<PAGE>

                                                                    EXHIBIT 10.3


                              EMPLOYMENT AGREEMENT

                                 by and between

                        AMERICAN TECHNOLOGY CORPORATION

                                      and

                                DAVID GRAEBENER



                          Effective February 15, 2000
<PAGE>

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


                                                                            Page
                                                                            ----
 1   Employment.........................................................      2

 2   Loyal And Conscientious Performance; Noncompetition................      3

 3   Term Of Employment.................................................      3

 4   Compensation.......................................................      3

 5   Termination........................................................      5

 6   Death Or Disability During Term Of Employment......................      8

 7   Proprietary And Confidential Information...........................      9

 8   Assignment And Binding Effect......................................     14

 9   Notices............................................................     15

10   Choice Of Law......................................................     15

11   Integration........................................................     16

12   Waiver.............................................................     16

13   Severability.......................................................     16

14   Interpretation; Construction.......................................     16

15   Attorneys' Fees....................................................     16

16   Counterparts.......................................................     17

17   Representations And Warranties.....................................     17

18   Arbitration........................................................     17


                                       i
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                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
effective as of February 15, 2000 by and between American Technology
Corporation, a Delaware corporation (the "Company") and David Graebener
("EMPLOYEE").  The Company and EMPLOYEE are hereinafter collectively referred to
as the "Parties," and individually referred to as each or any "Party."

                                   RECITALS:

     A.  WHEREAS, the Company is engaged in the design, development and
commercialization of sound, acoustics and other technologies, and the sales and
marketing of consumer electronic products and related areas (the "Business of
the Company"); and

     B.  WHEREAS, the Company desires assurance of the association and services
of EMPLOYEE in order to retain EMPLOYEE'S experience, skills, abilities,
background and knowledge, and is willing to engage EMPLOYEE'S services on the
terms and conditions set forth in this Agreement; and

     C.  WHEREAS, EMPLOYEE desires to be in the employ of the Company, and is
willing to accept such employment on the terms and conditions set forth in this
Agreement.

                                   AGREEMENT:

     In consideration of the foregoing premises and the mutual covenants herein
contained, and for other good and valuable consideration, the Parties, intending
to be legally bound, agree as follows:

                                       1
<PAGE>

1    Employment.
     -----------

     1.1   The Company hereby employs EMPLOYEE, and EMPLOYEE hereby accepts
employment by the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the date hereof and ending as provided in
Paragraph 3 hereof (the "Employment Period").

     1.2   During the Employment Period, EMPLOYEE shall serve as a Director of
Research and Development, shall report to Tom Tulowitzki, Senior Vice-President
of Research and Development, and shall have the normal duties, responsibilities
and authority of such office, unless otherwise determined from time to time by
the Company's Chief Executive Officer or Board of Directors.  EMPLOYEE shall do
and perform all services, acts or things necessary or advisable to carry out the
job duties assigned by the Company, provided, however, that at all times during
his employment EMPLOYEE shall be subject to the direction and policies from time
to time established by the Chief Executive Officer or the Board of Directors of
the Company.

     1.3   Within fourteen (14) days of execution of this Agreement EMPLOYEE
shall submit a budget for the balance of the calendar year for his division,
including a month-to-month breakdown for review and approval by the Senior Vice-
President of Research and Development of the Company. Upon approval, the budget
as amended in accordance with the provisions herein, shall determine the
expenditures for and the spending authority of EMPLOYEE for his division for the
periods stated. The budget may be revised from time to time as determined by the
Senior Vice-President of Research and Development. Any unbudgeted expense in
excess of five hundred dollars ($500) and budgeted expense in excess of two
thousand dollars ($2,000); either individually or in the aggregate, in any
thirty (30) day period for any single entity or

                                       2
<PAGE>

purpose must be pre-approved by the Senior Vice-President of Research and
Development of the Company.

2    Loyal And Conscientious Performance; Noncompetition.
     ---------------------------------------------------

     2.1   During his employment by the Company, EMPLOYEE shall devote his full
energies, interest, abilities and productive time to the proper and efficient
performance of this Agreement and shall not, without the prior written consent
of the Chief Executive Officer or the Board of Directors of the Company,
directly or indirectly, render services of a business, professional or
commercial nature to any other person or entity, whether for compensation or
otherwise, or engage in any business activities competitive with or adverse to
the Company's business or welfare, whether alone, as a partner, or as a
shareholder, officer or director of any other corporation, or as a trustee,
fiduciary or in a similar representative capacity, provided, however, that
EMPLOYEE shall be permitted to complete certain duties for Bohlender Graebner
within the 30 day period ending on March 25, 2000.

3    Term Of Employment.
     ------------------

     3.1   Subject to earlier termination as provided in this Agreement,
EMPLOYEE shall be employed pursuant to the terms of this Agreement for a three
(3) year term beginning on February 15, 2000 and expiring at midnight on
February 14, 2003.

4    Compensation.
     ------------

     4.1   Beginning with the Effective Date of this Agreement, Company shall
pay EMPLOYEE a salary (the "Base Salary") of One Hundred Ten Thousand Dollars
($110,000.00) per year, payable in accordance with the Company's normal payroll
practices for employees. Such salary shall be prorated for any partial
employment on the basis of a 30-day calendar month.

                                       3
<PAGE>

     4.2   EMPLOYEE'S compensation may be changed from time to time by mutual
agreement of EMPLOYEE and the Board of Directors of the Company.  Any such
agreement shall be evidenced by a written amendment of this Agreement, which,
among other things, shall specify with particularity any change in EMPLOYEE'S
compensation and the date or dates when each such change shall become effective.

     4.3   Immediately upon the execution of this Agreement by the parties,
EMPLOYEE shall be awarded an additional equity compensation package regarding
common voting shares of the Company according to the terms and conditions
described in Exhibit A to this Agreement.

     4.4   In addition to the Base Salary payable to EMPLOYEE hereunder, the
EMPLOYEE shall be entitled to the following benefits during the Employment
Period:

           4.4.1   All benefits to which the senior management of the Company
are entitled, as determined by the Company's Board of Directors, on terms
comparable thereto, including but not limited to, participation in any and all
pension and profit sharing plans, bonus and incentive payment programs, group
life insurance policies and plans, medical and health policies and plans, and
the like, which may be maintained by the Company for the benefit of its
executives.

           4.4.2   Two (2) weeks vacation per year, which shall accrue annually
beginning with the effective date of this Agreement. If the EMPLOYEE does not
utilize the entire two weeks of annual vacation in a given year, he may carry
over such weeks into the following calendar year, provided that such accrual
shall not exceed the maximum accrual permitted under current Company policy.

           4.4.3   EMPLOYEE shall be based in Nevada upon the effective date of
this Agreement and agrees to use his best efforts to relocate to San Diego,
California by the end of August, 2000. At such time as EMPLOYEE does relocate to
San Diego, the Company
                                       4
<PAGE>

shall reimburse to EMPLOYEE for his moving expenses to San Diego an amount up to
Twenty Thousand Dollars ($20,000) of such moving expenses, provided EMPLOYEE
provides to the Company appropriate documentation supporting such expenses.

     4.5   The Company shall reimburse EMPLOYEE for all reasonable out-of-pocket
expenses incurred by him in the course of performing his duties under this
Agreement, which are consistent with the Company's policies in effect from time
to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and
documentation of such expenses, provided that any expense in excess of $500
(excluding ordinary travel expenses incurred pursuant to Company policies and
practices) must be pre-approved by the Chief Executive Officer of the Company.

     4.6   All of EMPLOYEE'S compensation shall be subject to customary federal
and state withholding taxes and any other employment taxes as are commonly
required to be collected or withheld by the Company.

5    Termination.
     -----------

     5.1   The Company may terminate this Agreement for Cause (as defined
herein) by delivery of written notice to EMPLOYEE specifying the cause or causes
relied upon for such termination. If EMPLOYEE'S employment under this Agreement
is terminated by the Company for Cause before the last day of any calendar
month, EMPLOYEE shall be entitled to receive as compensation for such calendar
month, only the Base Salary set forth in Section 4.1 prorated to the date of
termination on the basis of a 30-day calendar month and all accrued and
unreimbursed business expenses incurred by EMPLOYEE on or before such date.
Grounds for the Company to terminate this Agreement for "Cause" shall include
the occurrence of any of the following events:

                                       5
<PAGE>

           5.1.1   EMPLOYEE'S willful misconduct or gross negligence in the
performance of his duties hereunder;

           5.1.2   EMPLOYEE'S willful failure or refusal to perform in the
usual manner at the usual time those duties which he regularly and routinely
performs in connection with the business of the Company or such other duties
reasonably related to the capacity in which he is employed hereunder which may
be assigned to him by the Board of Directors of the Company, if such failure or
refusal has not been substantially cured to the satisfaction of the Board of
Directors within thirty (30) days after written notice of such failure or
refusal has been given by the Company to EMPLOYEE.

           5.1.3   EMPLOYEE'S performance of any action when specifically
instructed not to do so by the Chief Executive Officer of the Company;

           5.1.4   EMPLOYEE'S engaging or in any manner participating in any
activity which is directly competitive with or intentionally injurious to the
Company or which violates any provision of Section 7;

           5.1.5   EMPLOYEE'S commission of any fraud against the Company or
use or appropriation for his personal use or benefit of any funds or properties
of the Company not authorized by the Board of Directors to be so used or
appropriated; or

           5.1.6   EMPLOYEE'S conviction of any crime involving moral turpitude.
Any notice of termination given pursuant to this Section 5.1 shall effect
termination as of the date specified in such notice or, in the event no such
date is specified, on the last day of the month in which such notice is
delivered.

     5.2   The Company may voluntarily terminate this Agreement without Cause by
giving not less than thirty (30) days written notice to EMPLOYEE, provided,
however, in no event shall

                                       6
<PAGE>

such termination without Cause be earlier than six (6) months from the effective
date of this Agreement. Any such notice shall specify the exact date of
termination (the "Termination Date"). If EMPLOYEE'S employment under this
Agreement is terminated by the Company without Cause (as defined herein),
EMPLOYEE shall be entitled to receive his Base Salary and other then current
benefits for six (6) months, at the rate existing at the date of termination,
provided that all vesting of stock options shall end on the Termination Date.
All such Base Salary payments shall be paid over time in accordance with the
Company's general payroll practices, as and when such Base Salary would have
been paid had EMPLOYEE'S employment not terminated.

     5.3   EMPLOYEE may voluntarily terminate this Agreement upon no less than
sixty (60) days written notice of such termination submitted to the Board of
Directors, and in such event EMPLOYEE shall be entitled to receive all amounts
due to him through the date of termination, provided that EMPLOYEE shall not be
entitled to terminate this Agreement unless and until the Technology and other
assets described in the Technology Transfer Term Sheet dated February 25, 2000
(the "Term Sheet") are fully, completely and properly transferred to the Company
to the satisfaction of the Chief Executive Officer or the Board of Directors.

     5.4   This Employment Agreement is a personal services contract whereby the
Company is engaging the exclusive services of EMPLOYEE.  By entering into this
Agreement, the Company is relying on EMPLOYEE'S performing his services for the
Company throughout the entire term of this Agreement.

     5.5   This Agreement shall terminate without notice upon the date of
EMPLOYEE'S death or the date when EMPLOYEE becomes "completely disabled" as that
term is defined in Section 6.1.

                                       7
<PAGE>

     5.6   In the event of EMPLOYEE'S death, all rights of EMPLOYEE to
compensation hereunder shall automatically terminate immediately upon his death,
except that EMPLOYEE'S heirs, personal representatives or estate shall be
entitled to any unpaid portion of his salary and accrued benefits earned up to
the date of his death, and may exercise within six (6) months after the date of
death, all vested options to acquire the common stock of the Company granted to
EMPLOYEE hereunder unless a longer term is provided for in the Company's
Incentive Stock Option Plan.

     5.7   In the event EMPLOYEE is disabled, EMPLOYEE shall be entitled to
receive such disability benefits as would apply to other senior executives in
the Company, subject to the terms and conditions of any such Company disability
program.

     5.8   If this Agreement is terminated pursuant to Sections 5.1 or 5.2, or
the EMPLOYEE gives the notice described in Section 5.3, the Chief Executive
Officer or the Board of Directors of the Company may, in his or its sole
discretion, relieve EMPLOYEE of his duties under this Agreement and assign
EMPLOYEE other duties and responsibilities to be performed until the termination
becomes effective.

6    Death Or Disability During Term Of Employment.
     ---------------------------------------------

     6.1   The term "completely disabled" as used in this Agreement shall mean
the inability of EMPLOYEE to perform his duties under this Agreement because he
has become permanently disabled within the meaning of any policy of disability
income insurance covering EMPLOYEE'S of the Company then in force. In the event
the Company has no policy of disability income insurance covering employees of
the Company in force when EMPLOYEE becomes disabled, the term "completely
disabled" shall mean the inability of EMPLOYEE to perform his normal and
customary duties under this Agreement for a total of six (6) consecutive months
by reason of any incapacity, physical or mental, which the Board of Directors of
the Company, based upon medical advice or an opinion provided by a licensed
physician acceptable to the Board of Directors of the

                                       8
<PAGE>

Company, determines to have incapacitated EMPLOYEE from satisfactorily
performing all of his usual services for the Company during the foreseeable
future. The action of the Board of Directors of the Company shall be final and
binding and the date such action is taken shall be the date of such complete
disability for purposes of this Agreement, and upon such date this Agreement
shall become null and void and of no further force and effect, provided that
EMPLOYEE may exercise within six months of the date of termination under this
Section 6, all vested options to acquire the common stock of the Company granted
to EMPLOYEE hereunder, provided that EMPLOYEE acknowledges that such options may
then be considered nonqualified options and not incentive stock options pursuant
to federal law unless a longer term is provided for in the Company's Incentive
Stock Option Plan.

7    Proprietary And Confidential Information.
     ----------------------------------------

     7.1   EMPLOYEE, during the term of this Agreement, will have access to and
become acquainted with various information of substantial value to the Company,
including trade secrets, which is not old and generally not known in the
industry, and which gives the Company an advantage over its competitors who do
not know or use it, including, but not limited to, formulas, patterns, devices,
software, patents, patent applications, software applications or algorithms,
secret inventions, processes, techniques, designs, drawings, developments,
equipment, prototypes, sales and customer information, customer and prospect
lists, and business and financial information relating to the business,
products, practices, and techniques of the Company (collectively, the
"Confidential Information"). EMPLOYEE agrees to regard and preserve as
confidential such Confidential Information obtained by EMPLOYEE from whatever
source and will not, either during EMPLOYEE'S employment or thereafter, publish
or disclose any part of such Confidential Information in any manner at any time,
or use such Confidential

                                       9
<PAGE>

Information except on behalf of the Company, without the prior written consent
of the Company. Further, both during EMPLOYEE'S employment and thereafter,
EMPLOYEE will refrain from any acts or omissions that would reduce the value of
such Confidential Information to the Company. All files, records, documents,
drawings, specifications, equipment, computer disks and software, and other
electronic media or similar items relating to the business of the Company,
whether prepared by the EMPLOYEE or otherwise coming into EMPLOYEE'S possession,
shall remain the exclusive property of the Company.

     7.2   Nonsolicitation.  In order to protect the Confidential Information
of the Company and avoid injury to the Company, EMPLOYEE represents and warrants
and agrees that, for the longer of one year following the termination of
EMPLOYEE'S employment with the Company, or so long as EMPLOYEE is receiving any
payments under Section 5.2.1 from Company:

           (a) EMPLOYEE will not directly or indirectly solicit the customers or
demonstrably prospective customers of the Company to purchase products or
services which are competitive with those of the Company;

           (b) EMPLOYEE will not directly or indirectly solicit or in any manner
encourage employees of the Company to leave its employ; and

           (c) EMPLOYEE will not accept employment from or with any company
which is directly competitive with the Business of the Company.

     Any breach by EMPLOYEE of this Section shall cause the immediate
termination of all of Company's obligation to pay EMPLOYEE any amounts
hereunder.

     7.3   Disclosure of Inventions.  EMPLOYEE agrees that he will promptly
disclose in writing to the officials designated by the Company to receive such
disclosures, complete information concerning each and every invention,
discovery, improvement, device, design,

                                       10
<PAGE>

apparatus, practice, process, method or product, whether EMPLOYEE considers them
patentable or not, made, developed, perfected, devised, conceived or first
reduced to practice by EMPLOYEE, either solely or in collaboration with others,
during the period of EMPLOYEE'S employment by the Company, and up to and
including a period of one (1) year after termination of EMPLOYEE'S employment,
whether or not during regular working hours, relating either directly to the
business, products, practices or techniques of the Company, or to the Company's
actual or demonstrably anticipated research or development, or resulting from
any work performed by EMPLOYEE for the Company (collectively, "Inventions").

     7.4   Assignment of Inventions.  EMPLOYEE agrees that any and all
Inventions made, developed, perfected, devised, conceived or reduced to practice
by him during the period of his employment by the Company, and any other
Inventions made, developed, perfected, devised, conceived or reduced to practice
by EMPLOYEE during said period of one (1) year after termination of his
employment, relating either directly to the business, products, practices or
techniques of the Company or the Company's actual or demonstrably anticipated
research or development, or resulting from any work performed by EMPLOYEE for
the Company, are the sole property of the Company, and EMPLOYEE hereby assigns
and agrees to assign to the Company, its successors and assigns, any and all of
his right, title and interest in and to any and all Inventions, and any patent
applications or Letters Patent thereon.

     7.5   List of Inventions.  As a matter of record, EMPLOYEE will, within 30
days of the execution of this Agreement, provide to Company, to be attached as
Exhibit B to this Agreement, a complete list of all inventions or improvements
relevant to the Business of the Company which have been made or conceived or
first reduced to practice by him alone or jointly with others prior to his
engagement by the Company which he desires to remove from the operation of this

                                       11
<PAGE>

Agreement, and he represents that such list is complete.  If no list is attached
or the list is blank, it means that he has no inventions or improvements to
list.

     7.6   Right to Use or Publish.  Nothing in this Agreement shall limit or be
construed to limit EMPLOYEE'S right to use or publish information which: (a) was
in the public domain before his employment commenced; (b) was known to EMPLOYEE
to be free from any claim of other third parties before EMPLOYEE'S employment;
(c) was developed or acquired independently of the Company; or (d) becomes
public knowledge without breach by him of any obligations of confidence to the
Company.

     7.7   Further Cooperation.  EMPLOYEE will, at any time during his
employment or thereafter, upon request and without further compensation
therefor, but at no expense to EMPLOYEE, do all lawful acts, including the
execution of papers and oaths and the giving of testimony, that in the opinion
of the Company, its successors and assigns, may be necessary or desirable for
obtaining, sustaining, reissuing or enforcing Letters Patent or copyrights in
the United States and throughout the world for any and all of said Inventions,
and for perfecting, recording and maintaining the title of the Company, its
successors and assigns, to the Inventions and to any patent or copyright
applications made and any Letters Patent or copyrights granted for the
Inventions in the United States and throughout the world.

     7.8   Keeping of Records.  EMPLOYEE will keep complete, accurate and
authentic accounts, notes, data and records of any and all of the Inventions in
the manner and form requested by the Company. Such accounts, notes, data and
records, including all copies thereof, shall be the property of the Company,
and, upon its request, EMPLOYEE will promptly surrender same to the Company, or
if not previously surrendered, EMPLOYEE will promptly surrender same to the
Company at the conclusion of his employment.

                                       12
<PAGE>

     7.9   Surrender of Materials.  EMPLOYEE agrees that he will also
surrender to the Company, at its request, or at the conclusion of his
employment, all accounts, notes, data, sketches, drawings and other documents
and records, and all material and physical items of any kind, including all
reproductions and copies thereof, which relate in any way to the business,
products, practices or techniques of the Company or contain Confidential
Information, whether or not created by him, or which come into his possession by
reason of his employment with the Company, and EMPLOYEE agrees further that all
of the foregoing are the property of the Company.

     7.10  Prohibition of Misappropriation from Others.  EMPLOYEE represents and
warrants and agrees that he will not disclose to the Company, use, or induce the
Company to use, any invention or confidential information belonging to any third
party.

     7.11  Imposed Obligations.  EMPLOYEE understands that the Company may
enter into agreements or arrangements that may be subject to laws and
regulations which impose obligations, restrictions and limitations on it with
respect to Inventions and patents which may be acquired by it or which may be
conceived or developed by employees, consultants or other agents rendering
services to it. EMPLOYEE agrees that he shall be bound by all such obligations,
restrictions and limitations applicable to any Invention conceived or developed
by him during the period of his employment, and EMPLOYEE shall take any and all
further action which may be required to discharge such obligations and to comply
with such restrictions and limitations.

     7.12  Preservation of Property.  EMPLOYEE will exercise reasonable care,
consistent with good business judgment, to preserve in good working order,
subject to reasonable wear and tear from authorized usage, and to prevent loss
of, any equipment, instruments or accessories of

                                       13
<PAGE>

the Company in his custody for the purpose of making demonstrations,
implementing trials, carrying out development work, or otherwise conducting the
business of the Company. Upon request, EMPLOYEE will promptly surrender the same
to the Company at the conclusion of his employment, or if not surrendered,
EMPLOYEE will account to the Company to its reasonable satisfaction as to the
present location of all such instruments or accessories and the business purpose
for their placement at such location. At the conclusion of EMPLOYEE'S employment
with the Company, he agrees to return such instruments or accessories to the
Company or to account for same to the Company's reasonable satisfaction.

     7.13  No Inconsistent Agreements.  EMPLOYEE represents and warrants that
he has no agreement with any other party that would preclude his compliance with
any obligations under this Agreement.

     7.14  Indemnity.  EMPLOYEE agrees to indemnify and hold Company harmless
from and against any and all loss, liability or expense arising from or related
to any breach of this Section 7 or the representations and warranties made by
EMPLOYEE hereunder. Any material breach of this Section 7 or any representation
and warranty of EMPLOYEE hereunder shall permit the Company to purchase from
EMPLOYEE any or all of any Contingent Stock (as defined in the Term Sheet)
EMPLOYEE receives at the price paid by EMPLOYEE for such stock.

8    Assignment And Binding Effect.
     -----------------------------

     8.1   This Agreement shall be binding upon and inure to the benefit of
EMPLOYEE and EMPLOYEE'S heirs, executors, administrators, estate, beneficiaries,
and legal representatives. Neither this Agreement nor any rights or obligations
under this Agreement shall be assignable by either party without the prior
express written consent of the other party. This

                                       14
<PAGE>

Agreement shall be binding upon and inure to the benefit of the Company and its
successors, assigns and legal representatives.

9    Notices.
     -------

     9.1   All notices or demands of any kind required or permitted to be given
by the Company or EMPLOYEE under this Agreement shall be given in writing and
shall be personally delivered (and receipted for) or mailed by certified mail,
return receipt requested, postage prepaid, addressed as follows:

       If to the Company:    American Technology Corporation
                             13114 Evening Creek Drive South
                             San Diego, California 92128
                             Attention:  Board of Directors

       with a copy to:       Michael J. Kinkelaar, Esq.
                             Procopio, Cory, Hargreaves & Savitch LLP
                             530 B Street, Suite 2100
                             San Diego, California 92101

       If to EMPLOYEE:       David Graebener
                             C/o Stratton Ballew
                             1313 Seattle Tower
                             1218 Third Avenue
                             Seattle, Washington 98101

Any such written notice shall be deemed received when personally delivered, or
three (3) days after its deposit in the United States mail as specified above.
Either Party may change its address for notices by giving notice to the other
Party in the manner specified in this section.

10   Choice Of Law.
     -------------

     10.1  This Agreement is made in San Diego, California.  This Agreement
shall be construed and interpreted in accordance with the laws of the State of
California. Each of the parties hereto agree to the exclusive jurisdiction of
the state and federal courts located in the State of California for any and all
actions between the parties. Any controversy or claim arising

                                       15
<PAGE>

out of or relating to this Agreement or the breach thereof, whether involving
remedies at law or in equity, shall be adjudicated in San Diego County,
California.

11   Integration.
     -----------

     11.1  This Agreement contains the entire agreement of the parties relating
to the subject matter of this Agreement, and supersedes all prior oral and
written employment agreements or arrangements between the Parties. This
Agreement cannot be amended or modified except by a written agreement signed by
EMPLOYEE and the Company.

12   Waiver.
     ------

     12.1  No term, covenant or condition of this Agreement or any breach
thereof shall be deemed waived, except with the written consent of the Party
against whom the waiver is claimed, and any waiver of any such term, covenant,
condition or breach shall not be deemed to be a waiver of any preceding or
succeeding breach of the same or any other term, covenant, condition or breach.
No failure or exercise, delay in exercising, or single or partial exercise of
any right, power or remedy by either party hereto shall constitute a waiver
thereof or shall preclude any other or further exercise of the same or any other
right, power or remedy.

13   Severability.
     ------------

     13.1  The unenforceability, invalidity or illegality of any provision of
this Agreement shall not render any other provision of this Agreement
unenforceable, invalid or illegal.

14   Interpretation; Construction.
     ----------------------------

     14.1  The headings set forth in this Agreement are for convenience only and
shall not be used in interpreting this Agreement.

15   Attorneys' Fees.  In any controversy or claim arising out of or relating to
     ---------------
this Agreement or the breach thereof, which results in legal action, proceeding
or arbitration,

                                       16
<PAGE>

the prevailing party in such action, as determined by the court or arbitrator,
shall be entitled to recover reasonable attorneys' fees and costs incurred in
such action.

16   Counterparts.  This Agreement may be executed in any number of
     ------------
counterparts, each of which when so executed and delivered shall together
constitute an original hereof.

17   Representations And Warranties.
     ------------------------------

     17.1  EMPLOYEE represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing each
of the terms and covenants contained in this Agreement, and that his execution
and performance of this Agreement will not violate or breach any other agreement
between EMPLOYEE and any other person or entity.

18   Arbitration.
     -----------

     18.1  Any controversy or claim arising out or relating to this Agreement,
or the breach hereof, or arising out of or relating to the rights, duties or
obligations of the Company or of EMPLOYEE shall be settled by arbitration
conducted in San Diego County, California in accordance with, and by an
arbitrator appointed pursuant to, the rules of the American Arbitration
Association in effect at the time, and the judgment upon the award rendered
pursuant thereto may be entered in any court having jurisdiction, and all rights
or remedies of the Company and of the EMPLOYEE to the contrary are hereby
expressly waived. Prior arbitration pursuant to the provisions of this Section,
and an award pursuant thereto, shall be a condition precedent to the bringing of
any action, suit or proceeding by EMPLOYEE for any form of relief against the
Company or any of its shareholders, directors or officers subject to this
Agreement.

                                       17
<PAGE>

     IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.

                                       THE COMPANY:

                                       American Technology Corporation,
                                       a Delaware Corporation


                                       By: /s/ CORNELIUS J. BROSNAN
                                          ----------------------------
                                          Cornelius J. Brosnan
                                          Chief Executive Officer


                                       EMPLOYEE:

                                       /s/ DAVID GRAEBENER
                                       ------------------------------
                                       David Graebener

                                       P.O. Box 2193
                                       Carson City, NV 98703
                                       [address]

                                       579482885
                                       -------------------------------
                                       EMPLOYEE Social Security No.

                                       18
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                                   Exhibit A


       Effective immediately upon signing this Agreement, EMPLOYEE shall be
awarded incentive stock options to purchase 100,000 shares of Common voting
shares in the Company.

       The exercise price of all said options shall be $8.125 per share.

       The above-mentioned options shall vest on the earlier of (i)quarterly
over three (3) years, with the first 8333 option shares vesting May 15, 2000,
and the balance vesting in equal amounts of 8333 option shares beginning on the
15th day of August, November, February and May of each year during the term of
this Agreement, until February 14, 2003, on which day balance of any unvested
option shares shall vest, or (ii) in the event of a significant license, trade
or sales agreement for the technology purchased from Hucon Limited.

       The options described above shall be set forth in a definitive stock
option agreement between EMPLOYEE and the Company which shall include all of the
above terms and other usual and customary provisions as deemed necessary by
counsel to the Company.



Initials:

     /s/ CB  The Company                   /s/ DG  David Graebener
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