to us on commercially acceptable terms or
at all. We may have difficulty obtaining additional funds as and when needed,
and we may have to accept terms that would adversely affect our stockholders.
Additional equity financings are likely to 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 or contain
rights, preferences and privileges senior to our Common Stock.

        Even after we begin to recognize revenue we also may be required to seek
additional financing in the future to respond to increased expenses or
shortfalls in anticipated revenues, accelerate product development and
deployment, respond to competitive pressures, develop new or enhanced products,
or take advantage of unanticipated acquisition opportunities. We cannot be
certain we will be able to find such additional financing on commercially
reasonable terms, or at all.

        If we are unable to obtain additional financing when needed, we could be
required to modify our business plan in accordance with the extent of available
financing. We also may not be able to accelerate Fthe development and deployment
of our products, respond to competitive pressures, develop new or enhanced
products or take advantage of unanticipated acquisition opportunities. Finally,
we may be required to sell out assets or shut down the company and cease
operations.

        Our independent registered public accountants have included an
explanatory paragraph in their report accompanying our audited consolidated
financial statements for the years ended December 31, 2005 and 2004 relating to
the uncertainty of our ability to continue as a going concern. This
qualification may make it more difficult for us to raise additional capital when
needed. Our auditors believe that there are conditions that raise substantial
doubt about our ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to the
recoverability of reported assets or liabilities should we be unable to continue
as a going concern.

        WE HAVE A LIMITED NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AVAILABLE
FOR ISSUANCE AND, IF OUR STOCKHOLDERS DO NOT APPROVE AN INCREASE IN THE
AUTHORIZED NUMBER OF SHARES OF OUR COMMON STOCK, OUR ABILITY TO RAISE ADDITIONAL
CAPITAL WILL BE SEVERELY LIMITED.

        We currently have a limited number of shares of Common Stock available
for issuance in future financings. Prior to a future financing, we may need to
obtain stockholder approval to increase the authorized number of such shares so
as to have sufficient availability for an equity or convertible security
offering of the magnitude necessary to yield proceeds to the Company sufficient
to meet liquidity needs and to commence commercialization efforts contemplated
by our business plan.

        As of February 24, 2006, there were 300,000,000 shares of Common Stock
authorized for issuance under our Certificate of Incorporation, of which
167,434,381 shares of Common Stock were outstanding and an additional 75,040,314
shares of Common Stock were reserved for possible future issuance upon the
exercise or conversion of outstanding options, warrants, and convertible
debentures. Thus, we have only 57,525,305 shares of Common Stock available for
issuance. We intend to propose at our 2006 annual meeting of stockholders that
our stockholders approve an increase in our authorized number of shares of
Common Stock. If our stockholders do not approve the increase in the number of
authorized shares of Common Stock, our ability to raise additional capital
through the issuance of Common Stock or securities convertible into or
exercisable for our Common Stock will be severely limited.

                                       14
<PAGE>

        A DEFAULT BY US UNDER OUR BRIDGE LOAN WOULD ENABLE THE LENDER TO TAKE
CONTROL OF ALL OF OUR ASSETS.

        In January 2006, we entered into a bridge loan agreement pursuant to
which an institutional investor loaned us $1,500,000 (net principal amount of
$1,335,000 after transactions costs) and we issued to the investor a secured
promissory note in the aggregate principal amount of $1,620,000, which reflects
an original issue discount on the principal amount of the loan of 15.5%. The
note will mature on the date that is the earlier of (i) the date on which we
consummate a subsequent financing that generates, on a cumulative basis together
with any other interim financings, gross proceeds to us of at least $2 million
or (ii) June 24, 2006. To secure our obligations under the bridge loan
agreement, we granted the investor a security interest in all of our assets
(including, without limitation, our intellectual property) The security interest
terminates upon payment or satisfaction of all of our obligations under the
bridge loan agreement. A default by us under the bridge loan agreement would
enable the investor to foreclose on all of our assets. The investor has no
operating experience in our line of business and any foreclosure could force us
to substantially curtail or cease our operations.

        WE HAVE A HISTORY OF LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE
THROUGH THE FORESEEABLE FUTURE.

        We are a late stage development stage company engaged in the design,
development and marketing of our BPL Solutions. We incurred net losses of
$11,226,555 and $7,514,113 for the years ended December 31, 2005 and 2004,
respectively. From inception through December 31, 2005, we reported an
accumulated deficit of approximately $86,206,000. We have been funding our
operations primarily through the sale of our securities and expect to continue
doing so for the foreseeable future. We expect to continue to incur net losses
for the foreseeable future as we continue to further develop and test our BPL
Solutions and intensify our commercialization efforts. Our ability to generate
and sustain significant additional revenues or achieve profitability will depend
upon the factors discussed elsewhere in this "Risk Factors" section. We cannot
assure you that we will achieve or sustain profitability or that our operating
losses will not increase in the future. If we do achieve profitability, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis in the future.

        WE HAVE A LIMITED OPERATING HISTORY.

        We were incorporated in June 1996 and have been engaged in the BPL field
since 1999. 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.

        OUR COMMERCIAL SUCCESS IS CONTINGENT UPON OUR BPL SOLUTIONS BEING
COMMERCIALLY DEPLOYED OVER THE UTILITIES DISTRIBUTION NETWORK OR IN ALTERNATIVE
MARKETS.

        Our activities to date have primarily focused on the design,
development, testing and marketing of our BPL Solutions for use on low and
medium voltage distribution systems. We have established contractual
relationships with leading technology companies and electric utilities for the
design, development, evaluation and testing of our BPL Solutions. No assurance
can be given that these arrangements will achieve their intended results or that
they will result in our BPL Solutions being commercially deployed over an
electrical power distribution network. We are in the process of integrating our
BPL Solutions with various other complementary and necessary technologies. While
our couplers and the other principal equipment and components comprising our BPL
Solutions have been successfully tested in field trials and are being used in
on-going pilots, no assurance can be given that these components or technologies
will be successfully developed or technologically feasible for deployment on a
commercial scale over an electric utility distribution network. In addition, the
costs of developing and

                                       15
<PAGE>

commercializing our BPL Solutions may far outweigh the revenues, if any, that we
may generate from such commercialization.

        To date, we have provided our BPL Solutions primarily to electric
utilities and ISPs on a pilot basis, and have earned limited revenues from these
efforts. Our marketing success is dependent, initially, on the deployment by
electric utilities of a communications network over their powerline distribution
system utilizing our BPL Solutions or on our ability to develop other market
applications for our technologies. If a significant number of electric utilities
ultimately elect not to commercially deploy a power line communications system
not to utilize our BPL Solutions 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, our BPL Solutions 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 BPL Solutions 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.

        Electric utilities are ordinarily 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 signals over power lines, necessitating governmental permission. These
regulations, as well as regulations in the telecommunications field, may
inhibit, delay or preclude the commercial deployment of BPL networks or the
utilization of our BPL Solutions.

        In October 2004, the Federal Communications Commission (the "FCC")
adopted rules and regulations that, in our view, are favorable to the
development of BPL. These regulations are being challenged. No assurance can be
given that these regulations will not be modified by FCC in a manner adverse to
our business or become subject to legal challenges. See "Governmental
Regulations."

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

        Subject to raising additional funds, 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 our BPL Solutions. The pace of any
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 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

                                       16
<PAGE>

   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 SIGNIFICANT REVENUE GENERATING
ACTIVITIES.

        While certain of our on-going pilot programs have resulted in limited
revenues to us, we presently have no agreement or understanding with any
electric utility or any other person relating to commercial exploitation of our
BPL Solutions and no assurance can be provided that we will be successful in
entering into 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. No assurance can be provided that we will be able to retain
existing personnel or attract and retain additional highly qualified employees
in the future.

                       RISKS CONCERNING OUR BPL SOLUTIONS

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

        The principal components comprising our BPL Solutions include our
proprietary and patent protected couplers, which we designed and developed
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 any commercialization, , 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.

        WE FACE COMPETITION FROM SEVERAL SOURCES.

        As we are proposing an alternative broadband option, the competition for
our BPL Solutions includes other non-power line based broadband providers, and
to a lesser extent, other providers of BPL systems. Some of the providers of
broadband access, including other providers of Powerline communications systems,
have substantially greater financial, research and development, technological
and marketing 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

                                       17
<PAGE>

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 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 BPL
Solutions non-competitive or obsolete.

        In addition, our BPL Solutions 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 United States Patent and Trademark Office
("USPTO"), and with the appropriate agencies in foreign countries and other
jurisdictions, patent applications with respect to the different BPL Solutions
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 in other jurisdictions. However, our BPL Solutions include several
components and technologies for which we may not have intellectual property
rights. Accordingly, we periodically undertake products and technology clearance
review of the technologies comprising our BPL Solutions.

        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 our
BPL Solutions 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
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.

        FAILURE TO IMPLEMENT AND /OR MAINTAIN EFFECTIVE INTERNAL CONTROLS IN
ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS OPERATIONS.

        Beginning in fiscal 2007, we must perform an annual evaluation and
testing of our internal controls over financial reporting to allow management
and our independent registered public accounting firm to report on the
effectiveness of those internal controls, as required by Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules adopted by the SEC. Our compliance with
Section 404 will require that we incur substantial accounting expenses and
expend significant management efforts. If we are not able to

                                       18
<PAGE>

comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies a deficiency in our
internal controls over financial reporting that is deemed to be a material
weakness, corrective actions will be required, the market price of our Common
Stock could decline and we could be subject to sanctions or investigations by
the SEC or other regulatory authorities, all of which would require the
expenditure of additional financial and management resources.

                     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 February 24, 2006, Consolidated Edison, Inc. ("CEI"), an affiliate
of the Consolidated Edison Company of New York, Inc., our leading utility
development collaborator, beneficially owned approximately 20.9% of the
outstanding shares of our Common Stock (prior to the exercise of outstanding
warrants and options). In addition, CEI 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 our issued and outstanding equity capital. To date CEI
has not exercised this right. When and if this right is exercised, CEI may be
able to exercise considerable influence over matters requiring board approval.
In addition, as a major stockholder, CEI currently is able to exercise
significant influence over matters requiring approval of 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 facts 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.

        As of February 24, 2006, we are authorized to issue up to 300,000,000
shares of Common Stock, of which 167,434,381 shares are outstanding. As of
February 24, 2006, an additional 75,040,314 shares of Common Stock are reserved
for issuance upon conversion of outstanding convertible debentures, the exercise
of warrants issued to the holders of these convertible debentures or exercise of
outstanding options or warrants to purchase Common Stock. Many of the above
options, warrants and convertible securities contain provisions that require the
issuance of increased numbers of shares of common stock upon exercise or
conversion in the event of stock splits, redemptions, mergers or other
transactions. The occurrence of any such event or the exercise or conversion of
any of the options, warrants or convertible securities described above would
dilute the interest in our company represented by each share of Common Stock and
may adversely affect the prevailing market price of our Common Stock.

        Additionally, our board of directors has the authority, without further
action or vote of our stockholders, to issue authorized shares of our Common
Stock that are not reserved for issuance. Such stock issuances may be made at a
price that reflects a discount from the then-current trading price of our Common
Stock. In addition, in order to raise the amount of capital that we need at the
current market price of out Common stock, we may need to issue a significant
number of shares of Common Stock or securities that are convertible into or
exercisable for a significant number of shares of our Common Stock.

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

                                       19
<PAGE>

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

        Provisions of Delaware law, as well as the presence of CEI, 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.

        OUR STOCK PRICE MAY FLUCTUATE.

        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    Quarterly variations in operating results;
   o    The progress or perceived progress of our research, development and
        marketing 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.

        VOLATILITY OF TRADING MARKET.

        The market price for our Common Stock is highly volatile. The factors
enumerated above, as well as various factors affecting the
telecommunications/broadband industry generally, and price and volume volatility
unrelated to operating performance affecting small and emerging growth companies
generally, may have a significant impact on the market price of our Common
Stock.

        PENNY STOCK REGULATIONS ARE APPLICABLE TO 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.

                                       20
<PAGE>

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 comprised of 14,477 square feet leased at a monthly rental of
$15,395 with a scheduled expiration date of February 28, 2008. 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.

        In addition, we also rent office space in Briarcliff, New York at a
monthly rental of $800 with a scheduled expiration date of July 5, 2006. We use
this office space primarily in connection with the on-going pilots and testing
being conducted at Con Edison's premises.

ITEM 3. LEGAL PROCEEDINGS

        We are not involved in any pending legal proceedings that 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, 2005.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

        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 February 23, 2006,
was $0.19 per share.

                                                        LOW       HIGH
                                                       ------    ------
          Year Ended December 31, 2005
            First Quarter                              $0.25     $0.45
            Second Quarter                             $0.185    $0.28
            Third Quarter                              $0.18     $0.279
            Fourth Quarter                             $0.092    $0.188

          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

                                       21
<PAGE>

        As of February 24, 2006, there were 158 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.

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

        We are primarily focused on the design, development, commercialization,
and marketing of BPL equipment, technologies, and services. BPL technology
enables power line infrastructure landlords (electric utilities & property
owners) to use their existing medium voltage and low voltage power distribution
infrastructure for the delivery of high-speed data services including consumer
Internet access and utility, governmental, and industrial applications.

        During our fiscal year 2005, we increased our staffing level, primarily
in product development, manufacturing, testing, and marketing. We increased the
number of and expanded the scope of the field trials and pilots that are
evaluating the components and technologies that compose our BPL Solutions. We
strengthened our existing partnerships and strategic relationships with
utilities and other technology companies to develop, deploy, and commercialize
our BPL technology and entered into new ones. Our patent portfolio increased in
size in 2005 to include six patents on the core data coupling technology and its
application, with several other patent applications allowed, pending, or under
review. During 2005, our technical personnel led key industry committees working
on BPL standardization and safety. We identified and address new marketing
opportunities and started development of a software solution for the management
of BPL networks.

        Subject to raising additional funds to meet our obligations as they come
due and realize our business plan, our objective over the next twelve months is
to continue our development, testing, commercialization, and marketing efforts.
We plan to continue to operate field trials and pilots of our BPL Solutions and
to actively seek new ones. Aided by our partnerships and strategic relationships
we plan to continue development of the next generation of BPL equipment and
technology. We plan to continue to expand our patent portfolio and to continue
to drive industry standardization efforts. We will continue to seek new
alliances and to identify and address new marketing opportunities. We shall
pursue a role as a leading BPL systems designer, integrator, and coordinator,
and continue to develop our network management solution, to position the company
to generate revenue from all phases of the BPL product life cycle.

                                       22
<PAGE>

        We are a late-stage development stage company that has generated
significant losses since our inception, and we expect to continue to incur
substantial losses for the foreseeable future. As of December 31, 2005, we had
an accumulated deficit of approximately $86.2 million (which includes
approximately $40.7 million in stock based charges and other non-cash charges).

MANAGEMENT DISCUSSION AND ANALYSIS

        REVENUE. Revenue for the year ended December 31, 2005 was $236,903 and
was attributable to the sales of equipment, software and related network design
and installation services from new pilots that were launched in 2005. No
revenues were recorded for the year ended December 31, 2004.

        If and when our BPL Solutions are commercially deployed in a BPL system,
we anticipate that we will be able to generate revenue principally from one or
more of the following: BPL network design and installation, sale and support of
our BPL components and our Network Management System 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.

        COST OF SALES. Costs of sales for year ended December 31, 2005 were
$501,707. No costs of sales were recorded for the year ended December 31, 2004.
Cost of sales include all costs related to manufacturing and selling products
and services and consist primarily of direct material costs and salaries and
related expenses for personnel. Cost of sales also includes expenses related to
the write down of inventory to the lower of cost or market. For the year ended
December 31, 2005 cost of sales included an inventory write down of $151,278
related to lower of cost or market adjustments and an inventory reserve of
$146,314 for excess, obsolete, and surplus inventory resulting from the
transition from first to second generation technology.

        GROSS MARGIN. Gross margin for the year ended December 31, 2005 was a
loss of $264,804. There was no gross margin recorded during 2004. Gross margin
for the year was negative as a result of inventory write-downs of $151,278 for
lower of cost of market adjustments and an inventory reserve of $146,413 in
excess, obsolete and surplus inventory. Because we are still a development stage
company, the allocation of fixed manufacturing costs to cost of goods sold may
continue to result in negative gross margins until we reach commercial
viability.

        RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of expenses incurred primarily in designing, developing and field
testing our BPL Solutions. 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, 2005 and 2004
were approximately $2.6 million and $2.5 million, respectively. The increase in
research and development expenses in 2005 compared to 2004 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 insurances, professional
fees for legal, accounting and other services. General and administrative
expenses for the years ended December 31, 2005 and 2004 were approximately $3.6
million and $2.4 million, respectively. The increase in general and
administrative expenses during 2005 is primarily attributable to to an increase
in personnel and related costs. 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 BPL Solutions.

                                       23
<PAGE>

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

        OTHER OPERATING EXPENSES. A portion of our operating expenses is
attributable to non-cash charges associated with the compensation of consultants
through the issuance of stock options and stock grants. Stock-based compensation
is non-cash and will therefore have no impact on our cash flows or liquidity.
For the years ended December 31, 2005 and 2004 we incurred non-cash stock-based
compensation expense of $39,477 and $80,464 respectively

        NON-CASH EXPENSES. For the year ended December 31, 2005, we incurred
non-cash expenses of approximately $2.31 million and $2.38 million related to
the amortization of the beneficial conversion feature of convertible debt and
the amortization of deferred financing costs as a result of the conversion of
approximately 79% of our convertible 2004 Debentures during fiscal 2005.

        For the year ended December 31, 2004, we incurred non-cash expenses of
approximately $20,000 and $2.53 million related to the amortization of the
beneficial conversion feature of convertible debt and the amortization of
deferred financing costs as a result of the conversion of our convertible 2003
Debentures during fiscal 2004.

        CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

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

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

        REVENUE RECOGNITION. We recognize revenue from product sales upon
shipment to customers and when all requirements related to the shipments have
occurred. We recognized revenue from design and installation services at the
time services are performed. Revenue from software licensing is deferred and
recognized over the life of the license agreement.

        INVENTORY VALUATION. Inventory is valued at the lower of cost or market
determined on the first-in, first-out (FIFO) basis. Market, with respect to
direct materials, is replacement cost and is net realizable value for
work-in-process and finished goods. The value of the inventory is adjusted for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. Further, as the Company is still in
late stage development, fixed manufacturing costs may produce negative gross
margins. As such, inventories are reviewed for lower of cost or market
valuation.

        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

                                       24
<PAGE>

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 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, 2005, our deferred income tax assets consisted primarily of net
operating loss carry forwards and stock based compensation charges which have
been fully offset with a valuation allowance due to the uncertainty that a tax
benefit will be realized from the assets in the future.

        LIQUIDITY AND CAPITAL RESOURCES

        Cash balances totaled approximately $1 million on February 24, 2006,
$393.513 at December 31, 2005 and $6,954,512 at December 31, 2004.

        Net cash used in operating activities during the year ended December 31,
2005 was approximately $6.1 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 BPL Solutions, we have inventory of $629,035 as of December 31,
2005.

        From inception through December 31, 2005, we have funded our operations
primarily through the issuance of our securities. Our recent financings are
discussed below.

        In February 2004, EarthLink invested $500,000 in Ambient though the
purchase of (i) a three-year

                                       25
<PAGE>

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.

        In January 2006, we entered into a bridge loan agreement pursuant to
which an institutional investor loaned us $1,500,000 (less $165,000 in offering
related fees and expenses). Pursuant to the bridge loan agreement, we issued to
the investor a secured promissory note in the aggregate principal amount of
$1,620,000, which reflects an original issue discount on the principal amount of
the loan of 15.5%. The note is scheduled to mature on the date that is the
earlier of (i) the date on which we consummates a subsequent financing that
generates, on a cumulative basis together with any other interim financings,
gross proceeds to us of at least $2 million or (ii) June 24, 2006. In connection
with the loan, we issued to the investor a five-year warrant to purchase
3,000,000 shares of our Common Stock at an exercise price of $0.15 per share,
subject to certain specified adjustments. This loan is secured by a lien on all
of our assets.

        We will require additional funds to repay the bridge loan upon maturity
and continue to meet our other liquidity and operating needs to satisfy our
current business plan. Management is aggressively seeking to raise capital that
will provide the funds needed for these purposes and to support the commercial
introduction, production and delivery of our BPL Solutions. 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, 2005. Such 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 2004, the FASB issued SFAS No. 123R. This standard requires
all share-based payments to employees, including grants of employee stock
options, to be expensed in the financial statements based on their fair values
beginning with the first annual period beginning after June 15, 2005 (the first
quarter of fiscal year 2006 for the Company). The pro forma disclosures
permitted under SFAS No. 123 will no longer be allowed as an alternative
presentation to recognition in the financial statements. Under SFAS No. 123R,
the Company must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for compensation cost and
the transition method to be used at the date of adoption. The transition methods
include modified prospective and modified retrospective adoption options. Under
the modified retrospective option, prior periods may be restated either as of
the beginning of the year of adoption or for all periods presented. The modified
prospective method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS No. 123R, while the retroactive methods record
compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. The Company expects to adopt SFAS No.
123R in its first quarter of fiscal year 2006 on a modified prospective basis,
which will require recognition of compensation expense for all stock option or
other equity-based awards that vest or become exercisable after the effective
date. The Company expects such adoption will not have a material impact on its
results of operations and its net income per common share in 2006 and forward,
but as yet has not quantified the effects of adoption.

                                       26
<PAGE>

        In March 2005, the SEC issued guidance on FASB SFAS 123(R), "Share-Based
Payments" ("SFAS No. 123R"). Staff Accounting Bulletin No. 107 ("SAB 107") was
issued to assist preparers by simplifying some of the implementation challenges
of SFAS No. 123R while enhancing the information that investors receive. SAB 107
creates a framework that is premised on two themes: (a) considerable judgment
will be required by preparers to successfully implement SFAS No. 123R,
specifically when valuing employee stock options; and (b) reasonable
individuals, acting in good faith, may conclude differently on the fair value of
employee stock options. Key topics covered by SAB 107 include: (a) valuation
models - SAB 107 reinforces the flexibility allowed by SFAS No. 123R to choose
an option-pricing model that meets the standard's fair value measurement
objective; (b) expected volatility - SAB 107 provides guidance on when it would
be appropriate to rely exclusively on either historical or implied volatility in
estimating expected volatility; and (c) expected term - the new guidance
includes examples and some simplified approaches to determining the expected
term under certain circumstances. The Company will apply the principles of SAB
107 in conjunction with its adoption of SFAS No. 123R.

        In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements" ("SFAS 154"). SFAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. SFAS 154 also
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The provisions of SFAS 154 are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of
SFAS 154 is not expected to have a material impact on the Company's financial
position or results of operations.

        In March 2005, the Securities and Exchange Commission announced that the
compliance dates for non-accelerated filers pursuant to Section 404 of the
Sarbanes-Oxley Act has been extended. Under the latest extension, a company that
is not required to file its annual and quarterly reports on an accelerated basis
must begin to comply with the internal control over financial reporting
requirements for its first fiscal year ending on or after July 15, 2006. The
Commission similarly has extended the compliance date for these companies
relating to requirements regarding evaluation of internal control over financial
reporting and management certification requirements contained in section 404 of
the Sarbanes-Oxley Act to January 1, 2007.

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.

                                       27
<PAGE>

ITEM 8. CONTROLS AND PROCEDURES

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

        CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the
quarter ended December 31, 2005, 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 8A. OTHER INFORMATION

None



                                       28
<PAGE>

                                    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,
2005 and such information is incorporated herein by reference.

3.1     Certificate of Incorporation of the Company, as amended. (1)
3.2     Bylaws of the Company, as amended. (1)
4.1     Specimen Stock Certificate. (1)
4.2     Form of Three-Year Warrant issued by the Company to the holders of the
        6% Convertible Debentures in October and November 2003. (4)
4.3     Form of 6% Three-Year Convertible Debenture issued by the Company on
        December 23, 2004. (5)
4.4     Form of Common Stock Purchase Warrant issued by the Company to certain
        investors on December 23, 2004. (5)
4.5     Secured Promissory Note in the Principal Amount of $1,620,000 issued by
        the Company on January 25, 2006.
4.6     Common Stock Purchase Warrant issued by the Company on January 25, 2006
10.1    Ambient Corporation 2000 Equity Incentive Plan. (3)
10.2    Stock Purchase Agreement dated as of September 30, 2002 between the
        Company and Consolidated Edison, Inc. (2)
10.3    Ambient Corporation 2002 Non-Employee Directors' Stock Option Plan. (3)
10.4    Amended and Restated Employment Agreement effective as of May 22, 2004
        between the Company and John Joyce. (6) +
10.5    Amended and Restated Employment Agreement effective as of August 11,
        2004 between the Company and Ramdas Rao. (6) +
10.6    Form of Securities Purchase Agreement dated as of December 23, 2004
        among the Company and certain investors. (5)
10.7    Form of Registration Rights Agreement dated as of December 23, 2004
        among the Company and certain investors. (5)
10.8    Bridge Loan Agreement dated as of January 18, 2006 between the Company
        and Double U Master Fund LP.
10.9    Security Interest Agreement dated as of January 18, 2006 between the
        Company and Double U Master Fund LP.
14      Code of Conduct and Ethics. (7)
23.1    Consent of Rotenberg Meril Solomon Bertiger & Guttilla, P.C.
31.     Certification of Chief Executive and Principal Accounting Officer
        pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.     Section 1350 Certification.

(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-40045) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the
three month period ended September 30, 2002 and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Definitive Proxy Statement on Form 14-A
filed on December 10, 2002 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-110112) and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
December 27, 2004.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the
three month period ended June 30, 2004 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual 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: February 24, 2006                 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                        February 24, 2006

/S/ MICHAEL WIDLAND          DIRECTOR                        February 24, 2006
MICHAEL WIDLAND

/S/ D. HOWARD PIERCE         DIRECTOR                        February 24, 2006
D. HOWARD PIERCE


                                       30
<PAGE>

                               AMBIENT CORPORATION

                          (A DEVELOPMENT STAGE COMPANY)


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                      PAGE

REPORT OF ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.           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 balances sheets of Ambient
Corporation and Subsidiaries (a development stage company) (the "Company") as of
December 31, 2005 and 2004, 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, 2005. 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
statements of operations, changes in stockholders' equity and cash flows 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 included an explanatory paragraph describing conditions that
raised substantial doubt about the Company's ability to continue as a going
concern.

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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004 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, 2005, 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 3, 2006

                                       F-1

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


                                                                                    December 31,    December 31,
                                                                                       2005            2004
                                                                                       ----            ----
<S>                                                                                <C>             <C>
ASSETS
CURRENT ASSETS
   Cash and  cash equivalents                                                      $    393,513    $  6,954,512
   Accounts receivable                                                                    5,894          12,487
   Inventory                                                                            629,035         354,497
   Prepaid expenses and other current assets                                            169,534         198,639
                                                                                   -------------   -------------

         Total current assets                                                         1,197,976       7,520,135

Property and equipment, net                                                             695,992         343,407
Prepaid licensing fees                                                                  237,606         316,808
                                                                                   -------------   -------------

         Total assets                                                              $  2,131,574    $  8,180,350
                                                                                   =============   =============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable                                                                $    914,143    $    654,223
   Accrued expenses and other current liabilities                                       212,711         242,752
   Advance from stockholder                                                             325,000         325,000
                                                                                   -------------   -------------

         Total current liabilities                                                    1,451,854       1,221,975

NON-CURRENT LIABILITIES
   Convertible debentures (net of discount of $758,263 and $5,459,813)                  391,737          40,187
                                                                                   -------------   -------------

         Total  liabilities                                                           1,843,591       1,262,162
                                                                                   -------------   -------------

STOCKHOLDERS' EQUITY
   Common stock, $.001 par value;
     300,000,000 shares authorized; 165,153,882 and 146,639,766
       issued; 164,153,882 and 145,639,766 outstanding, respectively                    165,154         146,640
    Additional paid-in capital                                                       86,562,899      82,031,660
    Deficit accumulated during the development stage                                (86,206,000)    (74,979,445)
     Less: deferred compensation                                                        (34,070)        (80,667)
     Less: treasury stock; 1,000,000 shares at cost                                    (200,000)       (200,000)
                                                                                   -------------   -------------

         Total stockholders' equity                                                     287,983       6,918,188
                                                                                   -------------   -------------

         Total liabilities and stockholders' equity                                $  2,131,574    $  8,180,350
                                                                                   =============   =============


                                 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,
                                                                                2005               2004                2005
                                                                                ----               ----                ----
<S>                                                                        <C>                 <C>               <C>
Revenues                                                                   $      236,903       $          -      $       359,903

Less Cost of goods sold (includes inventory
   markdowns of $297,592 and $-0-)                                               501,707                  -              501,707
                                                                           --------------      -------------     ----------------

Gross margin                                                                    (264,804)                 -             (141,804)

Expenses
     Research and Development (1)                                              2,647,828          2,522,522           12,142,494
     Less - Participation by the Office of the
       Chief Scientist of the State of Israel                                          -                  -              558,195
                                                                               2,647,828          2,522,522           11,584,299
Operating, general and administrative expenses (1)                             3,573,622          2,387,598           20,281,799
Stock based compensation - net                                                    39,477             80,464           17,565,114
                                                                           --------------      -------------     ----------------

Total expenses                                                                 6,260,927          4,990,584           49,431,212
                                                                           --------------      -------------     ----------------

Operating loss                                                                (6,525,731)        (4,990,584)         (49,573,016)

Interest expense                                                                (102,833)           (31,451)            (839,366)
Amortization of beneficial conversion feature of convertible debt             (2,317,912)           (19,810)          (6,433,398)
Amortization of deferred financing costs                                      (2,383,637)        (2,525,295)         (13,314,129)
Interest income                                                                  103,558             53,027              482,642
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                         (11,226,555)        (7,514,113)         (74,631,974)

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

Loss before extraordinary item                                               (11,226,555)        (7,514,113)         (74,606,974)

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

Net loss                                                                     (11,226,555)        (7,514,113)         (84,385,141)

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

Net loss attributable to common stockholders                               $ (11,226,555)      $ (7,514,113)     $   (86,206,000)
                                                                           ==============      =============     ================

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

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

Weighted average number of shares outstanding                                161,200,562        135,252,696
                                                                           ==============      =============

(1) Excludes non-cash,  stock based compensation expense as follows:
     Research and development, net                                         $           -       $          -      $     1,454,192
     Operating, general and administrative, net                                   39,477             80,464           16,110,922
                                                                           --------------      -------------     ----------------

                                                                           $      39,477       $     80,464      $    17,565,114
                                                                           ==============      =============     ================


                                          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                   Common Stock
                                                                           Shares         Amount          Shares         Amount
                                                                         -----------   ------------    ------------   ------------
<S>                                                                      <C>           <C>             <C>            <C>
Common stock issued to founders for nominal consideration                              $                  2,028,833   $      2,029
Common Stock issued to employees for services                                                               200,333            200
Net loss
                                                                         -----------   ------------    ------------   ------------

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

Common Stock issued to employees for services                                                               104,167            104
Common stock issued in connection with private placement of notes                                            80,000             80
Common stock issued to advisor for services                                                                   6,000              6
Amortization of deferred stock - based compensation
Net loss
                                                                         -----------   ------------    ------------   ------------

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

Common stock issued pursuant to consulting agreement                                                         75,000             75
Initial public offering in February 1998                                                                    525,000            525
Common stock issued in connection with short-term debt financing                                             20,000             20
Additional common 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

Common stock issued pursuant to consulting agreement                                                         56,500             57
Warrants issued pursuant to consulting agreement
Amortization of deferred stock - based compensation
Net loss
                                                                         -----------   ------------    ------------   ------------

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


Common stock issued in respect of extinguishment of debt                                                  3,490,000          3,490
Common stock issued pursuant to consulting agreements                                                     2,761,000          2,761
Warrants issued pursuant to consulting agreements
Warrants issued to convertible debenture holders
Common stock issued for services                                                                             67,250             67
Common stock issued pursuant to settlement agreement                                                        250,000            250
Common stock issued in private placement, net of offering costs                                           1,000,000          1,000
Preferred stock issued in private placement, net of offering costs        1,125,000          1,125
Warrants issued to convertible debenture holders
Warrants issued in connection with private placement
Common stock and options issued pursuant to severance agreement                                             200,000            200
Common stock issued upon conversion of debentures                                                         8,711,711          8,712
Common stock issued upon conversion of preferred stock                   (1,125,000)        (1,125)       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                                           1,649,090          1,649
Common stock issued for purchase of minority interest                                                       400,000            400
Common stock issued pursuant to consulting agreement                                                        852,500            853
Common stock issued as finders fee                                                                          250,000            250
Warrants issued pursuant to consulting agreement
Common stock issued for services                                                                            650,000            650
Common stock issued for note receivable                                                                   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

Common stock and warrants issued for rent reduction                                                         562,500            563
Common stock and warrants issued in private placement                                                       400,000            400
Common stock and warrants issued as repayment of loans                                                    1,500,000          1,500
Common stock issued as payment accrued salaries                                                           4,104,000          4,104
Common stock and warrants issued upon conversion of debt                                                  2,599,500          2,600
Common stock issued for cash                                                                             27,250,000         27,250
Exercise of warrants                                                                                      1,125,000          1,125
Stock 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                                                                             13,039,062         13,039
Common stock issued upon conversion of debt                                                                 100,000            100
Common stock and warrants issued for rent reduction                                                         532,888            533
Warrants issued as reduction in accounts payable
Issuance of warrants in connection with convertible debentures
Common stock issued upon conversion of debentures                                                        18,918,192         18,918
Cashless exercise of warrants                                                                               883,721            884
Stock options and warrants issued
Exercise of stock options                                                                                    30,000             30
Amortization of deferred stock - based compensation
Beneficial conversion feature of debentures issued
Cancellation of note receivable
Net loss
                                                                         -----------   ------------    ------------   ------------

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

Common stock issued for amounts payable                                                                     964,286            964
Warrants issued as reduction in accounts payable
Common stock and warrants issued for cash                                                                 2,083,333          2,083
Issuance of warrants in connection with convertible debentures
Common stock issued upon conversion of debentures and interest                                           22,357,778         22,358
Common stock issued upon exercise of warrants                                                            23,366,372         23,366
Beneficial conversion feature of debentures issued
Stock 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

Common stock issued upon conversion of debentures                                                        17,400,000         17,400
Common stock issued upon exercise of warrants                                                               296,875            297
Common stock issued for interest                                                                            315,991            316
Exercise of stock options                                                                                   501,250            501
Stock options issued (forfeited)
Amortization of deferred stock - based compensation
Net loss

                                                                         -----------   ------------    ------------   ------------
Balance - December 31, 2005                                                       -    $         -      165,153,882   $    165,154
                                                                         ===========   ============    ============   ============




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

Common stock issued to founders for nominal consideration                $                $               $
Common Stock issued to employees for services
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 1996                                                          -               -                -

Common Stock issued to employees for services                                  386,668                         (386,668)
Common stock issued in connection with private placement of notes              319,920
Common stock issued to advisor for services                                     23,994
Amortization of deferred stock - based compensation                                                             145,556
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 1997                                                    730,582               -         (241,112)

Common stock issued pursuant to consulting agreement                           654,925                         (655,000)
Initial public offering in February 1998                                     3,432,502
Common stock issued in connection with short-term debt financing                99,980
Additional common 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                           (1,600)
Amortization of deferred stock - based compensation                                                             658,029
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 1998                                                  4,941,189               -         (239,683)

Common stock issued pursuant to consulting agreement                            90,146                          (90,188)
Warrants issued pursuant to consulting agreement                                10,260
Amortization of deferred stock - based compensation                                                             325,808
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 1999                                                  5,041,595               -           (4,063)

                                                                                75,328
Common stock issued in respect of extinguishment of debt                    10,466,510
Common stock issued pursuant to consulting agreements                       11,186,318                      (11,189,079)
Warrants issued pursuant to consulting agreements                            1,500,000                       (1,500,000)
Warrants issued to convertible debenture holders                             1,144,805
Common stock issued for services                                               130,196
Common stock issued pursuant to settlement agreement                         1,312,250
Common stock issued in private placement, net of offering costs              1,799,000
Preferred stock issued in private placement, net of offering costs           1,819,734
Warrants issued to convertible debenture holders                             3,447,147
Warrants issued in connection with private placement                           410,495
Common stock and options issued pursuant to severance agreement              1,756,042                       (1,756,242)
Common stock issued upon conversion of debentures                            9,286,225
Common stock issued upon conversion of preferred stock
Stock options issued to employees                                            4,059,080                       (4,059,080)
Stock options issued to consultants                                          1,999,329                       (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                                                          16,067,085
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 2000                                                  61,133,173              -       (4,440,708)

Common stock issued in private placement, net of offering costs               1,441,684
Common stock issued for purchase of minority interest                           862,000                        (862,400)
Common stock issued pursuant to consulting agreement                          1,302,036                      (1,302,888)
Common stock issued as finders fee                                                 (250)
Warrants issued pursuant to consulting agreement                                120,643                        (120,643)
Common stock issued for services                                                109,850                        (110,500)
Common stock issued for note receivable                                         199,000       (200,000)
Re-measurement of deferred compensation                                      (5,235,512)                      3,526,232
Cancellation of options and warrants                                           (614,941)                        614,941
Amortization of deferred stock - based compensation                                                           2,122,931
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 2001                                                 59,317,682        (200,000)        (573,035)

Common stock and warrants issued for rent reduction                             44,438
Common stock and warrants issued in private placement                           68,918
Common stock and warrants issued as repayment of loans                          98,500
Common stock issued as payment accrued salaries                                201,096
Common stock and warrants issued upon conversion of debt                       336,841
Common stock issued for cash                                                 1,122,750
Exercise of warrants                                                            10,125
Stock options and warrants issued                                              296,955                         (296,955)
Amortization of deferred stock - based compensation                                                             817,751
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 2002                                              $  61,497,304    $   (200,000)   $     (52,239)

Common stock issued for cash                                                   892,273
Common stock issued upon conversion of debt                                      9,900
Common stock and warrants issued for rent reduction                             42,098
Warrants issued as reduction in accounts payable                               120,000
Issuance of warrants in connection with convertible debentures               4,315,693
Common stock issued upon conversion of debentures                            2,251,265
Cashless exercise of warrants                                                     (884)
Stock options and warrants issued                                               83,639                          (83,639)
Exercise of stock options                                                          270
Amortization of deferred stock - based compensation                                                             135,878
Beneficial conversion feature of debentures issued                             217,416
Cancellation of note receivable                                                                200,000
Net loss
                                                                         -------------    -------------   --------------

Balance - December 31, 2003                                                 69,428,974               -                -

Common stock issued for amounts payable                                        134,036
Warrants issued as reduction in accounts payable                                15,000
Common stock and warrants issued for cash                                      247,917
Issuance of warrants in connection with convertible debentures               2,443,411
Common stock issued upon conversion of debentures and interest               2,381,942
Common stock issued upon exercise of warrants                                4,390,391
Beneficial conversion feature of debentures issued                           2,711,554
Stock options issued                                                           161,131                         (161,131)
Exercise of stock options                                                      117,304
Amortization of deferred stock - based compensation                                                              80,464
Net loss

                                                                         -------------    -------------   --------------
Balance - December 31, 2004                                              $  82,031,660    $          -    $     (80,667)

Common stock issued upon conversion of debentures                            4,332,600
Common stock issued upon exercise of warrants                                   35,328
Common stock issued for interest                                                78,682
Exercise of stock options                                                       91,749
Stock options issued (forfeited)                                                (7,120)                           7,120
Amortization of deferred stock - based compensation                                                              39,477
Net loss

                                                                         -------------    -------------   --------------
Balance - December 31, 2005                                              $  86,562,899    $          -    $     (34,070)
                                                                         =============    =============   ==============


                                                                                            Deficit
                                                                                           Accumulated
                                                                                             During
                                                                           Treasury        Development
                                                                             Stock            Stage           Total
                                                                         -------------    -------------   --------------

Common stock issued to founders for nominal consideration                $                                $       2,029
Common Stock issued to employees for services                                                                       200
Net loss                                                                                      (693,995)        (693,995)
                                                                         -------------    -------------   --------------

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

Common Stock issued to employees for services                                                                       104
Common stock issued in connection with private placement of notes                                               320,000
Common stock issued to advisor for services                                                                      24,000
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)

Common stock issued pursuant to consulting agreement                                                                  -
Initial public offering in February 1998                                                                      3,433,027
Common stock issued in connection with short-term debt financing                                                100,000
Additional common 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                                                                      -
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)

Common stock issued pursuant to consulting agreement                                                                 15
Warrants issued pursuant to consulting agreement                                                                 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
Common stock issued in respect of extinguishment of debt                                                     10,470,000
Common stock issued pursuant to consulting agreements                                                                 -
Warrants issued pursuant to consulting agreements                                                                     -
Warrants issued to convertible debenture holders                                                              1,144,805
Common stock issued for services                                                                                130,263
Common stock issued pursuant to settlement agreement                                                          1,312,500
Common stock issued in private placement, net of offering costs                                               1,800,000
Preferred stock issued in private placement, net of offering costs                                            1,820,859
Warrants issued to convertible debenture holders                                                              3,447,147
Warrants issued in connection with private placement                                                            410,495
Common stock and options issued pursuant to severance agreement                                                       -
Common stock issued upon conversion of debentures                                                             9,294,937
Common stock issued upon conversion of preferred stock                                                                -
Stock options issued to employees                                                                                     -
Stock options issued to consultants                                                                                   -
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                                               1,443,333
Common stock issued for purchase of minority interest                                                                 -
Common stock issued pursuant to consulting agreement                                                                  -
Common stock issued as finders fee                                                                                    -
Warrants issued pursuant to consulting agreement                                                                      -
Common stock issued for services                                                                                      -
Common stock issued for note receivable                                                                               -
Re-measurement of deferred compensation                                                                      (1,709,280)
Cancellation of options and warrants                                                                                  -
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)

Common stock and warrants issued for rent reduction                                                              45,000
Common stock and warrants issued in private placement                                                            69,318
Common stock and warrants issued as repayment of loans                                                          100,000
Common stock issued as payment accrued salaries                                                                 205,200
Common stock and warrants issued upon conversion of debt                                                        339,440
Common stock issued for cash                                                                                  1,150,000
Exercise of warrants                                                                                             11,250
Stock options and warrants issued                                                                                     -
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                                                                                    905,312
Common stock issued upon conversion of debt                                                                      10,000
Common stock and warrants issued for rent reduction                                                              42,631
Warrants issued as reduction in accounts payable                                                                120,000
Issuance of warrants in connection with convertible debentures                                                4,315,693
Common stock issued upon conversion of debentures                                                             2,270,183
Cashless exercise of warrants                                                                                         -
Stock 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
Cancellation of note receivable                                              (200,000)                                -
Net loss                                                                                    (5,235,962)      (5,235,962)
                                                                         -------------    -------------   --------------

Balance - December 31, 2003                                                  (200,000)     (67,465,332)       1,860,865

Common stock issued for amounts payable                                                                         135,000
Warrants issued as reduction in accounts payable                                                                 15,000
Common stock and warrants issued for cash                                                                       250,000
Issuance of warrants in connection with convertible debentures                                                2,443,411
Common stock issued upon conversion of debentures and interest                                                2,404,300
Common stock issued upon exercise of warrants                                                                 4,413,757
Beneficial conversion feature of debentures issued                                                            2,711,554
Stock 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                                              $   (200,000)    $(74,979,445)   $   6,918,188

Common stock issued upon conversion of debentures                                                             4,350,000
Common stock issued upon exercise of warrants                                                                    35,625
Common stock issued for interest                                                                                 78,998
Exercise of stock options                                                                                        92,250
Stock options issued (forfeited)                                                                                       -
Amortization of deferred stock - based compensation                                                              39,477
Net loss                                                                                   (11,226,555)     (11,226,555)

                                                                         -------------    -------------   --------------
Balance - December 31, 2005                                              $   (200,000)    $(86,206,000)   $     287,983
                                                                         =============    =============   ==============


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

<PAGE>
<TABLE>
<CAPTION>

                                                         AMBIENT CORPORATION
                                                    (A Development Stage Company)
                                                      STATEMENTS OF CASH FLOWS


                                                                                                                       Cumulative
                                                                                            Year                     From Inception
                                                                                            Ended                          to
                                                                                         December 31,                 December 31,
                                                                                   2005               2004                2005
                                                                                   ----               ----                ----
<S>                                                                           <C>                 <C>               <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                 $ (11,226,555)      $ (7,514,113)     $   (86,206,000)
     Adjustments to reconcile net loss to net cash used in operating
       activities:
         Depreciation and amortization                                              246,730             89,737              803,617
         Amortization of note discount                                            2,383,637          2,525,295           12,669,258
         Beneficial conversion feature of convertible debt                        2,317,912             19,810            6,433,398
         Financing,  consulting and other expenses paid via the
           issuance of common stock and warrants                                    118,475            123,402           31,036,111
         Cancellation of officer loans in settlement of employment
           contract                                                                       -                  -              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                                                    6,593             40,647               14,631
              Inventory                                                            (274,538)          (212,802)            (629,035)
              Prepaid expenses and other current assets                              29,105           (114,217)            (100,829)
              Prepaid licensing fees                                                 79,202           (181,808)            (102,606)
              Accounts payable                                                      259,921            200,633            1,190,438
              Accrued expenses and other current liabilities                        (30,041)            46,934              363,367
                                                                              --------------      -------------     ----------------

Net cash used in operating activities                                            (6,089,559)        (4,976,482)         (29,038,779)
                                                                              --------------      -------------     ----------------

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                                       (599,315)          (348,688)          (1,697,045)
         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                                              (599,315)          (348,688)          (3,971,396)
                                                                              --------------      -------------     ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
         Net proceeds from issuance of share capital                                127,875          4,503,074           11,291,128
         Proceeds from loans and advances                                                 -                  -              690,000
         Proceeds from issuance of notes payable                                          -                  -            1,360,000
         Net proceeds from issuance of convertible debentures                             -          5,154,965           18,455,133
         Repayment of notes payable                                                       -                  -             (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                                           127,875          9,658,039           33,403,688
                                                                              --------------      -------------     ----------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 (6,560,999)         4,332,869              393,513

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                                     6,954,512          2,621,643                    -
                                                                              --------------      -------------     ----------------

CASH AND CASH EQUIVALENTS - END OF YEAR                                       $     393,513       $  6,954,512      $       393,513
                                                                              ==============      =============     ================

Noncash financing and investing activities:
        Issuance of common stock and warrants in respect of amounts payable   $           -       $    150,000
                                                                              ==============      =============
        Issuance of common stock upon conversion of debentures                $   4,350,000       $  2,682,933
                                                                              ==============      =============


                                            See Notes to Consolidated Financial Statements
                                                                  F-5
</TABLE>

<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


NOTE 1 - DESCRIPTION OF BUSINESS

        Ambient Corporation (herein "Ambient" or "the Company") is primarily
        focused on the design, development, commercialization, and marketing of
        Broadband over Power Lines (BPL) equipment, technologies, and services.
        BPL technology enables power line infrastructure landlords (electric
        utilities & property owners) to use their existing medium and low
        voltage power distribution infrastructure for the delivery of high-speed
        data services. In addition to consumer oriented broadband Internet
        access and Voice over Internet Protocol (VoIP) telephony services, BPL
        can also provide utility services such as automated meter reading,
        remote outage detection, real-time pricing, and direct load control, and
        government and industry applications such as video security surveillance
        and industrial process monitoring. The components and technologies that
        comprise Ambient's BPL solution are presently being evaluated in several
        field trials and pilots that are running a range of consumer, utility,
        and industrial applications.

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

        Ambient was incorporated under the laws of the State of Delaware in June
        1996. To date, the Company has funded operations through the sale of its
        securities. The Company anticipates that it will continue to incur
        significant operating costs and losses in connection with the
        development, marketing, and deployment of its products, technology, and
        services as the Ambient BPL Solution 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)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        FAIR VALUE OF FINANCIAL INSTRUMENTS

        Substantially all of the Company's financial instruments, consisting
        primarily of cash equivalents, account receivables, accounts payable and
        accrued expenses, other current liabilities and convertible debentures
        are carried at, or approximate, fair value because of their short-term
        nature or because they carry market rates of interest.

        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,
                                                                  2005                2004
                                                             --------------      --------------
<S>                                                           <C>                 <C>
        Net loss, as reported                                 ($11,226,555)        ($7,514,113)
        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            (2,344,746)           (850,313)
                                                             --------------      --------------

        Pro forma net loss                                    ($13,571,301)        ($8,346,426)
                                                             ==============      ==============

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

        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 2005 and 2004, respectively: a risk-free interest
        rate of 4.14% and


                                      F-7
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        3.65%; an expected life of 7.3 and 8 years; an expected volatility of
        157% and 116%; and no expected dividends.

        On December 29, 2005, the Board of Directors approved the repricing to
        $0.20 per share each outstanding stock option with an exercise price of
        greater than $0.20 per share that was previously granted under the
        Company's 2000 Equity Incentive Plan or 2002 Non-Employee Directors
        Stock Option Plan and certain non-plan options currently held by current
        non-employee directors and all current employees other than the
        Company's Chief Executive Officer. As a result of the repricing, options
        to purchase 10,829,500 shares of the Company's common stock par value
        $0.001 per share (the "Common Stock") with existing exercise prices
        ranging from $0.30 to $2.50 and a weighted average exercise price of
        $0.46 were repriced to $0.20 per share.

        The Board of Directors also accelerated the vesting of all outstanding
        stock options previously awarded to and currently held by non-employee
        directors and all current employees other than the Company's Chief
        Executive Officer. As a result of the acceleration, options to acquire
        10,043,750 shares of the Company's Common Stock became exercisable in
        full on December 31, 2005.

        The repricing and acceleration and of the options had no effect on the
        Company's financial position. The accelerated amortization expense and
        incremental value recognized due to the changes are included in the
        disclosure above.

        In December 2004, the FASB issued SFAS No. 123R. This standard requires
        all share-based payments to employees, including grants of employee
        stock options, to be expensed in the financial statements based on their
        fair values beginning with the first annual period beginning after June
        15, 2005 (the first quarter of fiscal year 2006 for the Company). The
        pro forma disclosures permitted under SFAS No. 123 will no longer be
        allowed as an alternative presentation to recognition in the financial
        statements. Under SFAS No. 123R, the Company must determine the
        appropriate fair value model to be used for valuing share-based
        payments, the amortization method for compensation cost and the
        transition method to be used at the date of adoption. The transition
        methods include modified prospective and modified retrospective adoption
        options. Under the modified retrospective option, prior periods may be
        restated either as of the beginning of the year of adoption or for all
        periods presented. The modified prospective method requires that
        compensation expense be recorded for all unvested stock options and
        restricted stock at the beginning of the first quarter of adoption of
        SFAS No. 123R, while the retroactive methods record compensation expense
        for all unvested stock options and restricted stock beginning with the
        first period restated. The Company expects to adopt SFAS No. 123R in its
        first quarter of fiscal year 2006 on a modified prospective basis, which
        will require recognition of compensation expense for all stock option or
        other equity-based awards that vest or become exercisable after the
        effective date. The Company expects such adoption will not have a
        material impact on its results of operations and its net income per
        common share in 2006 and forward, but as yet has not quantified the
        effects of adoption.

        In March 2005, the SEC issued guidance on FASB SFAS 123(R), "Share-Based
        Payments" ("SFAS No. 123R"). Staff Accounting Bulletin No. 107 ("SAB
        107") was issued to assist preparers by simplifying some of the
        implementation challenges of SFAS No. 123R while enhancing the
        information that investors receive. SAB 107 creates a framework that is
        premised on two themes: (a) considerable judgment will be required by
        preparers to successfully implement SFAS No. 123R, specifically when
        valuing employee stock options; and (b) reasonable individuals, acting
        in good faith, may conclude differently on the fair value of employee
        stock options. Key topics covered by


                                      F-8
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        SAB 107 include: (a) valuation models - SAB 107 reinforces the
        flexibility allowed by SFAS No. 123R to choose an option-pricing model
        that meets the standard's fair value measurement objective; (b) expected
        volatility - SAB 107 provides guidance on when it would be appropriate
        to rely exclusively on either historical or implied volatility in
        estimating expected volatility; and (c) expected term - the new guidance
        includes examples and some simplified approaches to determining the
        expected term under certain circumstances. The Company will apply the
        principles of SAB 107 in conjunction with its adoption of SFAS No. 123R.

        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.

                                                2005              2004
                                                ----              ----
                Stock options                22,148,250        19,317,000
                Warrants                     36,733,505        43,562,405
                Convertible debentures        4,600,000        22,000,000

        PROPERTY AND EQUIPMENT

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

        REVENUE RECOGNITION

        We recognize revenue from product sales upon shipment to customers and
        when all requirements related to the shipments have occurred. We
        recognized revenue from design and installation services at the time
        services are performed. Revenue from software licensing is deferred and
        recognized over the life of the license agreement.

        INVENTORY

        Inventory is valued at the lower of cost or market determined on the
        first-in, first-out (FIFO) basis. Market, with respect to direct
        materials, is replacement cost and is net realizable value for
        work-in-process and finished goods. The value of the inventory is
        adjusted for estimated obsolescence or unmarketable inventory equal to
        the difference between the cost of inventory and the estimated market
        value based upon assumptions about future demand and market conditions.
        Further, as the Company is still in development stage, fixed
        manufacturing costs may produce negative gross margins. As such,
        inventories are reviewed for lower of cost or market valuation

        RESEARCH AND DEVELOPMENT AND PATENT COSTS

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


                                       F-9
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        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, for the most part, 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.

        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 May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
        and Error Corrections, a replacement of APB Opinion No. 20, Accounting
        Changes and FASB Statement No. 3, Reporting Accounting Changes in
        Interim Financial Statements" ("SFAS 154"). SFAS 154 provides guidance
        on the accounting for and reporting of accounting changes and error
        corrections. It establishes, unless impracticable, retrospective
        application as the required method for reporting a change in accounting
        principle in the absence of explicit transition requirements specific to
        the newly adopted accounting principle. SFAS 154 also provides guidance
        for determining whether retrospective application of a change in
        accounting principle is impracticable and for reporting a change when
        retrospective application is impracticable. The provisions of SFAS 154
        are effective for accounting changes and corrections of errors made in
        fiscal periods beginning after December 15, 2005. The adoption of the
        provisions of SFAS 154 is not expected to have a material impact on the
        Company's financial position or results of operations.

        In March 2005, the Securities and Exchange Commission announced that the
        compliance date for non-accelerated filers pursuant to Section 404 of
        the Sarbanes-Oxley Act have been extended. Under the latest extension, a
        company that is not required to file its annual and quarterly reports on
        an accelerated basis must begin to comply with the internal control over
        financial reporting requirements for its first fiscal year ending on or
        after July 15, 2006. The Commission similarly has extended the
        compliance date for these companies relating to requirements regarding
        evaluation of internal control over financial reporting and management
        certification requirements. The Company will be required to comply with
        Section 404 of the Sarbanes-Oxley Act beginning on January 1, 2007.


                                      F-10
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


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, has a limited operating history and has sustained
        losses since its inception. These losses have produced operating cash
        flow deficiencies, and negative working capital. As indicated in the
        accompanying consolidated financial statements, as of December 31, 2005,
        the Company had a cash balance of $393,513 and incurred a net loss
        applicable to common stockholders of approximately $11.2 million for the
        year ended December 31, 2005. The Company expects to incur additional
        losses for the foreseeable future and will need to raise additional
        funds in order to realize its business plan. These conditions raise
        substantial doubt about the Company's ability to continue as a going
        concern. The financial statements do not include any adjustments that
        might result from the outcome of this uncertainty.

        The Company funded its operations during fiscal year 2005 from the
        proceeds of its private placement of convertible debentures that were
        placed in December 2004 and the exercise of outstanding warrants. Such
        net proceeds totaled approximately $8.8 million. In addition, in January
        2006, the Company raised net proceeds of $1,335,000 from the issuance of
        Short Term Loans. See Note 13 (Subsequent Events).

        The Company's future operations are dependent upon management's ability
        to find sources of additional equity capital. The Company needs to raise
        additional funds to continue to meet its liquidity needs, repay
        short-term loans that mature in June 2006, realize its current business
        plan and maintain operations. Management of the Company is continuing
        its efforts to secure funds through equity and/or debt instruments for
        its operations. Presently, the Company does not have any financing
        commitment from any person and there can be no assurance that additional
        capital will be available to the Company on commercially acceptable
        terms or at all.


NOTE 4 - INVENTORY

        Inventory consists of the following:

                                                    DECEMBER 31,
                                                2005           2004
                                                ----           ----

                Raw material                   $270,833       $159,003
                Finished goods                  358,202        195,494
                                               --------       --------
                                               $629,035       $354,497
                                               ========       ========


                                      F-11
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


NOTE 5 - PROPERTY AND EQUIPMENT

                                                            DECEMBER 31,
                                                        2005           2004
                                                        ----           ----

                Computers                              $272,326       $231,687
                Software                                214,246              -
                Machinery and equipment                 594,606        256,918
                Furniture and office equipment          152,032        158,731
                                                        -------        -------
                                                      1,233,210        647,336
                Less - accumulated depreciation         537,218        303,929
                                                        -------        -------
                                                       $695,992       $343,407
                                                       ========       ========

        Depreciation expense was $246,727 and $89,737 for the years ended
        December 31, 2005 and 2004, respectively.

NOTE 6 - 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 power line communications
        technology, 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 was $79,200 per year for the years
        ended December 31, 2005 and 2004. Annual amortization expense is
        estimated to be $79,200 in each of the years ended December 31, 2006,
        2007 and 2008.

NOTE 7 - OTHER CURRENT LIABILITIES

                                                            DECEMBER 31,
                                                        2005           2004
                                                        ----           ----
                Accrued payroll and payroll taxes      $ 88,793      $      -
                Accrued professional fees                85,831       158,146
                Accrued liabilities                      38,087        77,373
                Accrued interest                              -         7,233
                                                       --------      --------
                                                       $212,711      $242,752
                                                       ========      ========

NOTE 8 - CONVERTIBLE DEBENTURES

        o       In October and November 2003, the Company raised net proceeds of
                $4.2 million in a private placement of $4,655,000 principal
                amount of its three-year 6% Convertible Debentures (the "2003
                Debentures"). The 2003 Debentures are convertible into shares of
                Common Stock at a conversion rate equal to $0.12 per


                                      F-12
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


                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 the Company's 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 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 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 equal to $0.25 per share
                (subject to adjustment if there are certain capital adjustments
                or similar transactions, such as a stock split or merger). In
                February through July 2005, $4,350,000 of principal of the 2004
                Debentures was converted into 17.4 million shares of Common
                Stock.

                In January 2006, $820,000 of principle were converted into
                3,280,000 shares of Common Stock. By their terms, the Debentures
                are convertible into shares of Common Stock at a per share
                conversation rate of $0.25

                For financial reporting purposes, the Company recorded a
                discount of $2,193,411 to reflect the value of the warrants
                issued in connection with the 2004 Debentures and in accordance
                with EITF No. 00-27, an additional discount on the 2004
                Debentures of $2,711,554 to reflect the beneficial conversion
                feature of the 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 9 - INCOME TAXES

        At December 31, 2005, the Company had available $49 million of net
        operating loss carry forwards, for U.S. income tax purposes which expire
        in the years 2016 through 2025. However, due to changes in stock
        ownership the use of the U.S. net operating loss carry forwards is
        severely limited under Section 382 of the Internal Revenue Code
        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 carry forwards.

        Due to the uncertainty of their realization, no income tax benefit has
        been recorded by the Company for these loss carry forwards as valuation
        allowances have been established for any such benefits.


                                      F-13
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        Significant components of the Company's deferred tax assets for U.S.
        income taxes are as follows:

                                                            DECEMBER 31,
                                                        2005           2004
                                                        ----           ----

                Net operating loss carry forwards    $6,980,518     $4,907,180
                Stock based compensation                148,590        239,597
                Other                                   438,414        282,986
                                                        -------        -------
                      Total deferred tax assets       7,567,523      5,429,763
                      Valuation allowance            (7,567,523)    (5,429,763)
                                                     ----------     ----------

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

        The increase in the valuation allowance was primarily due to the
        increase in the net operating loss and the stock compensation costs of
        the Company.

NOTE 10 - 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
        were originally 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 from 5,000,000 to 15,000,000 and in June 2005 the
        2000 Incentive Plan was further amended to increase the total number of
        shares available for grant to 25,000,000.

        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. In June 2005, the number of shares of Common Stock reserved for
        issuance under the 2002 Directors Plan was increased from 2,000,000 to
        4,000,000.


                                      F-14
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        OTHER OPTION GRANTS

        In addition to the options granted under the stock option plans
        discussed above (the "Plans), the Company has issued options outside of
        the plans, pursuant to various employment, consulting and separation
        agreements.

        Option activity for 2005 and 2004 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                                Weighted
                                                                                                Average
                                                                     Options                    Exercise
                                                        Plans        Non-plan      Total         Price
                                                        -----        --------      -----         -----
<S>                                                   <C>           <C>          <C>              <C>
        Options outstanding, January 1, 2004          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
            Granted                                   3,400,000     1,600,000     5,000,000         .32
            Exercised                                  (501,250)            -      (501,250)       -.18
            Forfeited                                  (976,250)     (691,250)   (1,667,500)       -.35
                                                     ----------     ---------    ----------       -----
        Options outstanding, December 31, 2005       16,549,500     5,598,750    22,148,250       $ .33
                                                     ==========     =========    ==========       =====

        Shares of Common Stock available for
          Future grant under the plan                11,643,000
                                                     ==========
</TABLE>

        The following table summarizes information about stock options
        outstanding at December 31, 2005:

<TABLE>
<CAPTION>
                                                                                    Options Exercisable
                                                                    Weighted Average
                                                        Remaining
                                Number        Contractual       Exercise         Number         Exercise
        Ranges of price       Outstanding        Life             Price        Exercisable        Price
<S>                            <C>               <C>               <C>          <C>                <C>
        $.10 - $.12               615,000        5.34              $.11            615,000         $.11
        $.20                   15,748,250        7.95               .20         15,748,250          .20
        $.30 - $.40               825,000        8.82               .31            650,000          .32
        $.50                    2,235,000        6.53               .50          2,325,000          .50
        $1.00                   2,560,000        4.83              1.00          2,560,000         1.00
        $2.00                      75,000        4.75              2.00             75,000         2.00
                                   ------        ----              ----             ------         ----

        $.10-$2.00             22,148,250        7.39              $.33         21,973,250         $.33
                               ==========        ====              ====         ==========         ====
</TABLE>


                                      F-15
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        Weighted-average grant date fair value of options granted under the
        Plans in 2005 and 2004, under the Black-Scholes option pricing model,
        was $.32 and $.18 per option, respectively.

        WARRANTS

        o       In October and November 2003, in connection with the sale of the
                2003 Debentures (See Note 8, Convertible Debentures) the Company
                issued three-year warrants to purchase up to 19,395,833 shares
                of the Company's Common Stock with a per share exercise price of
                $0.25. The exercise period of the warrants is subject to
                reduction upon certain events. As of December 31, 2005 there
                were 2,104,167 warrants still outstanding.

        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 the Company's 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, 2005, all of these warrants are
                still outstanding.

        o       In December 2004, in connection with the sale of its 2004
                Debentures (See Note 8, Convertible Debentures) the Company
                issued three-year warrants to purchase up to 22,000,000 shares
                of the Company's Common Stock with a per share exercise price of
                $0.50. The Company also issued to placement agents three-year
                warrants to purchase up to 4,400,000 shares of Common Stock, of
                which 2,200,000 have an exercise price of $0.25 per share and
                2,200,000 with an exercise price of $.50 per share. As of
                December 31, 2005, all of these warrants were outstanding.

        A summary of the warrants outstanding at December 31, 2005 is as
follows:

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

                         250,000        $0.12          2006
                         100,000        $0.17          2006
                      11,562,505        $0.25          2006-2008
                          40,000        $0.30          2007
                      24,256,000        $0.50          2006-2007
                         145,000        $1.00          2007
                         100,000        $1.25          2007
                         140,000        $1.50          2006-2007
                          70,000        $2.00          2006-2007
                          70,000        $2.50          2006-2007
                          ------

                     36,733,505
                   =============


                                      F-16
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        STOCK ISSUANCES

        o       In June and December 2005, the Company issued 315,991 shares of
                Common Stock in payment of interest totaling $78,998 on their 6%
                convertible debentures.

NOTE 11 - RESEARCH AND DEVELOPMENT AGREEMENT

        Effective February 7, 2002, the Company and Consolidated Edison Company
        of New York, Inc. ("Con Edison"), an affiliate of Consolidated Edison,
        Inc, a major stockholder of the Company, entered into a Research and
        Development Agreement (the "Research and Development Agreement") to
        further develop and test the Company's PLC technology on Con Edison's
        grid system. Pursuant to the Research and Development Agreement, Con
        Edison advanced $325,000 to the Company, which will only be repayable if
        the Small Field Trial Phase, as defined therein, is deemed unsuccessful.
        The Company will have sole rights to any jointly developed intellectual
        property. Con Edison is 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.

        On January 27, 2006, Con Edison and Ambient entered into an agreement
        with NYSERDA (the New York State Energy Research and Development
        Authority) (the "NYSERDA Agreement") pursuant to which they undertook to
        conduct medium and low voltage electric systems monitoring activities to
        detect incipient or impending failures and related activities, for which
        Con Edison was awarded a $200,000 grant from NYSERDA. The NYSERDA
        Agreement necessitated an amendment to the Research and Development
        Agreement to modify the implementation plan contained therein to
        encompass the objectives of the NYSERDA Agreement. In the amendment, Con
        Edison and Ambient certified the completion of the Small Field Trial
        Phase, agreed that the $325,000 advance owing from Ambient to Con Edison
        was subsumed into the revenue royalty granted to Con Edison in the
        Research and Development Agreement, and agreed to move forward to an
        Advanced Grid Management Pilot Phase that encompassed the statement of
        work contained in the NYSERDA Agreement. Additionally, in the amendment,
        Con Edison committed to remit to Ambient not less than $180,000 of the
        grant monies received from NYSERDA to compensate Ambient for its
        equipment and other costs to be incurred in performing the Advanced Grid
        Management Pilot Phase. NYSERDA is a public benefit corporation created
        by the New York State Legislature to administer the State's energy
        program.

        The $325,000 advance will be recorded as revenue by Ambient during the
        first quarter 2006.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

        EMPLOYMENT AGREEMENTS

        On July 8, 2004, the Board of Directors approved an amended and restated
        employment agreement with the Company's 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. 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


                                      F-17
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


        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. 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 does not own any real property. The Company's corporate
        office in Newton, Massachusetts comprised of approximately 14,477 square
        feet leased at a monthly rental of $15,395 with a scheduled expiration
        date of February 28, 2008. The Company have improved this facility to
        meet its design and development activities. The Company believes that
        this facility is sufficient to meet its current requirements and that it
        would be able to renew its present lease or obtain suitable replacement
        facilities.

        In addition, the Company also rents office space in Briarcliff, New York
        at a monthly rental of $800 with a scheduled expiration date of July 5,
        2006. The Company uses this office space primarily in connection with
        the on-going pilots and testing being conducted at Con Edison's
        premises.

        Rent expense for 2005 and 2004 was $190,127 and $101,607, respectively.
        Future minimum rentals on this lease as of December 31, 2005 are as
        follows:

                Year ended December 31,
                2006                            $ 189,536
                2007                              184,736
                2008                               30,789
                                                ---------

                Total                           $ 405,061
                                                =========


NOTE 13 - SUBSEQUENT EVENTS

        BRIDGE LOAN

        In January 2006, the Company entered into a bridge loan agreement
pursuant to which an institutional investor loaned to it $1,500,000 (net
principal amount of $1,335,000 after transactions costs) and the Company issued
to the investor a secured promissory note in the aggregate principal amount of


                                      F-18
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


$1,620,000, which reflects an original issue discount on the principal amount of
the loan of 15.5%. The note is scheduled to mature on the date that is the
earlier of (i) the date on which the Company consummate a subsequent financing
that generates, on a cumulative basis together with any other interim
financings, gross proceeds to the Company us of at least $2 million or (ii) June
24, 2006. To secure its obligations under the bridge loan agreement, the Company
granted the investor a security interest in all of the Company's assets
(including, without limitation, its intellectual property) The security interest
terminates upon payment or satisfaction of all of the Company's obligations
under the bridge loan agreement. A default by the Company under the bridge loan
agreement would enable the investor to foreclose on all of the Company's assets.
The Company may repay the loan in whole or in part at any time without penalty.
The Company issued to the investor five year warrants to purchase 3,000,000
shares of its Common Stock at an exercise price of $0.15 per share, subject to
adjustments in certain specified circumstances

        COMMERCIAL PILOTS

        In January 2006, the Company entered into a pilot demonstration
agreement with a large investor-owned utility in the southeastern United States.
In January and February of 2006, revenue from the pilot program amounted to
approximately $400,000.


                                      F-19