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

                                   FORM 10-K

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

                  For the fiscal year ended September 30, 2000

                         Commission File Number 0-24248
                                               --------

                        AMERICAN TECHNOLOGY CORPORATION
             (Exact name of registrant as specified in its charter)

                    Delaware                            87-0361799
                    --------                            ----------
        (State or other jurisdiction of              (I.R.S. Employer
        incorporation or organization)            Identification Number)

       13114 Evening Creek Drive South, San Diego, California      92128
       ------------------------------------------------------      -----
      (Address of principal executive offices)                   (Zip Code)

                                 (858) 679-2114
                                ---------------
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  NONE
Securities registered pursuant to Section 12(g) of the Act:

                        Common Stock, $.00001 par value
                        -------------------------------
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [   ]

As of December 27, 2000, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was approximately $29.1
million.

The number of shares of Common Stock, $.00001 par value, outstanding on December
27, 2000, was 13,292,099

                      DOCUMENTS INCORPORATED BY REFERENCE

Information required by Part III is incorporated by reference to portions of the
Registrant's Proxy Statement for the Year 2000 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 2000 fiscal year.

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<TABLE>
<CAPTION>
                               TABLE OF CONTENTS
                                                                        Page
                                                                        ----
                                     PART I
<S>                                                                     <C>
ITEM 1.    Business                                                         3
ITEM 2.    Properties                                                      13
ITEM 3.    Legal Proceedings                                               13
ITEM 4.    Submission of Matters to a Vote of Security Holders             13

                                    PART II
ITEM 5.    Market for Registrant's Common Equity and Related
            Stockholder Matters                                            13
ITEM 6.    Selected Financial Data                                         13
ITEM 7.    Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                      14
ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk      20
ITEM 8.    Financial Statements and Supplementary Data                     20
ITEM 9.    Changes in and Disagreement with Accountants on
            Accounting and Financial Disclosure                            20

                                    PART III
ITEM 10.   Directors and Executive Officers of the Registrant              20
ITEM 11.   Executive Compensation                                          20
ITEM 12.   Security Ownership of Certain Beneficial Owners and Management  20
ITEM 13.   Certain Relationships and Related Transactions                  21

                                    PART IV
ITEM 14.   Exhibits, Financial Statement Schedules
             and Reports on Form 8-K                                       21
</TABLE>

                           FORWARD-LOOKING STATEMENTS

IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21A OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR"
PROVISIONS THEREOF. THEREFORE THE COMPANY IS INCLUDING THIS STATEMENT FOR THE
EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR WITH
RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING
STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO
FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED HEREIN,
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
ANTICIPATED RESULTS. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE,"  "PLANS," "STRATEGY," AND SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO CONSIDER THE
SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-
LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE
DATE HEREOF.

                                       2
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                                     PART I
Item 1. Business

Overview

American Technology Corporation develops, markets and licenses proprietary sound
reproduction and other technologies. Our primary marketing focus is on four of
our proprietary sound reproduction technologies:

*  HSS(TM), HyperSonic(TM) Sound Technology
*  SFT, Stratified Field(TM) Technology
*  NeoPlanar(TM) Technology
*  PureBass(TM), Sub-Woofer Technology

We also market a line of portable consumer products under our own label and are
developing other new technologies. We operate in one business segment,
electronic products.

Our HyperSonic Sound technology is a new method of sound reproduction. Sound is
generated in an air column using ultrasonic frequencies, those above the normal
range of hearing. Our proprietary electronic process generates an ultrasonic
beam to interact in mid-air producing wide spectrum audio along the beam. The
sound beam has a very high degree of directionality and maintains sound volume
over longer distances than traditional methods of sound reproduction. We believe
HyperSonic Sound has unique features useful in new sound applications. Initial
marketing is targeted at specialized markets benefiting from highly directional
sound.

Stratified Field is an advanced speaker technology that shares certain
characteristics of electrostatic speakers. Electrostatic speakers employ a thin
plastic film to radiate sound and are known for very high sound quality and low
distortion. Our Stratified Field technology is a non-magnetic thin panel speaker
design that we believe has performance advantages over traditional speakers and
other thin panel speakers. Stratified Field is being targeted at the home and
multimedia speaker markets.

NeoPlanar technology is a thin film magnetic speaker which can be produced as
thin as 1/8". This speaker uses novel films and magnetic materials which we
believe results in superior sound quality, reduced distortion and greater sound
volume for a given size than traditional planar (flat or thin) magnetic speaker
devices. Our NeoPlanar speaker technology is targeted at the automotive and
multimedia speaker markets.

Our PureBass extended range sub-woofer was designed to complement our high
performance Stratified Field and NeoPlanar technologies. PureBass employs unique
cabinet construction and vent configurations along with multiple acoustic
filters which we believe produces improved performance. We believe PureBass
minimizes distortion, provides high output for its size, and results in economic
system costs when compared to conventional woofer systems. It provides a high
frequency interface with upper range satellite speaker systems. We are marketing
this technology as a complement to our Stratified Field and NeoPlanar speakers.

Our objective is to be a leader in developing, marketing and licensing
innovative sound reproduction technologies that address large and expanding
domestic and international consumer and commercial electronics markets. We seek
to have our sound technologies become important alternatives to conventional
loudspeakers in target market segments. We believe it is becoming increasingly
difficult for manufacturers to differentiate their sound reproduction products
to offer consumers new choices. We also believe the rapid emergence of flat
panel computer and television monitors and the growing computer multimedia
market provide new and growing opportunities for our products.

We have an innovative engineering and development team of 16 persons. We have
developed and own other technologies in various stages of development. Our
strategy is to focus on sound reproduction technologies and to license or sell
other technologies incubated by our development team.

We also label, under the American Technology brand, portable consumer products,
primarily sourced from foreign manufacturers. We currently market and distribute
approximately 13 portable consumer products with retail prices ranging from
$11.99 to $29.99. The marketing of portable consumer products provided
substantially all revenues during fiscal 2000, 1999 and 1998. However the
majority of marketing and development costs during fiscal 2000 were incurred
towards our sound technologies.

                                       3
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American Technology was incorporated in the State of Utah on February 11, 1980
as Chasko, Inc. and on April 7, 1982 our name was changed to American Technology
Corporation. From inception to 1988, we were engaged in electronic product
development. From 1988 to early 1992, we were inactive due to inadequate
financial resources. In early 1992 our company was brought into good standing
and restructured. On June 19, 1992 we redomiciled from the State of Utah to the
State of Delaware.

Since the 1992 restructuring, our operations have focused on developing sound
reproduction technology assets. Our shares trade on NASDAQ under the symbol
"ATCO." Our address is 13114 Evening Creek Drive South, San Diego, California,
and our telephone number is 858-679-2114. Our Internet site is located at
www.atcsd.com.

Recent Key Business Developments
During fiscal 2000 and during the period since September 30, 2000 to the date of
this report we achieved some important business developments:

*    We completed development of our Stratified Field technology, licensed the
     technology to two licensees including Thomson Audio Hong Kong, a subsidiary
     of Thomson Multimedia, a leading producer of consumer electronics. We also
     demonstrated our ability to complete the technology transfer of this
     technology to customers.
*    We produced new HyperSonic Sound emitters and substantially improved our
     electronic systems to further reduce distortion and improve output and
     performance. We are working with the Bath Iron Works division of General
     Dynamics and a new licensee focusing on the trade show, exhibit, event and
     point-of-purchase market segments to exploit our HSS technology.
*    With the development milestones achieved with HyperSonic Sound and our
     belief that this technology offers unique sound opportunities, we have
     focused additional resources and marketing efforts to exploit this
     technology.
*    In April 2000 we purchased our NeoPlanar technology and since the
     acquisition have developed and improved the technology to the point where
     we believe the technology can be commercialized. We are actively pursuing
     licensees in the automotive and multimedia markets. According to industry
     insiders the OEM automotive speaker market consists of 200 million units
     per year worldwide.
*    We developed and began licensing a new sub-woofer technology, PureBass.
     PureBass complements our Stratified Field and NeoPlanar technologies to
     provide a complete system solution to prospective licensees.
*    During the period described above we substantially expanded our portfolio
     of intellectual property. During this time we filed ten additional U.S.
     patent applications and continued efforts to expand patent coverage in
     major countries throughout the world.

We believe the above developments should allow us to recognize sound technology
revenues in fiscal 2001 and beyond.

Sound Reproduction Industry Overview
The human ear is sensitive to the rate at which sound vibrations occur or
frequencies from about 20 Hertz (Hz) to 20,000 Hz (a Hertz is equal to one
vibration per second). A wide variety of loudspeakers are produced today to
recreate the range of hearing. These range from tweeters that attempt to re-
create the top end of the audio spectrum, to mid-range speakers and woofers to
address the lower frequencies. Conventional loudspeakers generally are direct
radiating.  They is fundamentally a piston-like device designed to directly pump
air molecules into motion to create audible sound waves. Better sound quality
and low frequency (bass) reproduction is generally associated with larger and
more expensive speakers.

Since 1925, when C.W. Rice and E.W. Kellogg described basic, direct radiating
speaker parameters, there have been, until recently, few fundamental changes in
speaker design or in the way electrical impulses are converted to sound.
Electronics (receivers, amplifiers, tuners and recording and playback equipment)
have evolved from vacuum tubes to solid state digital circuits and recording
technology has progressed from analog grooves in records to digital coding on
compact discs that are read by a laser or data in memory. Loudspeaker industry
developments have focused primarily on improving individual elements such as
magnets, coils, cones and enclosures. However, compared to the improvements in
electronics, we believe loudspeakers are still relatively inefficient in
converting electrical energy into acoustic energy and their design contributes
to various forms of sound distortion.

Loudspeakers are used in televisions, radios, telephones, computers,
automobiles, and a wide range of other consumer and industrial applications.
From miniature speakers in hearing aids to large home theater, public address
and concert sound systems, loudspeakers encompass a wide range in size, quality
and cost. The manufacture and sale of loudspeakers is highly competitive and
includes both large international consumer electronic companies and specialty

                                       4
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branded loudspeaker manufacturers. We believe the lack of fundamental innovation
and the diversity and size of the loudspeaker market presents an opportunity to
introduce new sound technology that will appeal to consumers and be cost-
effective for manufacturers.

The rapid emergence of flat panel computer and television monitors and the
growing multimedia computer market provides opportunities for thin flat panel
speaker designs. Several designs of direct radiating speakers are currently
associated with thinner or flat speaker products. These include electrostatic
speakers, planar magnetic speakers and magnetic actuated panel speakers. An
electrostatic loudspeaker generally employs a diaphragm (generally a thin
plastic film) which is tensioned between two conductive planes. A charge is
applied to the diaphragm and charges are alternated between the two conductive
planes to move the diaphragm thus moving air to create audible tones. Based on
the size of the device and the speed of the movement of the diaphragm, various
sound pressure levels and frequencies are produced. Generally electrostatic
speakers are:

*   low in distortion, high in sound quality
*   quite large in order to produce low frequencies
*   difficult to manufacture due to high tolerances, resulting in high cost

A planar magnetic loudspeaker combines some aspects of traditional direct
radiating speakers and electrostatic designs. In the traditional planar design,
conducting wires are imbedded in a large plastic film or sheet, and magnets are
employed to create a magnetic field around the sheet to radiate sound similar to
an electrostatic speaker. Certain flat panel designs employ a magnetic actuator
or exciter to excite a rigid panel to radiate sound. Traditional planar speakers
are generally expensive and difficult to produce.

Our HyperSonic Sound technology employs new concepts not previously
commercialized by others.

Our Sound Solutions

We believe our solutions reflect significant improvements to electrostatic and
planar magnetic designs. Our HyperSonic Sound solution innovates novel new
concepts. Our primary development and marketing focus is on the following four
sound reproduction technologies.

HyperSonic Sound Technology
---------------------------

Our HyperSonic Sound technology utilizes a new method of sound reproduction --
sound is generated in the air using ultrasonic frequencies, those above the
normal range of hearing. A patent-pending electronic process creates and
modulates (shapes) an ultrasonic wave that interacts in mid-air to produce wide
spectrum audio.

HyperSonic Sound is partially based on a phenomenon in music known as Tartini
tones, which were first noted by Giuseppe Tartini, an 18th century composer.
When two sound tones are positioned relatively close together and are sufficient
in volume, then two new tones appear, one is the sum of the original tones and
one is the difference. In 1856, H. von Helmholtz, a German physiologist and
physicist, published the results of his combination tone experiments proving the
effect resulted from the non-linearity of air. Although others have experimented
with these principles in the past (the general field of experimentation being
described as parametric speakers), we believe we have created novel and
proprietary methods to efficiently use these concepts to produce sufficient
sound volume and quality capable of being commercially exploited. Our HyperSonic
Sound technology and processes are the subject of nine issued patents and
multiple pending patents.

HyperSonic Sound employs a method where ultrasonic frequencies are created
electronically using proprietary techniques to carry intelligence (e.g. music,
voice), and these ultrasonic frequencies are then emitted into the air using an
ultrasonic emitter. Since the audible sound is created in the air, sound does
not appear on the surface of the ultrasonic emitter (a significant departure
from a loudspeaker) but is actually created within and throughout the invisible
beam of ultrasonic energy being emitted. Accordingly, if the beam is directed
towards a wall, the sound emanates from the surface of the wall, and if the beam
is directed to a person, the sound emanates at the person. This directionality
allows sound to be manipulated in space or diffused from a surface in a wide
variety of ways to produce desired effects. The sound also does not dissipate at
the same rate over distance as it does with traditional speakers. We believe
this unique feature provides greater volume at selected distant points with less
energy.

Our technology uses ultrasonic emitters (transducers which convert electrical
energy to high frequency acoustical energy).  Such ultrasonic devices are not
designed to produce frequencies in the audible range. However, we have developed
the ability to use such devices (in lieu of loudspeakers) to emit a custom-
generated ultrasonic wave with the

                                       5
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proper difference frequency characteristics to produce audible sound in the air.
And we have developed new proprietary emitter designs specific to our
application.

We believe our HyperSonic Sound technology, comprised of the combination of
proprietary electronics and proprietary custom ultrasonic emitters (specialized
ultrasonic devices essentially taking the place of the radiating element of a
loudspeaker) offers a number of advantages:

*   The ability to create an invisible beam to place sound where you want it
*   Elimination of the need for a speaker enclosure
*   Reduction of the effect of room acoustics on sound quality
*   Ability to manipulate or selectively position or diffuse the source of sound
*   Ability to deliver a beam of sound over long distances
*   Elimination of magnets, their weight and adverse effects
*   Elimination of feedback in professional applications

We believe our sound technologies offer important competitive advantages for
original equipment manufacturers ("OEMs") and new features important to
consumers. We believe our HyperSonic Sound technology will be utilized within
the industrial applications, such as, trade show exhibits, Kiosk, military
applications and other various directional applications. However, there can be
no assurance our HyperSonic Sound or other sound technology advantages can be
successfully implemented commercially or will achieve market acceptance.

Stratified Field Technology
---------------------------

We believe Stratified Field Technology, or SFT, is a thin, non-magnetic
loudspeaker design providing high quality performance for a variety of
applications. The term Stratified Field relates to the multiple layers of
materials employed in the design. We have developed a number of distinct
Stratified Field designs employing plastic film as the direct radiating element.
During fiscal 2000 we focused on bringing our best performing design to market
by developing manufacturing techniques to allow technology transfer. We believe
this design offers advantages over existing electrostatic, traditional planar
magnetic and magnetic actuated panel designs generally associated with flat
speakers.

Stratified Field is both a departure from and a significant improvement on
electrostatic designs. While employing plastic film as the primary radiating
sound element, our designs are distinct from traditional electrostatic, planar
magnetic or magnetic actuator speaker designs. New materials and methods are
employed to overcome some of the limitations of electrostatic, planar magnetic
and magnetic actuator speaker designs. We expect Stratified Field to compete
with conventional loudspeakers due to high sound quality, competitive economics
and ease of manufacture in a variety of thin sizes and shapes.

We have five issued U.S. patents and multiple pending patents on our Stratified
Field speaker designs. Our Stratified Field designs can be shaped in cylinders
and spheres. This flexibility provides unique product design opportunities for
consumer product manufacturers. Our design eliminates the costs and the
constraints of the normal "box" associated with loudspeakers. We believe the
following attributes compare well on a competitive basis to conventional and
other flat panel loudspeaker designs:

     Performance Attributes
     ----------------------

*   Consistent radiation movement over the entire surface resulting in low
    distortion, smooth frequency response and low coloration of sound
*   Smooth, flat frequency response across the effective sound range
*   Low bass response compared to comparable size flat panels
*   Accurate imaging and high sound quality
*   Low mechanical vibration
*   Loss-less load (no heat is produced regardless of sound pressure level)
*   No constraint on the ratio of height to width. Ability to curve and shape
    the panels to produce new product designs.

     Physical Attributes
     -------------------

*   Thin physical format - as thin as 5 mm over the entire surface with no
    protruding actuator drive mechanism
*   Non-magnetic design employs no magnetic fields
*   Low moving mass producing minimal vibration
*   No requirement for a speaker box or enclosure
*   Radiating surface can be curved, shaped or cylindrical
*   Low overall weight

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     Manufacturing Benefits
     ----------------------

*   Simple manufacturing process with robust design for manufacturability
*   High fidelity to cost ratio
*   Variable dimensions to meet custom application requirements
*   Multiple product mounting options
*   Low component and manufacturing costs

In our opinion, the above properties offer advantages for products such as flat
panel video displays, laptop computers, home audio and theater systems,
installed sound reinforcement, professional monitors, high-fidelity speakers,
automotive systems and other applications requiring physically flat or thin (in
the case of curved) panels but with high-quality audio performance.

Planar Magnetic Speaker Technology
----------------------------------

Our NeoPlanar technology is a thin film magnetic speaker which can be produced
as thin as 1/8". This speaker uses novel films, magnetic materials and a new
manufacturing process which we believe provides improved cost/performance
benefits. Traditional planar magnetic speakers use materials with limited power
handling ability and are generally associated with high distortion. Our novel
designs result in greater power handling, lower mass and greater durability. As
a result, we believe our NeoPlanar technology produces superior sound quality,
higher sensitivity, while requiring lower wattage power amplifiers to produce
higher sound pressure levels. We also believe our design provides extended high
frequency output to meet the demands of new compact disks.

We have filed for patent protection of our NeoPlanar design that distinguish it
from traditional planar magnetic speakers. We believe the high quality and high
output of our very thin NeoPlanar technology is ideally suited to automotive and
multimedia markets.

PureBass Sub-Woofer Technology
------------------------------

Our PureBass extended range sub-woofer was designed to complement our Stratified
Field and NeoPlanar technologies. We believe traditional woofer technologies
produce distortion with limited frequency range making it difficult to achieve
accurate, seamless transition, upper range speakers. PureBass employs unique
cabinet construction and vent configurations along with multiple acoustic
filters to produce low distortion and improved transition to high-performance
speaker systems. While conventional sub-woofers crossover to upper range
speakers at approximately 100-110 Hz, our extended range PureBass sub-woofer
allows for crossover well over 220 Hz providing improved matching with thin
panel speakers.

We believe the following characteristics distinguish PureBass technology:
*   Our acoustic system filters incoming audio and reduces distortion
    components to produce a clean sound.
*   These acoustic filters reduce cone motion at low frequencies while allowing
    greater output and power handling for a given size woofer.
*   Higher upper range performance eliminates active or passive low range
    crossover systems associated with traditional woofers.
*   Our higher transition frequencies reduces interference providing improved
    integration with upper range high-quality speakers.
*   PureBass technology reduces the size, weight and cost of a comparably
    performing system.

We have filed multiple patent applications on various aspects of our PureBass
technology and have innovated proprietary construction techniques for use by our
existing licensees and future licensees. We are marketing this technology as a
complement to our Stratified Field and NeoPlanar speakers. It also has
applications in other high performance satellite speaker systems including home
theater, multimedia, bookshelf systems, televisions and others.

Other Proprietary Technologies

We have other sound inventions and technologies in various stages of development
including our Magnified Force Woofer ("MFW") technology and other woofer
designs. In June 1998 we acquired certain rights to a patented method of
producing powerful ultrasonic frequencies which may have applications for
government and military applications. In late 1994, we innovated a proprietary
method of tracking persons and objects utilizing Global Positioning System (GPS)
technology. We own two U.S. patents on our GPS designs. We have been awarded one
U.S. patent regarding our Engine Plasma Displacement (EPD) technology, a new
method and system for reducing noise in jet engines. There can be no assurance
that these technology concepts will function as theorized or that any practical
product or technology will result from these inventions.

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Our focus and our resources are on our sound reproduction technologies described
above. We are not actively developing other non-sound technologies owned by us.
Our strategy is to either sell or license these technologies, all of which
require further development to assess commercial viability, or in the
alternative to develop them at a later date not presently determinable. There
can be no assurance we can sell, license or otherwise exploit these technologies
or future technologies incubated by our engineers.

Our Strategy

The marketing of our sound technologies continues to evolve as a result of
market awareness, technical developments, changes in patent and protection
strategies and reactions from users of our technologies. We are focusing our
efforts on OEMs desiring to implement our technology in specific products or
applications. Our strategy is to establish business relationships with leading
participants in selected segments of the electronics and sound reproduction
markets. We believe this strategy will enable us to take advantage of the
superior financial resources, technological capabilities, proprietary positions,
branding, distribution and market presence of OEMs in establishing and
maintaining our technologies.

We also are implementing a branding strategy aimed to make HyperSonic Sound
(HSS), Stratified Field, NeoPlanar and PureBass synonymous with innovative,
high-quality sound reproduction. We believe we can facilitate the rapid adoption
of our technologies through licensing and technology collaboration arrangements
with contract and OEM manufacturers. Key elements of our strategy include:

     1.   Build on technical achievements allowing licensees to produce
          commercially viable products for consumers. We have converted our
          prototypes into designs and materials that licensees can use across a
          variety of targeted market segments. We expect to continue to improve
          our designs to benefit licensees.

     2.   Expand patent coverage. We have filed multiple patent applications
          worldwide and expect to continue to file amendments, continuations and
          additional patents as development progresses. We believe the scope and
          breadth of our patents will be an important factor in the exploitation
          of our technologies.

     3.   Implement a segmented and flexible licensing approach. We have
          identified a segmented licensing approach targeted at general fields
          of use. This approach may include developing one or more manufacturing
          partners to supply product to those OEMs not wishing to produce the
          core elements of our technologies. We may also sell key components or
          materials to make implementation simpler.

     4.   Identify and determine market segment needs. We have identified and
          are focusing initial HyperSonic Sound marketing on certain government
          applications, public address and audio for point-of-purchase areas.
          Stratified Field marketing and licensing efforts are focused on four
          initial fields of use (a) computer multimedia (b) high-end
          televisions, (c) consumer home audio, and (d) professional audio.
          NeoPlanar technology is being targeted at the automotive market and
          computer multimedia markets. Our initial PureBass marketing is focused
          on serving as a complement to Stratified Field and NeoPlanar speakers
          to offer a total integrated system. We believe our technologies can
          become an important competitive features for OEMs and can also help
          OEMs achieve premium price or premium margins for their products.

     5.   Support licensees and develop a market position. We support our
          licensees and manufacturers with technical support and on ongoing
          research and development effort. We require branding of our devices to
          create and build consumer awareness.

Our strategy is to develop strategic arrangements with manufacturers in targeted
fields of use with limited exclusivity to accelerate implementation and market
introduction and to allow selected manufacturers to differentiate product
offerings from competitors. Although we anticipate generating a significant
portion of our revenues from licensing and royalties or arrangements with
contract manufacturers, we may also directly produce and sell materials or
components used in the production of our speakers. There can be no assurance
that we can be successful in implementing our strategies or commercializing our
technologies.

Markets and Licensing

According to the CEMA's (Consumer Electronics Manufacturer's Association)
loudspeaker market estimates for the year 2000 the following represents the
number of units sold and market value in the United States.

                                       8
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*   Home Speakers, 3.3 million units or $863 million
*   Aftermarket Automobile, 5.2 million units or $394 million
*   OEM Auto, 110 million units or $1.8 billion

In addition, according to CEMA more than $16 billion of personal computer
equipment was sold in 1999, and substantially all of this equipment is sold with
two loudspeaker drivers or bundled with two loudspeaker drivers. According to
Frost & Sullivan research, the North American commercial and professional
loudspeaker market in 2000 is estimated to be approximately $934 million.

We believe that our HyperSonic Sound technology can be utilized in both the
commercial sound and point-of-sale markets. It has potential application in
specialized home, automotive and government markets. Our Stratified Field
technology is a thin, non-magnetic loudspeaker technology with a high audio
"quality-to-cost ratio" and can be curved and shaped to fit design needs. We
believe the primary target market for Stratified Field is in home speakers.  Our
NeoPlanar technology is a very thin, low-cost, flat magnetic speaker technology
with high sound pressure capability and excellent fidelity. It is lighter than
conventional loudspeakers and impervious to harsh environments. We believe the
target markets for NeoPlanar include the automotive, professional, computer and
home speaker markets. It also has been tested for operational use aboard
vessels.

Licensing and Contracts
-----------------------

We seek to execute our licensing strategy through our marketing and executive
personnel and through a business development and representation agreement with
Teksel Co., Ltd. in Japan.

In June 1998, we executed our first license agreement on a early version of our
Stratified Field technology with Authentic of Japan. We received an initial
$50,000 non-refundable payment. As of the date of this report, Authentic has
chosen not to develop this technology although they retain the right to do so
including subsequent improvements developed by us.

In August 1998, we obtained an initial military contract for $20,000 from the
U.S. Army Space and Missile Command to evaluate an application of the HSS
technology. The project was completed in January 1999. In May 1999, we obtained
a contract from the University of Mississippi ("NCPA") for $46,322 to provide
NCPA with three to six HSS(TM) sound sources for testing. The project was
completed in November 1999.  In September 1999, we obtained a $44,773 contract
from General Dynamics to develop a HyperSonic Sound engineering model. This
project was completed in December 2000.

In April 2000, we granted Thomson Multimedia a non-exclusive license to
manufacture and market our Stratified Field technology for the home audio
Market. As of this date Thomson is completing tooling and beginning setup of
their manufacturing process. We expect they will introduce their first product
using our technology in 2001.

In September 2000 we licensed our Stratified Field and PureBass technology to
HST, Inc., a Southern California-based manufacturer of composite components and
assemblies.  HST is developing systems targeted at the Hi-Fi and home theater
markets.

In October 2000 we licensed our HyperSonic Sound technology to SoundIdeas, a
Southern California-based distributor targeting the trade show, exhibit, event
and point-of-purchase markets. SoundIdeas has an exclusive license to these
markets in North America. They are working with large volume prospective users
of HSS as we coordinate the setup of mass-producing facilities.

In addition to seeking OEMs to market and sell our technologies, we are seeking
to develop supply agreements with manufacturers capable of supplying HyperSonic
Sound electronics and emitters to us for use by licensees.

Many OEMs source speaker products from outside vendors rather than manufacture
such components. Accordingly, our strategy is to develop a supply arrangement
for these future OEM customers that do not wish to manufacture. We believe there
are contract manufacturers with facilities and capabilities to manufacture and
assemble our technologies for OEMs.

Although we expect several of our licensees to introduce products employing our
technology in fiscal 2001 and produce royalty revenues to us, there can be no
assurance thereof. We believe we have innovated important new sound technologies
but there can be no assurance that commercially viable systems will be completed
by OEMs and marketed

                                       9
<PAGE>

to consumers due to the inherent risks of new technology development,
refinement, limitations on financing, competition, obsolescence, loss of key
technical personnel, customer acceptance, strategic changes by OEMs and other
factors beyond our control.

Consumer Product Sales

To date substantially all of our revenues have been derived from portable
consumer products. We currently offer a total of 13 sourced portable consumer
products (including miniature FM, AM and solar radios) targeted for niche
markets at retail prices ranging from $11.99 to $21.99. Sourcing is from three
manufacturers on both an exclusive and nonexclusive basis and for different
market territories on a product by product basis. Our market focus is in North
America.

We inventory finished goods and also offer direct factory shipment to certain
customers.

Our management continually seeks additional products and accessories developed
by others for distribution. There can be no assurance we can obtain rights to
manufacture and/or distribute any future products.

Selling and Marketing

One sales and marketing officer and one senior executive personnel direct our
sound technology marketing. We have employed one agent, Teksel Co., Ltd. in
Japan. Our marketing activities are directed at promoting our technologies
through industry press, at industry trade shows and related marketing
activities. Our sound technology sales activities are targeted at specific
prospective OEMs.

Our sound technology and marketing activities have resulted in a number of
awards and press articles. In May 1997, the inventor of the HSS technology, Mr.
Norris, was awarded the 1997 Discover Magazine Award for Technical Innovation in
the sound category for our HyperSonic sound technology. Winners in a total of
eight categories were selected from over 4,000 entries. The annual awards are
designed to recognize and promote new technological innovations, and an expert
panel of judges selected the winners. Winners were also featured in the July
issue of Discovery magazine. In November 1997, HSS technology won a Popular
Science 1997 "Best of What's New Award" from among thousands of new products.
These awards and recognition have provided marketing exposure for the HSS
technology. HSS technology has also been featured in over 30 journal articles
providing additional marketing exposure.

We have two full-time marketing personnel assigned to consumer electronic
product marketing and sales activities. We had 33 independent representative
agencies in the U.S. and Canada at October 31, 2000.

We focus most of our consumer electronic product marketing on traditional retail
outlets and catalog distributors. We employ cooperative marketing and
advertising arrangements with our product customers from time to time.

Customers

For the fiscal year ended September 30, 2000, sales to two customers accounted
for 35% of product sales with Big 5 and Sam's Club accounting for approximately
12% and 23% of sales, respectively, with no other single customer accounting for
more than 10% of product sales.

We expect that we will continue to rely on a number of large individual
customers for future revenues and the loss of any customer could have a material
adverse effect on our financial condition, results of operations and cash flows.

Competition

Our technologies and products compete with those of other companies. Many of our
present and potential future competitors have, or may have, substantially
greater resources to devote to further technological and new product
developments. When our products are introduced commercially we believe we will
compete primarily on the originality of our concepts, the uniqueness and quality
of our technology and designs, the ease and cost of manufacturing and
implementing our technologies, the ability to meet OEMs' needs to differentiate
their products, the strength of our intellectual property and the strength of
future licensee and contract supply arrangements. There can be no assurance that
based on these factors we can be competitive with existing or future products,
technologies or services of our competitors.

We are not aware of any other sound reproduction system that has commercially
employed HyperSonic Sound technology concepts similar and to the degree
developed by us. Although others have attempted to use parametric speaker
concepts to produce sound, to our knowledge and research, none have progressed
to our stage of development

                                       10
<PAGE>

nor been able to produce sufficient sound volume and quality to make a
commercially viable system. We also believe our Stratified Field and NeoPlanar
technologies are novel with distinct market appealing attributes compared to
existing and competing flat panel speaker designs. We further believe our
PureBass sub-woofer technology offers distinct cost performance benefits versus
competitive sub-woofer technology.

Other companies that are focusing marketing efforts in the flat panel market
segment include, but are not limited to (i) high-end electrostatic flat panel
manufacturers such as Martin Logan and others, (ii) NXT Plc and their licensees
employing the NXT flat panel technology which uses a magnetic actuator to
produce vibrations over a rigid panel, (iii) NCT Group, Inc. and their Gekko
line of flat panel speakers using a comparable actuated panel, (iv) Sonigistix's
Monsoon multimedia speaker using a planar magnetic design, (v) new Harmon Kardon
multimedia speakers and (vi) many other manufacturers. There are continuing
attempts by a large number of competitors to innovate new methods of sound
reproduction to overcome limitations of traditional loudspeakers. There can be
no assurance that alternate technologies and systems have not been developed, or
that such systems may currently be in development, or will be developed by
others in the future, that would be directly competitive with our sound
technology.

Our sound reproduction methods will also compete with traditional loudspeakers.
Many international manufacturers provide loudspeakers such as Sony, AIWA,
Phillips, Samsung, Mitsubishi, Toshiba, Sanyo, Sharp, JVC and others. There are
also specialty audio component manufacturers such as Marantz, NAD and others. We
will also compete with branded loudspeaker manufacturers including Bose
Corporation, JBL, Harman International (Infinity and Epicure), International
Jensen (Acoustic Research and Advent), Polk Audio, Boston Acoustics, Klipsch,
Yamaha and a host of others. Such competitors have substantially greater
financial, technical and marketing resources and have proven technology and
products, marketing data, customer relationships and distribution channels.
There can be no assurance that our technologies will be competitive in the
entrenched loudspeaker market with these or other customers.

We believe our success will be dependent upon creating relationships with OEMs
by providing them the ability to differentiate their products with our sound
technology attributes.

The consumer product and consumer electronic marketplaces are extremely
competitive with a large number of suppliers. Most of our competitors have
greater financial, manufacturing and marketing resources and can command more
retail and consumer exposure. Barriers to entry by new competitors are not
significant and new competitors in consumer products and consumer electronics
are continually commencing operations. The technology of electronics and
electronic components, features and capabilities is also rapidly changing, in
many cases rapidly obsoleting existing products and technologies. We seek to
market unique products to large market segments.

With respect to our consumer product sales, which accounts for most of our
revenues, we are dependent on contract suppliers for finished goods. We source
products developed by others from a variety of suppliers. The loss of a supply
of a high selling product could have a material adverse effect on our
operations. Disruption of supply could cause additional costs and delays and
could also have an adverse impact on our operations. The manufacture of consumer
electronic products is dependent upon the availability of electronic components.
We believe there are secondary suppliers of components and subassemblies such
that the products we distribute are not reliant on one supplier, although delays
could result should there be a change in suppliers of longer lead-time
components or subassemblies. Any significant delays in obtaining components from
existing or secondary suppliers through supplier changes or from component
shortages, which are common to the electronics industry, could have a material
adverse effect on our financial condition and results of operations.

Government Regulation

Certain of our electronic products are subject to various regulations and are
required to meet the specifications of agencies such as the Federal
Communications Commission (the "FCC").  We believe we are in substantial
compliance with all current applicable regulations, and that we have all
material governmental permits, licenses, qualifications and approvals currently
required for our operation.

We do not believe our HyperSonic Sound technology ultrasonic emitters, which
emit ultrasonic waves into the air rather than electromagnetic waves, are out of
compliance with existing governmental regulations for ultrasonic emission.
However there can be no assurance that interpretations of existing regulations
or imposition of new regulations could not have an adverse impact on the
commercialization of our technologies.

We do not believe we are materially affected, nor do we expect to be materially
affected, by the costs and effects of compliance with environmental laws.

                                       11
<PAGE>

Intellectual Property Rights and Proprietary Information

We operate in an industry where innovations, investment in new ideas and
protection of resulting intellectual property rights are important to success.
We rely on a variety of intellectual property protections for our products and
technologies, including patent, copyright, trademark and trade secret laws, and
contractual obligations, and pursue a policy of vigorously enforcing such
rights.

We own 13 U.S. patents and have 43 U.S. patents (and additional foreign
applications) pending on our sound technologies. We are preparing and intend to
file other sound technology patent applications. We own two U.S. patents on
consumer products and two U.S. patents on our GPS technology. We have one patent
on our EPD technology. We have purchased one patent on transducer technology
primarily targeted for government applications.

We have an ongoing policy of filing patent applications to seek protection for
novel features of our products and technologies. Prior to the filing and
granting of patents, our policy is to disclose key features to patent counsel
and maintain these features as trade secrets prior to product introduction.
There can be no assurance that any additional patents on our products or
technology will be granted.

In addition to such factors as innovation, technological expertise and
experienced personnel, we believe that a strong patent position will be
important to compete effectively through licensing in the sound reproduction
industry. We are investing significant management, legal and financial resources
toward our technology patents. The electronics industry is characterized by
frequent litigation regarding patent and other intellectual property rights.
Others, including academic institutions and competitors, hold numerous patents
in electronics and sound reproduction. Although we are not aware of any existing
patents that would materially inhibit our ability to license our sound
technology; there can be no assurance that others will not assert claims in the
future. There can be no assurance that such claims, with or without merit, would
not have a material adverse effect on our financial condition or results of
operations.

The validity of our existing patents has not been adjudicated by any court.
Competitors may bring legal action to challenge the validity of our existing or
future patents or may attempt to circumvent the protection provided by such
patents. There can be no assurance that either of such activities by competitors
would not be successful. The failure to obtain patent protection or the loss of
patent protection on our existing and future technologies or the circumvention
of our patents by competitors could have a material adverse effect on our
ability to compete successfully.

We generally take advantage of the Patent Convention Treaty procedures for
patent protection in foreign countries. This procedure is more cost efficient,
but results in a delay in the application and issuance of foreign patents;
however, any resulting foreign patents, if and when issued, enjoy the same
priority date as U.S. counterparts.

We also file for tradename and trademark protection when appropriate. We are the
owner of federally registered trademarks on HYPERSONIC(R), HYPERCOUSTIC(R) and
HSS(R). Trademark applications have been filed for STRATIFIED FIELD TECHNOLOGY
and PICOSONIC. There can be no assurance any degree of protection will be
granted, or that if granted, that tradenames or trademarks could be successfully
maintained, defended or protected.

Our policy is to enter into nondisclosure agreements with each employee and
consultant or third party to whom any of our proprietary information is
disclosed. These agreements prohibit the disclosure of confidential information
to others, both during and subsequent to employment or the duration of the
working relationship. There can be no assurance, however, that these agreements
will not be breached, that we will have adequate remedies for any breach or that
our trade secrets will not otherwise become known or be independently developed
by competitors.

Research and Development

The sound reproduction market is subject to rapid changes in technology and
designs with frequent improvements and new product introductions. We believe our
future success will depend on our ability to enhance and improve existing
technologies and to introduce new technologies on a competitive basis.
Accordingly, we have in the past, and are expected in the future, to engage in
significant research and development activities. There can be no assurance,
however, that we will be able to commercialize our current or future
technologies.

For the fiscal years ended September 30, 2000, 1999 and 1998 we invested
$2,086,019, $1,099,848 and $991,238 respectively, on research and development.
Future levels of research and development expenditures will vary depending

                                       12
<PAGE>

on the timing of further new product development and the availability of funds
to carry on additional research and development on currently owned technologies
or in other areas.

Employees

At October 31, 2000, in addition to our three executive officer employees, we
employed twenty-five full-time persons. Of such employees, sixteen are in
research, development and technology transfer, two in shipping and distribution,
three in general and administrative and four in marketing, sales and licensing.
We also lease technical personnel from time to time on an as needed basis and
use outside consultants for various services.

We have not experienced any work stoppages and are not a party to a collective
bargaining agreement.

Item 2. Properties.

On July 11, 1997, we entered into a three-year joint lease agreement with
e.Digital, an affiliated company for property located at 13114 Evening Creek
Drive South, San Diego, California. In September 2000, we amended the lease to
become an independent lessee and for an additional 3,500 square feet of research
and development space. The term lease expires July 31, 2003.  We occupy
approximately 12,100 square feet with aggregate monthly payments of $14,772
inclusive of utilities and costs.

We believe this facility is adequate to meet our needs for the next twelve
months given current plans. However should we expand our operations, we may be
required to obtain additional space or alternative space. We believe there is
adequate availability of office space in the general vicinity to meet our future
needs.

Item 3. Legal Proceedings.

We are not a party to any material legal proceedings.

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

No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year.

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.

Market Information

Our common stock is traded and quoted on NASDAQ SmallCap Market under the symbol
"ATCO".  Prior to July 1999 our shares were quoted on the OTC Electronic
Bulletin Board. The market for our common stock has often been sporadic and
limited.

The following table sets forth the high and low bid quotations for our common
stock for the fiscal years ended September 30, 1999 and 2000:

<TABLE>
<CAPTION>
                                                     Bid Quotations
                                                      High      Low
                                                   ---------  -------
     <S>                                           <C>        <C>
     Fiscal Year Ending September 30, 1999
       First Quarter                                 $ 4.375  $4.1875
       Second Quarter                                $  7.25  $4.9688
       Third Quarter                                 $6.1875  $5.0625
       Fourth Quarter                                $ 7.625  $  6.75

     Fiscal Year Ending September 30, 2000
       First Quarter                                 $7.9375  $5.0625
       Second Quarter                                $ 15.00  $  6.00
       Third Quarter                                 $13.375  $4.4375
       Fourth Quarter                                $ 7.125  $  4.00
</TABLE>

The above quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.

                                       13
<PAGE>

We had 1,136 holders of record of our common stock at December 7, 2000 with
13,292,099 shares issued and outstanding. We have never paid a cash dividend on
our common stock and do not expect to pay any in the foreseeable future.

Recent Sales of Unregistered Securities

No equity securities were sold during the past three years which were not
registered under the Securities Act and not previously reported in prior
quarterly filings.

Item 6. Selected Financial Data

The following is a summary of selected financial data as of and for the five
most recent fiscal periods ended. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Financial Statements and the Notes thereto appearing
elsewhere in this document.

<TABLE>
<CAPTION>
For the fiscal years ended September 30,
                                                                    2000          1999          1998          1997          1996
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>           <C>           <C>           <C>
Statement of Operations:
Net revenues                                                    $ 1,433,050   $   823,753   $   244,758   $   967,408   $  933,643
Gross profit (loss)                                                 382,155       204,088      (162,365)      157,971      136,489
Net loss                                                         (3,068,046)   (3,041,634)   (4,593,713)   (2,144,363)    (560,448)
Net loss available
 to common stockholders                                         $(7,948,994)  $(3,809,486)  $(4,593,713)  $(2,762,009)  $ (560,448)
Net loss per share-
 basic and diluted                                                   $(0.67)       $(0.33)       $(0.42)       $(0.30)      $(0.08)
Weighted average number of
 shares-basic and diluted                                        11,868,511    11,408,264    10,889,654     9,268,128    7,464,588

<CAPTION>
As of September 30,
                                                                    2000          1999          1998          1997          1996
----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet:
Working capital                                                 $ 4,794,743   $ 1,096,475   $   985,888   $ 3,719,807   $1,047,787
Total assets                                                      7,275,614     2,161,036     1,683,745     4,251,878    1,595,462
Long-term obligations                                                     -             -             -       386,651            -
Total stockholders' equity                                        6,829,874     1,717,192     1,402,912     3,692,922    1,227,472
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
 of Operations.


Overview

We are focused on commercializing our proprietary HyperSonic Sound, Stratified
Field, NeoPlanar and PureBass technologies. Our HyperSonic Sound technology
employs a laser-like beam to project sound to any listening environment. Our
Stratified Field technology features a thin form factor, in a variety of shapes
and sizes, producing high fidelity and low distortion sound reproduction. Our
NeoPlanar technology is a thin film magnetic speaker that uses unique films and
materials, which we believe results in superior sound quality and volume for any
given size with low distortion. PureBass is an extended range sub-woofer
designed to complement our high performance Stratified Field and NeoPlanar
technologies. PureBass employs unique cabinet construction and vent
configurations along with multiple acoustic filters which we believe produces
improved performance. Our strategy is to commercialize these technologies
through OEMs by entering into licensing or contract supply agreements. There can
be no assurance we will be successful in commercially exploiting our sound
technologies.

We believe that our Stratified Field Technology, NeoPlanar and PureBass
technologies meet OEM requirements and can be transferred to production. We have
also recently obtained our first contract on HyperSonic Sound technology and are
commencing marketing of this technology. There can be no assurance that
commercially viable systems can be produced in the future due to the inherent
risks of new technology development and transfer, limitations on financing,
competition, obsolescence, loss of key technical personnel and other factors
beyond our control. We have not generated any significant revenues from our
sound technologies to date.

                                       14
<PAGE>

Our various development projects are high risk in nature. Unanticipated
technical obstacles can arise at any time and result in lengthy and costly
delays or result in a determination that further development is unfeasible.
There can be no assurance of timely completion of commercially viable sound
products by customers or that, if available, such products will perform on a
cost-effective basis, or that they will achieve market acceptance.

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

To date substantially all of our revenues have been derived from the sale of
portable consumer products. We have sourced a total of 13 products (including FM
and solar radios) targeted for niche markets at retail prices ranging from
$11.99 to $29.99. Sourcing is on both an exclusive and nonexclusive basis and
for different market territories on a product by product basis. Our market focus
is in North America. We inventory finished goods as well as provide direct
factory shipment to certain customers. There can be no assurance that our line
of products can be marketed successfully.

Demand for our portable consumer products is subject to significant month to
month variability resulting from seasonal demand fluctuations and the limited
number of customers and market penetration achieved by us to date. Further,
sales have been concentrated with a few customers. We are also reliant on
outside manufacturers to supply our products and there can be no assurance of
future supply. The markets for our products and future products and technologies
are subject to rapidly changing customer tastes and a high level of competition.
Demographic trends in society, marketing and advertising expenditures, and
product positioning in retail outlets, technological developments, seasonal
variations and general economic conditions influence demand for our products.
Because these factors can change rapidly, customer demand can also shift
quickly. We may not be able to respond to changes in customer demand because of
the time required to change or introduce products, production limitations and
because of our limited financial resources.

Results of Operations (Fiscal Years ended September 30, 2000, 1999 and 1998)

Total revenues for the fiscal year ended September 30, 2000 ("fiscal 2000") were
$1,433,050, a 74% increase from revenues of $823,753 for fiscal 1999. Revenues
for fiscal 1998 were $244,758. Substantially all revenues for the three fiscal
years were from consumer product sales. Product sales continued to grow during
fiscal 2000 due to the increase demand for our solar powered radio's and desktop
products. The increase in product sales from fiscal 1998 to fiscal 1999
reflected new product sales of the solar powered radios and the continuous sales
growth of the small FM sounds radio to new customers. Fiscal 2000 product sales
consisted of sourced products manufactured by others which where introduced by
us in fiscal 1999 in a new product line. Consumer product sales are subject to
significant month to month and quarter to quarter variability based on the
timing of orders, new accounts, lost accounts and other factors. Our sales are
further affected by a variety of factors including seasonal requirements of
customers.

Contract and license revenues were $137,516 in fiscal 2000 compared to $36,345
for fiscal 1999. Contract and license revenues for fiscal 1998 were $50,000.
Fiscal 2000 contract and license revenues consisted of amounts recognizable
under the term of each license. Fiscal 1999 contract and license revenues
consisted of amounts earned on development contracts for customers. Fiscal 1998
revenues were received from one customer as a non-refundable license payment.
There can be no assurance when or if we will realize any future payments under
existing license agreements. Revenue from up-front license fees are recognized
ratably over the specified term of the particular license. Contract fees are
recorded as services are performed.

Cost of sales for the fiscal year ended September 30, 2000 were $1,050,895
resulting in a gross profit of  $382,155 or 27%. This compares to a gross profit
for fiscal 1999 of $204,088 or 25% and a gross loss for fiscal 1998 of $162,365
or 66%. For fiscal 2000 cost associated with contract and licensing revenues are
minimal. The increase in gross profit from fiscal 1999 resulted from the minimal
cost allocated to licensing revenue offset by the increase in revenue of  lower
marginal product sales. The fiscal 1998 gross loss resulted from the phasing out
of our previous ear radio product line and included special closeout pricing to
reduce inventory levels. Gross profit percentage is highly dependent on sales
prices, volumes, purchasing costs and overhead allocations. Overall gross
margins will also be impacted by future contract and licensing revenues, if any.

Selling, general and administrative expenses reflect an increase from fiscal
year 1999 from $2,078,558 to $2,563,223 for fiscal 2000. They totaled $2,222,522
for fiscal 1998. The $484,665 increase in fiscal 2000 from 1999 resulted from an
increase of $331,780 in personnel and related costs, an increase of $133,126 in
legal, an increase in licenses, permits and fees of $62,697 offset by a decrease
of $80,925 for professional services. The $143,964 decrease in fiscal 1999

                                       15
<PAGE>

from fiscal 1998 resulted primarily from a reduction in legal expenditures of
$47,394 and a reduction in travel expenditures and related costs of $77,280. We
may expend additional resources on marketing our sound technologies in the
future quarters, which may increase selling, general and administrative expenses
in future periods.

Research and development costs for the year ended September 30, 2000 were
$2,086,019 compared to $1,099,848 for the prior year. Research and development
costs were $991,238 for fiscal 1998. The $986,171 increase in fiscal 2000
resulted from an increase of $442,059 in personnel and related costs, an
increase of $307,475 for materials and film, an increase of $49,581 for
consulting, an increase of $85,597 for depreciation and amortization expense and
$80,000 for royalties on technology in development. The $108,610 increase in
fiscal 1999 from 1998 resulted primarily from an increase in sound technology
development activities and related personnel and component costs.

Research and development costs vary quarter by quarter due to the timing of
projects, the availability of funds for research and development and the timing
and extent of use of outside consulting, design and development firms. We expect
fiscal 2001 research and development costs to remain at comparable levels to
fiscal 2000 or at higher levels should we increase staffing or expand the use of
outside design and consultants.

In fiscal 2000 we recorded in selling, general and administrative $81,110 for
services paid through the issuance of 8,233 shares of common stock. In fiscal
1999 we recorded in selling, general and administrative $137,137 for services
paid through the issuance of 25,018 shares of common stock. We recorded non-cash
compensation expense of $131,000 for the year ended September 30, 1999 compared
to $438,000 for fiscal 1998. Non-cash compensation expense for the fiscal 1999
included the $70,000 value attributable to stock options granted to consultants
on 30,000 shares of common stock. Fiscal 1998's total of $438,000 included
$122,000 for warrants issued for services and $316,000 for the value of options
granted for services.

As a result of the above factors, we experienced a loss from operations of
$4,267,087 during the year ended September 30, 2000, compared to a loss from
operations of $3,105,318 for the year ended September 30, 1999 and a loss from
operations of $3,814,125 for the year ended September 30, 1998. We expect to
incur continued operating losses until we are able to commercialize our
technologies and produce revenues sufficient to support operating costs. There
can be no assurance we will be successful in such efforts.

During fiscal 1998, we incurred $926,555 of non-cash interest expense including
$920,000 computed on the cashless exercise of previously issued warrants. Net
non-operating income aggregated $63,684 for fiscal 1999 as compared to $779,588
in operating expense for fiscal 1998.

For fiscal 2000, interest income was $211,843 as compared to $64,781and $131,967
for fiscal 1999 and 1998, respectively. This increase is the result of cash
received from the sales of investment securities of $988,112 and proceeds from
equity transactions during the fiscal year 2000.

We incurred a net loss of  $3,068,046 for fiscal 2000, compared to a net loss of
$3,041,634 for fiscal 1999 and a net loss of $4,593,713 in fiscal 1998. We have
federal net loss carryforwards of approximately $12,790,000 expiring through
2020. The amount and timing of the utilization of our net loss carryforwards may
be limited under Section 382 of the Internal Revenue Code. A valuation allowance
has been recorded to offset the related net deferred tax asset as management is
unable to determine that it is more likely than not that the deferred tax asset
will be realized.

The net loss available to common stockholders for fiscal 2000 was increased in
computing loss per share of common stock by an imputed deemed dividend on
warrants issued with our Series C Preferred Stock in the amount of $1,478,000,
accretion of the Series B and Series C Preferred Stock of $126,118 and $171,830,
respectively, a $1,031,250 imputed deemed dividend from a discount provision or
$0.06 per share in the aggregate and a cumulative effect of a change in
accounting principles of $2,073,750. The net loss available to common
stockholders for fiscal 1999 was increased in computing loss per share of common
stock by an imputed deemed dividend on warrants issued with Series B Preferred
Stock in the amount of $595,000, accretion on the stock at the stated rate of
$112,852 and a $60,000 imputed deemed dividend from a discount provision or
$0.06 per share in the aggregate. The imputed deemed dividend is not a
contractual obligation to pay such imputed dividends in cash or otherwise. There
were no comparable adjustments in fiscal 1998.

Future operations are subject to significant variability as a result of
licensing activities, product sales and margins, timing of new product
offerings, the success and timing of new technology exploitation, decisions
regarding future research and development and variability in other expenditures.

                                       16
<PAGE>

Liquidity and Capital Resources

Since we recommenced operations in January 1992, we have had significant
negative cash flow from operating activities. Our negative cash flow from
operating activities was $3,690,599 for the fiscal year ended September 30,
2000, $2,913,161 and for the fiscal year ended September 30, 1999 and $2,464,375
for fiscal year 1998. During fiscal 2000, the net loss of $3,068,046 included
non-cash expenses of $238,986 resulting in an adjusted net cash loss of
$2,829,060. In addition to this adjusted net cash loss, cash was used in
operating activities through an $91,379 increase in accounts receivable, and a
$99,952 decrease in accounts payable. Operating cash in fiscal 2000 was provided
by a $114,848 decrease in inventories, a decrease of $20,099 in prepaid expenses
and other and a $101,847 increase in accrued liabilities.

At September 30, 2000 we had approximately 67 days product sales in accounts
receivable as compared to 83 days at September 30, 1999. The decrease is due
primarily to the larger sales volume and better terms with customers in the
current year. Large retail chains often require 90-120 day terms on sales. Our
receivables can vary dramatically due to overall sales volumes and due to
quarterly and seasonal variations in sales and timing of shipments to and
receipts from large customers.

For the year ended September 30, 2000, we used approximately $204,625 for the
purchase of laboratory equipment, we made investments of  $174,276 in patents
and $300,000 in purchased technology. We anticipate a continued investment in
patents in fiscal 2001. Dollar amounts to be invested on these patents are not
currently estimable by management.

At September 30, 2000, ATC had working capital of $4,794,743 as compared to
$1,096,475 for the year ended September 30, 1999.

We have financed our operations primarily through the sale of Preferred Stock,
exercise of stock options, issuance's of convertible notes, proceeds from the
sale of investment securities and margins from consumer product sales. At
September 30, 2000, we had cash of $4,645,615.  Primarily as a result of the
sale of the investment securities in January 2000 and the issuance of the Series
C Preferred Stock, our cash position increased by approximately $4.05 million
from September 30, 1999.  Based on our cash position assuming (a) currently
planned expenditures and level of operations, (b) continuation of sales to
existing retail customers and; (c) royalty revenue against existing license
agreements; we believe we have sufficient capital resources for the next twelve
months. Other than cash and cash equivalents, we have no unused sources of
liquidity at this time. We expect to incur additional operating losses as a
result of continued losses in operations of product sales and as a result of
expenditures for research and development and marketing costs for our sound
technologies. The timing and amounts of these expenditures and the extent of our
operating losses will depend on many factors, some of which are beyond our
control. We anticipate that the commercialization of our technologies may
require increased operating costs, however we cannot currently estimate the
amounts of these costs.

New Accounting Pronouncements

The Financial Accounting Standards Board has issued a new pronouncement for
future implementation as discussed in our financial statements (see page F-11).
As discussed in the notes to the financial statements, the implementation of
these new pronouncements is not expected to have a material effect on our
financial statements.

Risks Factors

This report contains a number of forward-looking statements which reflect our
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed below and elsewhere in this Annual Report on Form 10-
K, that could cause actual results to differ materially from historical results
or those anticipated. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify forward-looking
statements. Readers are cautioned to consider the specific risk factors
described below and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. We
undertake no obligation to publicly revise these forward-looking statements, to
reflect events or circumstances that may arise after the date hereof. If any of
the following risks occur our business could be harmed, the price of our common
stock could decline and investors may lose all or part of their investment.

We Have A History Of Net Losses. We Expect To Continue To Incur Net Losses And
------------------------------------------------------------------------------
We May Not Achieve Or Maintain Profitability. - We have incurred significant
---------------------------------------------
operating losses and anticipate continued losses in fiscal 2001. At September
30, 2000 we had an accumulated deficit of $14,873,693. There is no assurance
that we will be able to achieve or sustain profitability in the future. We also
expect to incur additional operating losses in future periods.  In

                                       17
<PAGE>

addition, the sales of our products are subject to significant quarterly and
seasonal variability. We have been and we expect to continue to be reliant on a
limited number of customers, and the loss of any of these customers could have
a material adverse effect on our financial condition and results of operations.

We Are An Early Stage Company Developing New Technologies. If We Do Not Develop
-------------------------------------------------------------------------------
Commercially Successful Products, We May Be Unprofitable or Forced to Cease
---------------------------------------------------------------------------
Operations. - Our HSS, SFT, NeoPlanar and PureBass technologies are still being
-----------
improved. We cannot guarantee that commercially viable sound technology systems
can be produced due to the inherent risks of technology development, limitations
on financing, competition, obsolescence, loss of key technical personnel and
other factors. We have not generated significant revenues from our sound
technology to date, and we cannot guarantee any significant revenues in the
future. The development of our sound technology has taken longer than
anticipated by management and could be subject to additional delays. Moreover,
we cannot guarantee that a commercially viable sound technology will be
completed on a timely basis, or would perform on a cost-effective basis. Even if
products employing our sound technology are introduced, we can make no
assurances that any will achieve market acceptance. Our various development
projects are high risk in nature, and unanticipated technical obstacles can
arise at any time and result in lengthy and costly delays or result in a
determination that further development is unfeasible. If we do not successfully
develop and exploit our technology, our financial condition and results of
operations and business prospects would be adversely effected.

We May Experience Quarterly Fluctuations In Operating Results. - Our quarterly
--------------------------------------------------------------
financial results may vary significantly depending on a variety of factors
including the timing of orders and contracts, the timing of new technologies and
products offered by us or our competitors, and the loss or acquisition of
significant customers. In addition, historically our revenues have been seasonal
and have fluctuated significantly due to the above and other factors some of
which are beyond our control. Quarterly variations in financial results could
adversely affect the market price of our common stock and cause it to fluctuate.
We may also from time to time increase operating expenses to fund greater levels
of research and development, increase sales and marketing activities or to
broaden our customer support capabilities.

Many Potential Competitors Who Have Greater Resources And Experience Than We Do
-------------------------------------------------------------------------------
May Develop Products And Technologies That Make Ours Obsolete. - Technological
--------------------------------------------------------------
competition from other and longer established electronic and loudspeaker
manufacturers is significant and expected to increase. Most of the companies
with which we expect to compete have substantially greater capital resources,
research and development staffs, marketing and distribution programs and
facilities, and many of them have substantially greater experience in the
production and marketing of products. In addition, one or more of our
competitors may have developed or may succeed in developing technologies and
products that are more effective than any of ours, rendering our technology and
products obsolete or noncompetitive. There can be no assurance we will be viable
or competitive in the face of competition and technological change.

Our New Technology Faces Significant Barriers And Risks. - The introduction of
--------------------------------------------------------
new technology, such as our sound technologies, often faces barriers to
commercialization and many risks that cannot currently be identified. Our
HyperSonic sound technology employs ultrasonics. Although ultrasonics are
employed in a wide variety of medical and industrial applications, there can be
no assurance we will not face barriers to introduction due to the use of
ultrasonics. Our technology uses relatively small amounts of ultrasonic energy
which dissipates rapidly in air. We also employ frequencies above those that may
be harmful to pets.  Although we believe the frequencies and the amount of
energy employed is harmless, there can be no assurance that barriers to
commercialization will not develop or that the use of such ultrasonics will not
be subject to future regulation or interpretation of existing regulation.

Commercialization Of Our Sound Technologies Depends On Collaborations With Other
--------------------------------------------------------------------------------
Companies. If We Are Not Able To Find Collaborators And Strategic Alliance
--------------------------------------------------------------------------
Relationships In The Future, We May Not Be Able To Develop Our Sound
--------------------------------------------------------------------
Technologies And Products. - Our strategy is to establish business relationships
-------------------------
with leading participants in various segments of the electronics and sound
reproduction markets to assist us in developing, marketing and selling consumer
electronic products and products that include our sound technologies. We believe
this strategy will enable us to take advantage of the superior financial
resources, technological capabilities, proprietary positions and market presence
of these companies in developing, marketing and selling products, if any, that
result from our technology in the sound reproduction market. Although our
strategy is to establish closer relationships with selected companies through
specific product collaborations, licensing or product supply arrangements; we
may not be able to successfully collaborate to develop commercial products to
exploit our technologies.

                                       18
<PAGE>

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

Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our
-------------------------------------------------------------------------------
Competitive Position. - We have both issued and pending patents on our sound
---------------------
reproduction technologies and we are considering additional patent applications.
We cannot guarantee that patents will be issued from any of our pending
applications, or that any claims allowed from existing or pending patents will
be of sufficient scope or strength or that any patents that may be issued to us
will not be challenged or invalidated. Further, we cannot guarantee the patents
will be issued in all countries where our products can be sold or licensed to
provide us meaningful protection or any commercial advantage. Our competitors
may also be able to design around our patents. The electronics industry is
characterized by vigorous protection and pursuit of intellectual property rights
or positions, which have resulted in significant and often protracted and
expensive litigation. There is currently no pending intellectual property
litigation against us. We cannot guarantee, however, that our technologies or
products do not and will not infringe the patents or proprietary rights of third
parties. Problems with patents or other rights could potentially increase the
cost of our products, or delay or preclude our new product development and
commercialization. If infringement claims against us are deemed valid, we may
seek licenses which might not be available on acceptable terms or at all.
Litigation could be costly and time-consuming but may be necessary to protect
our future patent and/or technology license positions, or to defend against
infringement claims. A successful challenge to our sound technology could have a
materially adverse effect on our business prospects. Moreover, we cannot
guarantee that the application of any of our technologies will not infringe upon
the proprietary rights of others or that licenses required by us from others
will be available on commercially reasonable terms, if at all.

Our Product Sales Are Dependent On Outside Contractors. Disruptions In Supply
-----------------------------------------------------------------------------
Could Adversely Affect Us. - Consumer electronic product sales account for
--------------------------
substantially all of our revenues. However, we are dependent on contract
suppliers for our finished consumer electronics products. We source products
developed by others from a variety of suppliers. The loss of a supply of a high
selling product could have a material adverse effect on our operations.
Disruption of our supply could cause additional costs and delays and could also
have an adverse impact on our operations. The manufacturers of our consumer
electronic products are also dependent upon the availability of electronic
components. We believe there are secondary suppliers of components and
subassemblies for our manufacturers so that the products they manufacture are
not reliant on one supplier, although delays could result should there be a
change in suppliers of longer lead time components or subassemblies. Any
significant delays in obtaining components from existing or secondary suppliers
through supplier changes or from component shortages, which are common to the
electronics industry, could have a material adverse effect on our financial
condition and results of operations.

If Our Key Employees Do Not Continue To Work For Us, Our Business Will Be Harmed
--------------------------------------------------------------------------------
Because Competition For Replacements is Intense. - Our performance is
------------------------------------------------
substantially dependent on the performance of our executive officers and key
technical employees. We are dependent on our ability to retain and motivate high
quality personnel, especially highly skilled technical personnel. Our future
success and growth also depends on our continuing ability to identify, hire,
train and retain other highly qualified technical, managerial and sales
personnel. Competition for such personnel is intense, there can be no assurance
that we will be able to attract, assimilate or retain other highly qualified
technical, managerial or sales personnel in the future. The inability to attract
and retain the necessary technical, managerial or sales personnel could have a
material adverse effect upon our business, operating results or financial
condition.

Our Certificate Of Incorporation, Bylaws And Delaware Law Contain Provisions
----------------------------------------------------------------------------
That Could Discourage A Third Party From Acquiring Us And, Consequently,
------------------------------------------------------------------------
Decrease The Market Value Of Your Investment. - Some provisions of our amended
---------------------------------------------
certificate of incorporation and bylaws and Delaware law could delay or prevent
a change in control or changes in our management that a stockholder might
consider favorable. If a change of control or change in management is delayed or
prevented, the market price of our common stock could decline.

Conversion Of All Of Or Part Of Our Outstanding Convertible Preferred Stock
---------------------------------------------------------------------------
And/Or The Exercise Of Outstanding Warrants Will Cause Immediate And Possibly
-----------------------------------------------------------------------------
Significant Dilution In The Net Tangible Book Value Of Your Shares. - If the
------------------------------------------------------------------
holders of our outstanding preferred stock and/or warrants decide to convert or
exercise all or part of their preferred stock or warrants, you will experience
immediate and possibly significant dilution in the net tangible book

                                       19
<PAGE>

value of your shares. The market price of our common stock could also decline
upon the sale of the common stock after conversion of the preferred stock or
upon exercise of the warrants.

Our Stock Price Is Volatile And May Continue To Be Volatile In The Future. - Our
--------------------------------------------------------------------------
common stock trades on the NASDAQ SmallCap Market. The market price of our
common stock has fluctuated significantly to date. In the future, the market
price of our common stock could be subject to significant fluctuations due to
general market conditions and in response to quarter-to-quarter variations in
(i) our anticipated or actual operating results; (ii) developments concerning
our sound reproduction technologies; (iii) technological innovations or setbacks
by us or our competitors; (iv) conditions in the consumer electronics market;
(v) announcements of merger or acquisition transactions; and (vi) other events
or factors and general economic and market conditions.

In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have effected the market price of many technology
companies, and that have often been unrelated or disproportionate to the
operating performance of companies. These fluctuations, as well as general
economic and market conditions may harm the market price of our common stock.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of American Technology due to adverse
changes in market prices, including interest rate risk and other relevant market
rate or price risks. We do not use derivative financial instruments in our
investment portfolio.

We are exposed to some market risk through interest rates, related to our
investment of current cash and cash equivalents of approximately $4.6 million.
The risk is not considered material and we manage such risk by continuing to
evaluate the best investment rates available for short-term high quality
investments.

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

Item 8. Financial Statements and Supplementary Data

The financial statements required by this item begin on page F-1 (immediately
following page 23 of this report) with the index to financial statements
followed by the financial statements.

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

None.
                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information relating to the directors of American Technology Corporation is
incorporated herein by reference from the "ELECTION OF DIRECTORS -- Information
As To Nominees" and the "ELECTION OF DIRECTORS -- Executive Officers" contained
in the American Technology Proxy Statement for our 2000 Annual Meeting of
Stockholders (the "2000 Proxy Statement"), which 2000 Proxy Statement is to be
filed within 120 days of the end of the fiscal year covered by this Report
pursuant to General Instruction G(3) of Form 10-K.

Item 11. Executive Compensation.

Information relating to executive compensation is incorporated herein by
reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related
Matters" section of the 2000 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information relating to the security ownership of certain beneficial owners and
management is incorporated herein by reference from the "ELECTION OF DIRECTORS--
Beneficial Ownership Of Company Securities" section of the 2000 Proxy Statement.

                                       20
<PAGE>

Item 13. Certain Relationships and Related Transactions.

Information relating to related transactions is incorporated herein by reference
from the "ELECTION OF DIRECTORS -- Executive Compensation And Related Matters"
and "ELECTION OF DIRECTORS -- Related Transactions" sections of the 2000 Proxy
Statement.

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Exhibits - The following is a list and index of Exhibits required by Item
    --------
601 of Regulation S-K. Except for those exhibits indicated by an asterisk which
are filed herewith, the remaining exhibits listed below are incorporated by
reference to the exhibit (of the number indicated) previously filed by us as
indicated.

Exhibit Index

2. Plan of Acquisition

       2.1     Asset Purchase Agreement dated as of April 11, 2000 between the
               Company and Hucon Limited, David Graebener and Stephen M.
               Williams filed as Exhibit 10.1 on Form 8-K dated April 26, 2000.

3. Articles and Bylaws

       3.1     Certificate of Incorporation of American Technology Corporation
               (Delaware) dated March 1, 1992, filed as Exhibit 2.1 on Form 10-
               SB effective August 1, 1994

     3.1.1     Amendment to Certificate of Incorporation of American Technology
               Corporation dated March 24, 1997 and filed with Delaware on April
               22, 1997. Filed as Exhibit 3.1.1 on Form 10-QSB for March 31,
               1997

     3.1.2     Certificate of Designations of Series A Convertible Preferred
               Stock filed with Delaware on August 15, 1997. Filed as Exhibit
               3.1.2 on Form 8-K dated August 29, 1997.

     3.1.3     Corrected Certificate of Designations of Series A Convertible
               Preferred Stock dated and filed with Delaware on August 25, 1997.
               Filed as Exhibit 3.1.3 on Form 8-K dated August 29, 1997.

     3.1.4     Corrected Certificate of Designations of Series B Convertible
               Preferred Stock filed with Delaware on December 23, 1998. Filed
               as Exhibit 3.1.4 on Form 10-KSB dated December 29, 1998.

     3.1.5     Corrected Certificate of Designation of Series C Preferred Stock
               filed with Delaware on April 19, 2000. File as exhibit 3.1.5 on
               Form 8-K dated April 19, 2000.

       3.2     Bylaws of American Technology Corporation (Delaware) filed as
               Exhibit 2.3 on Form 10-SB effective August 1, 1994

4. Instruments Defining the Rights of Holders

       4.1     Form of Stock Purchase Warrant exercisable at $5.00 per share
               until March 1, 2000 granted to sixteen investors for an aggregate
               of 50,000 common shares filed as Exhibit 4.8 on Form 8-K dated
               April 1, 1997

       4.2     Stock Purchase Warrant issued to Renwick Corporate Finance, Inc.
               dated as of February 5, 1997 exercisable to purchase 90,000
               common shares at $5.00 per share until February 5, 2000 filed as
               Exhibit 4.9 on Form 10-QSB for March 31, 1997

       4.3     Form of Stock Purchase Warrant exercisable at $7.50 per share
               until August 1, 2000 granted to eleven investors for an aggregate
               of 175,000 common shares and filed as Exhibit 4.10 on Form 8-K
               dated August 29, 1997

                                       21
<PAGE>

        4.4    Stock Purchase Warrant dated June 18, 1998 exercisable at $16.00
               per share until June 18, 2000 between ATC and to L.H. Friend,
               Weinress, Frankson & Presson, Inc. for an aggregate of 25,000
               common shares. Filed as Exhibit 4.4 on Form 10-KSB dated December
               29, 1998.

        4.5    Stock Purchase Warrant dated May 12, 1998 exercisable at $16.00
               per share until May 12, 2003 between ATC and Jonathan A. Berg for
               an aggregate of 50,000 common shares. Filed as Exhibit 4.5 on
               Form 10-KSB dated December 29, 1998.

        4.6    Form of Series B Preferred Stock and Warrant Purchase Agreement
               executed with nine investors and dated December 24, 1998. Filed
               as Exhibit 4.6 on Form 10-KSB dated December 29, 1998.

        4.7    Form of Warrant to Purchase Common Stock granted to nine
               investors for an aggregate of 172,750 shares of Common Stock
               dated December 24, 1998. Filed as Exhibit 4.7 on Form 10-KSB
               dated December 29, 1998.

        4.8    Reference is made to Exhibits 3.1 through 3.2.

        4.9    Form of Stock Purchase Warrant exercisable at $11.00 per share
               until March 31, 2003 granted to thirty-six investors for an
               aggregate of 300,000 common shares. Filed as Exhibit 4.9 on Form
               8-K dated April 19, 2000.

       4.10    Form of Series C Preferred Stock and Warrant Purchase Agreement
               between the registrant and certain investors dated March 14,
               2000. Filed as Exhibit 10.1 on Form S3 dated May 1, 2000.

10. Material Contracts

       10.1    Royalty Agreement between ATC and Elwood G. Norris dated
               September 3, 1985 filed as Exhibit 6.2 on Form 10-SB effective
               August 1, 1994

       10.2    Assignment of Technology Agreement between ATC and Elwood G.
               Norris dated March 2, 1992 filed as Exhibit 6.3 on Form 10-SB
               effective August 1, 1994

     10.2.1    Addendum Agreement to Assignment of Technology Agreement between
               ATC and Elwood G. Norris dated December 2, 1996 filed as Exhibit
               10.3.1 on Form 10-KSB for September 30, 1996

       10.3    1992 Incentive Stock Option Plan adopted by the Board of
               Directors on March 2, 1992 and approved by the shareholders on
               June 19, 1992 filed as Exhibit 6.8 on Form 10-SB effective August
               1, 1994

     10.3.1    Standard form of Incentive Stock Option Plan Agreement filed as
               Exhibit 6.8.1 on Form 10-SB effective August 1, 1994

       10.4    1992 Non-Statutory Stock Option Plan adopted by the Board of
               Directors on March 2, 1992 and approved by the shareholders on
               June 19, 1992 filed as Exhibit 6.9 on Form 10-SB effective August
               1, 1994

     10.4.1    Standard form of Non-Statutory Stock Option Plan Agreement filed
               as Exhibit 6.9.1 on Form 10-SB effective August 1, 1994

       10.5    Demand Promissory Note for $82,500 due from Robert Putnam dated
               January 17, 1997 filed as Exhibit 10.11 on Form 10-QSB for March
               31, 1997

       10.6    Sublease Agreement between Global Associates, Ltd. and Norris
               Communications, Inc. and the Company dated July 11, 1997 filed as
               Exhibit 10.13 on Form 10-QSB for June 30, 1997

    *10.6.1   Sublease Agreement between ATC and Smiths Industries Aerospace &
               Defense Systems, Inc. as amended, dated September 1, 2000.


                                       22
<PAGE>

        10.7   1997 Employee Stock Compensation Plan of ATC dated March 10, 1997
               filed as Exhibit 10.11 on Form S-8 dated March 24, 1997

        10.8   Stock Option Agreement dated September 1, 1997 between ATC and
               Dale Williams filed as Exhibit 10.15.1 on Form 10-KSB for
               September 30, 1997

      10.8.1   Separation Agreement and General Release between Dale Williams
               and ATC executed on June 19, 1998 filed as Exhibit 10.15.2 on
               Form 8-K dated June 29, 1998

      10.8.2   Amendment to Stock Option Agreement between Dale Williams and ATC
               dated as of June 12, 1998 filed as Exhibit 10.15.3 on Form 8-K
               dated June 29, 1998

        10.9   Employment Agreement dated as of September 1, 1997 between ATC
               and Elwood G. Norris filed as Exhibit 10.16 on Form 10-KSB for
               September 30, 1997

       10.10   Employment Agreement dated as of September 1, 1997 between ATC
               and Robert Putnam filed as Exhibit 10.17 on Form 10-KSB for
               September 30, 1997

       10.11   Agreement dated as of June 1, 1998, between ATC and Authentic,
               Ltd. (Portions of this Exhibit have been omitted, based on a
               request for confidential treatment, and have been filed with the
               Securities and Exchange Commission pursuant to rule 406) as filed
               as Exhibit 10.18 on 10-QSB dated August 10, 1998

       10.12   1997 Stock Option Plan as adopted on January 23, 1998 filed as
               Exhibit 10.1 on Form S-8 dated July 27, 1998

       10.13   Employment Agreement dated July 17, 1998 between ATC and
               Cornelius J. Brosnan. Filed as Exhibit 10.13 on Form 10-KSB dated
               December 29, 1998.

     10.13.1   Special Stock Option Agreement dated October 2, 1997 between ATC
               and Cornelius J. Brosnan filed as Exhibit 10.2 on Form S-8 dated
               July 27, 1998

     10.13.2   Stock Option Agreement dated July 15, 1998 between ATC and
               Cornelius J. Brosnan. Filed as Exhibit 10.13.2 on Form 10-KSB
               dated December 29, 1998.

     10.13.3   Special Option Agreement dated July 16, 1999 between ATC and
               Cornelius J. Brosnan covering 100,000 shares exercisable at
               $10.00 per share subject to a stock price of $25.00. Filed as
               Exhibit 10.15 on Form 10K dated December 28, 1999.

     10.13.4   Special Option Agreement dated July 16, 1999 between ATC and
               Cornelius J. Brosnan covering 100,000 shares exercisable at
               $10.00 per share subject to a stock price of $50.00. Filed as
               Exhibit 10.16 of Form 10K dated December 28, 1999.

    *10.13.5   Separation Agreement dated September 12, 2000 between ATC and
               Cornelius J. Brosnan.

       10.14   Employment Agreement dated July 8, 1998 between ATC and James
               Croft. Filed as Exhibit 10.14 on Form 10-KSB dated December 28,
               1998.

       10.15   Employment Agreement dated July 8, 1998 between ATC and Robert
               Todrank. Filed as Exhibit 10.15 on Form 10K dated December 28,
               1999.

       10.16   Employment Agreement effective as of February 15, 2000 between
               the Company and Stephen M. Williams filed as Exhibit 10.2 on Form
               8-K dated April 26, 2000.

       10.17    Employment Agreement effective as of February 15, 2000 between
               the Company and David Graebener filed as Exhibit 10.3 on Form 8-K
               dated April 26, 2000.

                                       23
<PAGE>


*23.1  Consent of BDO Seidman, LLP

*27.1  Financial Data Schedule

____________________________

(b) Reports on Form 8-K -
    -------------------

     On September 14, 2000, the Company filed a Form 8-K. The report reported an
Item 5 event related to the resignation of Cornelius Brosnan and the appointment
of Elwood Norris as Chairman of the Board of Directors and Chief Executive
Office

                                       24
<PAGE>

American Technology Corporation
Index to Financial Statements
==========================================================================


<TABLE>
<S>                                                       <C>
Report of Independent Certified Public Accountants               F-2

Balance Sheets as of September 30, 2000 and 1999                 F-3

Statements of Operations for the Years Ended
     September 30, 2000, 1999 and 1998                           F-4

Statements of Comprehensive Loss for the Years Ended
     September 30, 2000, 1999 and 1998                           F-5

Statements of Stockholders' Equity for the Years Ended
     September 30, 2000, 1999 and 1998                           F-6

Statements of Cash Flows for the Years Ended
     September 30, 2000, 1999 and 1998                           F-7

Summary of Accounting Policies                            F-8 - F-10

Notes to Financial Statements                             F-12- F-19

Schedule II - Valuation and Qualifying Accounts                 F-20
</TABLE>

                                                                             F-1
<PAGE>

Report of Independent Certified Public Accountants
=============================================================================


To the Stockholders and Board of Directors
American Technology Corporation
San Diego, California



We have audited the accompanying balance sheets of American Technology
Corporation as of September 30, 2000 and 1999 and the related statements of
operations, comprehensive loss,  stockholders' equity and cash flows for each of
the three years in the period then ended. We have also audited the schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement and schedule presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Technology Corporation
as of September 30, 2000 and 1999 and the results of its operations and its cash
flows for each of the three years in the period then ended in conformity with
generally accepted accounting principles.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.



                                                          /s/ BDO SEIDMAN, LLP
                                                         ---------------------
                                                              BDO Seidman, LLP

Denver, Colorado
November 17, 2000

                                                                             F-2
<PAGE>

                        American Technology Corporation

                                BALANCE SHEETS

<TABLE>
<CAPTION>
September 30,                                                                                    2000            1999
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>             <C>
ASSETS
Current Assets:
  Cash                                                                                      $  4,645,615    $    590,236
  Investment securities available for sale [note 1]                                                    -         299,648
  Trade accounts receivable, less allowance of
     $20,000 and $8,000 for doubtful accounts                                                    237,912         158,533
  Inventories [note 2]                                                                           172,473         287,321
  Prepaid expenses and other                                                                     184,482         204,581
------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                           5,240,482       1,540,319
------------------------------------------------------------------------------------------------------------------------
Equipment, net [note 3]                                                                          237,327         133,047
Patents, net                                                                                     640,513         487,670
Purchased technology, net [note 4]                                                             1,157,292               -
------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                $  7,275,614    $  2,161,036
========================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Accounts payable                                                                           $    233,802    $    333,754
 Accrued liabilities:
   Payroll and related                                                                           182,048          94,695
   Other                                                                                          29,889          15,395
------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                        445,739         443,844
------------------------------------------------------------------------------------------------------------------------

Commitments and contingencies [notes 4, 7 and 8]

Stockholders' equity [notes 7 and 8]:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized
  Series B Preferred stock 250,000 shares designated: 192,260 and 250,000
   issued and outstanding, respectively.                                                               2               3
 Series C Preferred stock 300,000 shares designated: 10,000 and nil issued
   and outstanding, respectively.                                                                      -               -
Common stock, $0.00001 par value; 20,000,000 shares authorized
  13,282,099 and 11,464,213 shares issued and outstanding                                            133             115
  Additional paid-in capital                                                                  21,731,328      13,251,171
  Note receivable, officer [note 5]                                                              (27,895)        (27,895)
  Accumulated deficit                                                                        (14,873,693)    (11,805,647)
  Accumulated other comprehensive income                                                               -         299,445
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                     6,829,875       1,717,192
------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                  $  7,275,614    $  2,161,036
========================================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.                                                                 F-3
<PAGE>

                     American Technology Corporation

                         STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended September 30,                                                       2000               1999              1998
===========================================================================================================================
<S>                                                                          <C>                 <C>               <C>
Revenues:
  Product sales [note 10]                                                   $ 1,295,534       $   787,408       $   194,758
  Contract and license                                                          137,516            36,345            50,000
---------------------------------------------------------------------------------------------------------------------------
Total revenues                                                                1,433,050           823,753           244,758
---------------------------------------------------------------------------------------------------------------------------
Cost of revenues                                                              1,050,895           619,665           407,123
---------------------------------------------------------------------------------------------------------------------------

Gross profit (loss)                                                             382,155           204,088          (162,365)
---------------------------------------------------------------------------------------------------------------------------

Operating expenses:
  Selling, general and administrative, (including $131,000, and $438,000
     noncash for 1999 and 1998, respectively)                                 2,563,223         2,209,558         2,660,522
  Research and development                                                    2,086,019         1,099,848           991,238
---------------------------------------------------------------------------------------------------------------------------
Total operating expenses                                                      4,649,242         3,309,406         3,651,760
---------------------------------------------------------------------------------------------------------------------------

Loss from operations                                                         (4,267,087)       (3,105,318)       (3,814,125)
---------------------------------------------------------------------------------------------------------------------------

Other income (expense):
  Interest income                                                               211,843            64,781           131,967
  Gain (loss) on sales of investment securities                                 988,112                 -                 -
  Interest expense - non-cash [notes 4 and 6]                                         -                 -          (926,555)
  Other                                                                            (914)           (1,097)           15,000
---------------------------------------------------------------------------------------------------------------------------
Total other income (expense)                                                  1,199,041            63,684          (779,588)
---------------------------------------------------------------------------------------------------------------------------

Net loss                                                                    $(3,068,046)      $(3,041,634)      $(4,593,713)
===========================================================================================================================
Net loss available to common stockholders                                   $(7,948,994)      $(3,809,486)      $(4,593,713)
===========================================================================================================================
Net loss per share of common stock - basic and diluted                      $     (0.67)      $     (0.33)      $     (0.42)
===========================================================================================================================
Average weighted number of common shares outstanding                         11,868,511        11,408,264        10,889,654
===========================================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.                                                                  F-4
<PAGE>

        American Technology Corporation

        STATEMENTS OF COMPREHENSIVE LOSS

<TABLE>
<CAPTION>
Years Ended September 30,                                      2000                 1999                 1998
=====================================================================================================================
<S>                                                            <C>                  <C>                  <C>
Net Loss                                                       $(3,068,046)         $(3,041,634)         $(4,593,713)

Reclassification adjustment for gains
   included in net income                                         (299,445)             285,004              (14,645)
                                                               ------------------------------------------------------
Comprehensive loss                                             $(3,367,491)         $(2,756,630)         $(4,608,358)
                                                               ======================================================
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>

                                                 American Technology Corporation
                                               Statements of Stockholdes' Equity

<TABLE>
<CAPTION>
Years Ended September 30, 2000, 1999 and 1998
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Common Stock
                                                                                                      ------------
                                                                                                                     Additional
                                                                                                                      Paid-in
                                                                                          Shares       Amount         Capital
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>           <C>            <C>
Balance, September 30, 1997                                                              9,758,779             $98    $ 4,666,035
----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                                                    158,800               2        213,716
For compensation and services [note 8]                                                      14,750               -         91,919
Upon conversion of 6% convertible notes at $3.50 per share
   and accrued interest [note 7]                                                           128,459               1        393,205
Cash-less exercise of warrants [note 7]                                                    106,029               1        919,999
Upon conversion of Series A Preferred Stock [note 7]                                       974,197              10      3,321,143
Upon exercise of warrants from $0.50 - $7.50                                               215,000               2        136,248
Value assigned to 75,000 warrants granted as
    consulting services [note 7]                                                                 -               -        122,000
Value assigned to 80,000 options granted for services [note 8]                                   -               -        316,000
Payment on notes receivable [note 4]                                                             -               -              -
Net loss for the year                                                                            -               -              -
Other comprehensive income (loss)                                                                -               -              -
----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998                                                             11,356,014             114     10,180,265
----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                                                     82,500               1        319,772
For compensation and services [note 8]                                                      25,699               -        140,137
Issuance of 250,000 shares of Series B preferred stock                                           -               -      2,479,997
Value assigned to 30,000 options granted for
    consulting services [note 7]                                                                 -               -         70,000
Value assigned to 20,000 options granted for services [note 7]                                   -               -         61,000
Net loss for the year                                                                            -               -              -
Other comprehensive income                                                                       -               -              -
----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999                                                             11,464,213             115     13,251,171
----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                                                    268,600               3        539,064
For compensation and services [note 8]                                                       8,233               -         81,110
Purchase of technology [note 4]                                                            200,000               2        962,498
Upon exercise of warrants from $5.00 to $7.50                                              147,500               2        972,498
Cashless exercise of warrants                                                               33,452               -              -
Conversion of Series B preferred stock [note 7]                                            122,716               1              -
Issuance of Series C preferred stock, net of offering costs
 of $543,783 [note 7]                                                                            -               -      5,924,997
Conversion of Series C preferred stock [note 7]                                          1,037,385              10            (10)
Net loss for the year                                                                            -               -              -
Other comprehensive income (loss)                                                                -               -              -
----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000                                                             13,282,099            $133    $21,731,328
----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                      Series A Convertible Preferred Stock    Series B Convertible Preferred Stock


                                                                Shares                Amount            Shares          Amount
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                  <C>             <C>
Balance, September 30, 1997                                     350,000           $ 3,321,153                -               -
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                               -                     -                -               -
For compensation and services [note 8]                                -                     -                -               -
Upon conversion of 6% convertible notes at $3.50 per share
   and accrued interest [note 7]                                      -                     -                -               -
Cash-less exercise of warrants [note 7]                               -                     -                -               -
Upon conversion of Series A Preferred Stock [note 7]           (350,000)           (3,321,153)               -               -
Upon exercise of warrants from $0.50 - $7.50                          -                     -                -               -
Value assigned to 75,000 warrants granted as
    consulting services [note 7]                                      -                     -                -               -
Value assigned to 80,000 options granted for services [note 8]        -                     -                -               -
Payment on notes receivable [note 4]                                  -                     -                -               -
Net loss for the year                                                 -                     -                -               -
Other comprehensive income (loss)                                     -                     -                -               -
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998                                           -                     -                -               -
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                               -                     -                -               -
For compensation and services [note 8]                                -                     -                -               -
Issuance of 250,000 shares of Series B preferred stock                -                     -          250,000               3
Value assigned to 30,000 options granted for
    consulting services [note 7]                                      -                     -                -               -
Value assigned to 20,000 options granted for services [note 7]        -                     -                -               -
Net loss for the year                                                 -                     -                -               -
Other comprehensive income                                            -                     -                -               -
----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999                                           -                     -          250,000               3
----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                               -                     -                -               -
For compensation and services [note 8]                                -                     -                -               -
Purchase of technology [note 4]                                       -                     -                -               -
Upon exercise of warrants from $5.00 to $7.50                         -                     -                -               -
Cashless exercise of warrants                                         -                     -                -               -
Conversion of Series B preferred stock [note 7]                       -                     -          (57,740)             (1)
Issuance of Series C preferred stock, net of offering costs
 of $543,783 [note 7]                                                 -                     -                -               -
Conversion of Series C preferred stock [note 7]                       -                     -                -               -
Net loss for the year                                                 -                     -                -               -
Other comprehensive income (loss)                                     -                     -                -               -
----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000                                           -                     -          192,250         $     2
----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                 Series C Convertible Preferred
                                                                                                         Notes
                                                                        Shares         Amounts        Receivables
-----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                   <C>            <C>
Balance, September 30, 1997                                                  -              -          $(153,150)
-----------------------------------------------------------------------------------------------------------------
Issuance of common stock:                                                    -              -                  -
Upon exercise of stock options [note 8]                                      -              -                  -
For compensation and services [note 8]                                       -              -                  -
Upon conversion of 6% convertible notes at $3.50 per share
   and accrued interest [note 7]                                             -              -                  -
Cash-less exercise of warrants [note 7]                                      -              -                  -
Upon conversion of Series A Preferred Stock [note 7]                         -              -                  -
Upon exercise of warrants from $0.50 - $7.50                                 -              -                  -
Value assigned to 75,000 warrants granted as
    consulting services [note 7]                                             -              -                  -
Value assigned to 80,000 options granted for services [note 8]               -              -                  -
Payment on notes receivable [note 4]                                         -              -            125,255
Net loss for the year                                                        -              -                  -
Other comprehensive income (loss)                                            -              -                  -
-----------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998                                                  -              -            (27,895)
-----------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                                      -              -                  -
For compensation and services [note 8]                                       -              -                  -
Issuance of 250,000 shares of Series B preferred stock                       -              -                  -
Value assigned to 30,000 options granted for
    consulting services [note 7]                                             -              -                  -
Value assigned to 20,000 options granted for services [note 7]               -              -                  -
Net loss for the year                                                        -              -                  -
Other comprehensive income                                                   -              -                  -
-----------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999                                                  -              -            (27,895)
-----------------------------------------------------------------------------------------------------------------
Issuance of common stock:                                                    -              -                  -
Upon exercise of stock options [note 8]                                      -              -                  -
For compensation and services [note 8]                                       -              -                  -
Purchase of technology [note 4]                                              -              -                  -
Upon exercise of warrants from $5.00 to $7.50                                -              -                  -
Cashless exercise of warrants                                                -              -                  -
Conversion of Series B preferred stock [note 7]                              -              -                  -
Issuance of Series C preferred stock, net of offering costs
 of $543,783 [note 7]                                                   300,000             3                  -
Conversion of Series C preferred stock [note 7]                        (290,000)           (3)                 -
Net loss for the year                                                         -             -                  -
Other comprehensive income (loss)                                             -             -                  -
-----------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000                                              10,000        $    -           $(27,895)
-----------------------------------------------------------------------------------------------------------------

<CAPTION>
------------------------------------------------------------------------------------------------------------

                                                                                     Accumulated
                                                                                       Other          Total
                                                                      Accumulated   Comprehensive Stockholders'
                                                                        Deficit        Income         Equity
-------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>           <C>
Balance, September 30, 1997                                         $  (4,170,300)    $   29,086  $ 3,692,922
-------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                                         -              -      213,718
For compensation and services [note 8]                                          -              -       91,919
Upon conversion of 6% convertible notes at $3.50 per share
   and accrued interest [note 7]                                                -              -      393,206
Cash-less exercise of warrants [note 7]                                         -              -      920,000
Upon conversion of Series A Preferred Stock [note 7]                            -              -           -
Upon exercise of warrants from $0.50 - $7.50                                    -              -      136,250
Value assigned to 75,000 warrants granted as
    consulting services [note 7]                                                -              -      122,000
Value assigned to 80,000 options granted for services [note 8]                  -              -      316,000
Payment on notes receivable [note 4]                                            -              -      125,255
Net loss for the year                                                  (4,593,713)             -   (4,593,713)
Other comprehensive income (loss)                                               -        (14,645)     (14,645)
-------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998                                            (8,764,013)        14,441  $ 1,402,912
-------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                                         -              -      319,773
For compensation and services [note 8]                                          -              -      140,137
Issuance of 250,000 shares of Series B preferred stock                          -              -    2,480,000
Value assigned to 30,000 options granted for
    consulting services [note 7]                                                -              -       70,000
Value assigned to 20,000 options granted for services [note 7]                  -              -       61,000
Net loss for the year                                                  (3,041,634)             -   (3,041,634)
Other comprehensive income                                                      -        285,004      285,004
-------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999                                           (11,805,647)       299,445    1,717,192
-------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Upon exercise of stock options [note 8]                                        -               -      539,067
For compensation and services [note 8]                                         -               -       81,110
Purchase of technology [note 4]                                                -               -      962,500
Upon exercise of warrants from $5.00 to $7.50                                  -               -      972,500
Cashless exercise of warrants                                                  -               -           -
Conversion of Series B preferred stock [note 7]                                -               -           -
Issuance of Series C preferred stock, net of offering costs
 of $543,783 [note 7]                                                          -               -    5,925,000
Conversion of Series C preferred stock [note 7]                                -               -           (3)
Net loss for the year                                                 (3,068,046)              -   (3,068,046)
Other comprehensive income (loss)                                              -        (299,445)    (299,445)
--------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000                                         $(14,873,693)     $        -  $ 6,829,875
--------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.                                                                 F-6
<PAGE>

                        American Technology Corporation

                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended September 30,                                                       2000             1999          1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>            <C>            <C>
Increase (Decrease) in Cash
Operating Activities:
Net loss                                                                       $(3,068,046)   $(3,041,634)   $(4,593,713)
Adjustments to reconcile net loss to net cash
   used in operations:
   Depreciation and amortization                                                   226,986        127,260        132,215
   Allowance for doubtful accounts                                                  12,000              -              -
   Warrants granted for services                                                         -              -        122,000
   Gain on sales of investment securities                                         (988,112)             -              -
   Common stock issued for services and compensation                                81,110        140,137         91,919
   Common stock issued for interest                                                                     -         18,206
   Options granted for services                                                          -        131,000        316,000
   Inventory and loss accrual                                                            -              -        160,000
   Bonus paid on exchange for payment                                                    -              -        125,255
   Non-cash interest on cash-less exercise of warrants                                   -              -        920,000
   Non-cash accrued interest on long term debt                                           -              -        (11,651)
Changes in assets and liabilities:
     Trade accounts receivable                                                     (91,379)       (86,795)       235,437
     Inventories                                                                   114,848       (200,029)       (57,477)
     Prepaid expenses and other                                                     20,099       (146,111)       (31,094)
     Accounts payable                                                              (99,952)       131,712         81,173
     Accrued liabilities                                                           101,847         31,299         27,355
-------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                           (3,690,599)    (2,913,161)    (2,464,375)
-------------------------------------------------------------------------------------------------------------------------

Investing Activities:
Purchase of equipment                                                             (204,625)       (69,458)       (80,995)
Patent costs paid                                                                 (174,276)      (261,495)      (108,479)
Purchase of technology                                                            (300,000)             -              -
Proceeds from sales of investment securities                                       988,315              -              -
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                                309,414       (330,953)      (189,474)
-------------------------------------------------------------------------------------------------------------------------

Financing Activities:
Proceeds from issuance of preferred stock, net                                   5,925,000      2,480,000              -
Proceeds from exercise of common stock warrants                                    972,500              -        136,250
Proceeds from exercise of stock options                                            539,064        319,773        213,718
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                        7,436,564      2,799,773        349,968
-------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                                  4,055,379       (444,341)    (2,303,881)
Cash, beginning of year                                                            590,236      1,034,577      3,338,458
-------------------------------------------------------------------------------------------------------------------------
Cash, end of year                                                               $4,645,615       $590,236     $1,034,577
=========================================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.                                                                 F-7

<PAGE>

American Technology Corporation
Summary of Accounting Policies
===============================================================================


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

CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
Other than cash of $4,645,615 at September 30, 2000, the Company has no other
material unused sources of liquidity at this time. We have financed our
operations primarily through the sale of Preferred Stock, exercise of stock
options, issuance's of convertible notes, proceeds from the sale of investment
securities and margins from consumer product sales. Primarily as a result of the
sale of the investment securities in January 2000 and the issuance of the Series
C Preferred Stock, our cash position increased by approximately $4.05 million
from September 30, 1999.  Based on our cash position assuming (a) currently
planned expenditures and level of operations, (b) continuation of sales to
existing retail customers and ; (c) royalty revenue against existing license
agreements; we believe we have sufficient capital resources for the next twelve
months. We expect to incur additional operating losses as a result of continued
product sale operations and as a result of expenditures for research and
development and marketing costs for our sound and other products and
technologies. The timing and amounts of these expenditures and the extent of our
operating losses will depend on many factors, some of which are beyond our
control. We anticipate that the commercialization of our technologies may
require increased operating costs, however we cannot currently estimate the
amounts of these costs.

There can be no assurance that any funds required during the next twelve months
or thereafter can be generated from operations or that such required funds will
be available from the aforementioned or other potential sources. The lack of
sufficient funds from operations or additional capital could force the Company
to curtail or scale back operations and would therefore have an adverse effect
on the Company's business.

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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and trade accounts receivable.

The Company's cash is placed in quality money market accounts with major
financial institutions. The investment policy limits the Company's exposure to
concentrations of credit risk. Such deposit accounts at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.

Concentration of credit risk with respect to the trade accounts receivable are
limited due to the wide variety of customers and markets which comprise the
Company's customer base, as well as their dispersion across many different
geographic areas. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that the trade accounts receivable
credit risk exposure is limited. Generally, the Company does not require
collateral or other security to support customer receivables.

The carrying amounts of financial instruments including cash, trade accounts
receivable, notes receivable-officers, accounts payable and accrued liabilities
approximated fair market value because of the immediate or short-term maturity
of these instruments.

INVESTMENT SECURITIES
Investment securities classified as available for sale are those securities that
the Company does not have the positive intent to hold to maturity or does not
intend to trade actively. These securities are reported at fair value with

                                                                             F-8
<PAGE>

American Technology Corporation
Summary of Accounting Policies
===============================================================================


unrealized gains and losses reported as a net amount (net of applicable deferred
income taxes) as a separate component of stockholders' equity.

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

EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation is computed over the estimated useful
lives of three years using the straight-line method.

PATENTS
Patents are carried at cost and, when granted are amortized over their estimated
useful lives. The carrying value of patents is periodically reviewed and
impairments, if any, are recognized when the expected future benefit to be
derived from individual intangible assets is less than its carrying value.
Amortization expense was $21,433 for fiscal 2000.

PURCHASED TECHNOLOGY
Purchased technology is carried at cost, and is amortized over three years.
Amortization expense was $105,208 for fiscal 2000.

LEASES
Leases entered into are classified as either capital or operating leases.  At
fiscal year end 2000 the Company had no capital lease obligations. All current
leases reported are classified as operating leases.

REVENUE RECOGNITION
Product sales are recognized in the periods that products are shipped. Revenues
from on-going per unit license fees are earned based on units shipped
incorporating the Company's patented proprietary technologies and are recognized
in the period when the manufacturers' units shipped information is available to
the Company and collectibility is reasonably assured. Revenues from up-front
license fees and annual license fees are recognized ratably over the specified
term of the particular license.

RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.

INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109. Temporary differences are differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future years. A
valuation allowance is recorded by the Company to the extent it is more likely
than not that a deferred tax asset will not be realized.

NET LOSS PER SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common stockholders, after deduction for cumulative
unpaid dividends, by the weighted average number of common shares outstanding
for the period. The weighted average number of common shares outstanding during
fiscal 2000 was 11,868,511 [1999 - 11,408,264] [1998 - 10,889,654). Diluted
earnings (loss) per share reflects the potential dilution of securities that
could share in the earnings of an entity. The Company's losses for the years
presented cause the inclusion of potential common stock instruments outstanding
to be antidilutive and, therefore, in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), the Company
is not required to present a diluted earnings (loss) per share. Stock options,
warrants and convertible preferred stock exercisable into 2,329,827 shares of
Common Stock were outstanding at September 30, 2000, stock options, warrants and
convertible preferred stock exercisable into 3,009,761 shares of Common Stock
were outstanding at September 30, 1999, and stock options and warrants
exercisable into 1,693,100 shares of Common Stock were

                                                                             F-9
<PAGE>

American Technology Corporation
Summary of Accounting Policies
===============================================================================


outstanding at September 30, 1998. These securities were not included in the
computation of diluted earnings (loss) per share because of the losses but could
potentially dilute earnings (loss) per share in future periods.

Net loss available to common stockholders was increased during the years ended
September 30, 2000 and 1999 in computing net loss per share by an imputed deemed
dividend based on the value of warrants issued in connection with Series B
Preferred Stock and Series C Preferred Stock  (see Note 8). The Company
calculated the fair value of the warrants at $595,000 and $1,478,000,
respectively. The net loss available to common stockholders was also reduced by
an additional deemed dividend computed from a discount provision in the Series B
Preferred Stock of $60,000 and in the Series C Preferred Stock of $1,031,250.
Such imputed deemed dividends are not included in the Company's stockholders'
equity as the Company has an accumulated deficit. Amounts are included in net
loss available to common stockholders. The imputed deemed dividends are not
contractual obligations of the Company to pay such imputed dividends.

The provisions of the Company's Series B Preferred Stock provides for an
accretion in the conversion value (similar to a dividend) of 6% or $0.60 per
share per annum. The Series C Preferred Stock provides for an accretion in the
conversion value of 6% or $1.20 per share per annum. The accrued accretion of
the Series B and Series C Preferred Stock for the year ended September 30, 2000
was $126,118 and $171,830, respectively, which increases the net loss available
to common stockholders. Net loss available to common stockholders is computed as
follows:

<TABLE>
<CAPTION>
Years Ended September 30,                                        2000          1999          1998
--------------------------------------------------------  -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
 Net loss                                                 $(3,068,046)  $(3,041,634)  $(4,593,713)
 Series B and Series C Preferred stock imputed
  deemed dividends based on discount at issuance           (1,031,250)      (60,000)            -
 Imputed deemed dividends on warrants issued
  with Series B and Series C Preferred Stock               (1,478,000)     (595,000)            -
 Accretion on Series B Preferred Stock at stated rate        (126,118)     (112,852)            -
 Accretion on Series C Preferred Stock at stated rate        (171,830)            -             -
                                                          -----------   -----------   -----------
Net loss available to common stockholders before
 cumulative effect of a change in accounting
 principles                                                (5,875,244)   (3,809,486)   (4,593,713)
 Cumulative effect of a change in accounting
    principles [note 7]                                    (2,073,750)            -             -
                                                          -----------   -----------   -----------
 Net loss available to common stockholders                $(7,948,994)  $(3.809,486)  $(4,593,713)
                                                          ===========   ===========   ===========
</TABLE>

STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for all stock option plans. Under APB
Opinion 25, compensation cost is recognized for stock options granted to
employees when the option price is less than the market price of the underlying
common stock on the date of grant.

SFAS Statement No. 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information for employees, the Company estimates the fair value of
each stock option at the grant date by using the Black-Scholes option-pricing
model. Under SFAS No. 123, compensation cost is recognized for stock options
granted to non-employees using the Black-Scholes Option-pricing model.

STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.

RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133") which establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as

                                                                            F-10
<PAGE>

American Technology Corporation
Summary of Accounting Policies
===============================================================================


either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133, as
extended by SFAS No. 137, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not expect the adoption of
SFAS No. 133 to have a material effect on the Company's financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements of all public registrants.  The provisions of SAB 101 are
effective for transactions beginning in the Company's fiscal year 2001. The
Company does not expect the adoption of SAB 101 to have a material effect on the
Company's financial statements.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000.  This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees.  The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.

                                                                            F-11
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================


1. INVESTMENT SECURITIES
During the fiscal year ended September 30, 2000, the Company received $988,315
from the sale of 225,300 shares of e.Digital Corporation ("EDIG") common stock,
an affiliated corporation. At September 30, 2000 the Company no longer holds
available for sale investment securities. For fiscal year 1999 investment
securities of e.Digital Corporation common stock were valued as follows:

<TABLE>
<CAPTION>
For the Years Ended September 30,                                 2000        1999
-----------------------------------------------------------------------------------
<S>                                                          <C>         <C>
Cost                                                         $       -   $     203
Gross Unrealized Gains                                               -     299,445
-----------------------------------------------------------------------------------
Estimate Fair Value                                          $       -   $ 299,648
===================================================================================
2. INVENTORIES
Inventories consisted of the following at September 30,           2000        1999
-----------------------------------------------------------------------------------
Finished goods                                               $ 103,094   $ 228,021
Raw materials                                                   89,379      79,300
-----------------------------------------------------------------------------------
                                                               192,473     307,321
Reserve for obsolescence                                       (20,000)    (20,000)
-----------------------------------------------------------------------------------
                                                             $ 172,473   $ 287,321
===================================================================================
3. EQUIPMENT
Equipment consisted of the following at September 30,             2000        1999
-----------------------------------------------------------------------------------

Machinery and equipment                                      $ 504,813   $ 424,477
Office furniture and equipment                                 196,512     149,668
Leasehold improvements                                         114,887      37,442
-----------------------------------------------------------------------------------
                                                               816,212     611,587
Accumulated depreciation                                      (578,885)   (478,540)
-----------------------------------------------------------------------------------
Net equipment                                                $ 237,327   $ 133,047
===================================================================================
</TABLE>

Depreciation expense was $100,345,  $105,777, and $108,049 for the years ended
September 30, 2000, 1999 and 1998, respectively.

4. PURCHASED TECHNOLOGY

In April 2000, the Company acquired all rights to certain loudspeaker technology
owned by David Graebener ("Graebener"), Stephen M. Williams ("Williams") and
Hucon Limited, a Washington corporation ("Hucon").  The purchase price consisted
of $300,000 cash plus 200,000 shares of Common Stock.  The 200,000 shares of
Common Stock were issued in June 2000 and were valued at $962,500. The Company
will pay up to an additional 159,843 shares of Common Stock upon the achievement
of certain performance milestones relating to gross revenues received by the
Company from the purchased loudspeaker technology. These shares reflect a
reduction for the amount paid by the Company for prepaid minimum royalties for
proprietary film purchases. The Company agreed to employ Mr. Williams and Mr.
Graebener for a term of three years subject to certain terms and conditions.

5. RELATED PARTY TRANSACTIONS
Royalties
---------
In connection with a 1992 agreement to purchase technology, the Company is
required to pay a stockholder/director of the Company a 1% royalty on all net
sales of certain radio equipment (as defined). Sales of these products were
discontinued in fiscal 1998. For the year ended September 30, 1998 total
royalties paid by the Company on radio equipment sales were $973.

The Company is also obligated to pay the stockholder/director royalties of 2% on
gross revenues of the Company's sound reproduction and global positioning
satellite technologies. As of September 30, 2000, no amounts have been paid nor
are due under this agreement.

                                                                            F-12
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================


Notes Receivable-Officer
------------------------
At September 30, 2000 and 1999 an officer was obligated to the Company in the
amount of $27,895 from a cash loan made to exercise stock options. The note is
presented as a reduction from stockholders' equity in the accompanying financial
statements.

6. INCOME TAXES
Income taxes consisted of the following:

<TABLE>
<CAPTION>


Years ended September 30,                                                         2000                 1999               1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                  <C>                <C>
 Deferred (benefit)
  Federal                                                                   $(1,077,000)         $(1,025,000)       $(1,302,000)
  State                                                                        (190,000)            (181,000)          (230,000)
                                                                            -----------          -----------        -----------
                                                                             (1,267,000)          (1,206,000)        (1,532,000)
 Change in valuation allowance                                                1,267,000            1,206,000          1,532,000
                                                                            -----------          -----------        -----------
                                                                            $         -          $         -        $         -
                                                                            ===========          ===========        ===========

A reconciliation of income taxes at the federal statutory rate of 34%
 to the effective tax rate is as follows:

Years ended September 30,                                                       2000                 1999               1998
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefit) computed at the
 federal statutory rate                                                  $(1,043,000)         $(1,034,000)       $(1,562,000)
Tax effect of change in valuation allowance                                1,267,000            1,206,000          1,562,000
Nondeductible compensation
 interest expense and other                                                    6,000              (18,000)           288,000
State income taxes (benefit), net of
 federal tax benefit                                                        (184,000)            (182,000)          (276,000)
Other                                                                        (46,000)              28,000             24,000
                                                                         -----------          -----------        -----------
                                                                         $         -          $         -        $         -
                                                                         ===========          ===========        ===========
</TABLE>

The types of temporary differences between the tax basis of assets and
liabilities and their approximate tax effects that give rise to a significant
portion of the net deferred tax asset (liability) at September 30, 2000 and 1999
are as follows:

<TABLE>
<CAPTION>


Deferred tax assets:                                                      2000          1999
                                                                   -----------   -----------
 <S>                                   <C>                         <C>           <C>
 Net operating loss carryforwards                                  $ 5,131,000   $ 4,173,000
 Research and development credit                                       119,000             -
 Equipment                                                              40,000         8,000
 Purchased technology                                                   17,000             -
 Accruals and other                                                     62,000        46,000
 Allowances                                                              8,000         3,000
                                                                   -----------   -----------
  Gross deferred tax asset                                           5,377,000     4,230,000
  Less valuation allowance                                          (5,377,000)   (4,110,000)
                                                                   -----------   -----------
                                                                             -       120,000
                                                                   -----------   -----------
Deferred tax liabilities:
   Unrealized gain on investment securities                                  -      (120,000)
                                                                   -----------   -----------
Net deferred tax asset (liability)                                 $         -   $         -
                                                                   ===========   ===========
</TABLE>

A valuation allowance has been recorded to offset the net deferred tax asset as
management has been unable to determine that it is more likely than not that the
deferred tax asset will be realized.

At September 30, 2000, the Company, for federal income tax purposes, has net
operating loss carryforwards of approximately $12,790,000 which expire through
2020 of which certain amounts are subject to limitations under the Internal
Revenue Code of 1986, as amended.

                                                                            F-13
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================


7. STOCKHOLDERS' EQUITY

Preferred Stock
---------------

The Company is authorized to issue 5,000,000 shares of preferred stock, $0.0001
par value, without any action by the stockholders. The board of directors has
the authority to divide any and all shares of preferred stock into series and to
fix and determine the relative rights and preferences of the preferred stock,
such as the designation of series and the number of shares constituting such
series, dividend rights, redemption and sinking fund provisions, liquidation and
dissolution preferences, conversion or exchange rights and voting rights, if
any. With respect to voting rights, if the preferred stock were permitted to
vote in the election of directors or on other matters, each such share would be
entitled to one vote, and such shares may vote with the shares of common stock
or may vote as a separate class. Issuance of preferred stock by the board of
directors could result in such shares having dividend and or liquidation
preferences senior to the rights of the holders of common stock and could dilute
the voting rights of the holders of common stock.

On March 16, 2000 the Company issued 300,000 shares of Series C Preferred Stock,
par value $0.00001 ("Series C Stock") for cash at $20.00 per share for net
proceeds of approximately $5,925,000. The dollar amount of Series C Stock,
increased by $1.20 per share accretion per annum and other adjustments, is
convertible one or more times into fully paid shares of Common Stock of the
Company at a conversion price which is the lower of (i) $8.00 per share or (ii)
92% of the average of the five days closing bid market price prior to
conversion, but in no event less than $5.75 per share. The Series C Stock may
not be converted at an effective price of less than $8.00 per share until August
31, 2000. The shares of Series C Stock may be called by the Company for
conversion if the market price of the Common Stock exceeds $20.00 per share for
ten days and certain conditions are met. The Series C Stock is subject to
automatic conversion on March 31, 2003. In connection with the sale of Series C
Stock, the Company issued warrants to the purchasers to purchase an aggregate of
300,000 shares of Common Stock at $11.00 per share until March 31, 2003. During
the year ended September 30, 2000, of the Series C Stock 290,000 shares were
converted into 1,037,385 shares of Common Stock.  As of September 30, 2000, the
10,000 shares remaining of the Series C Stock would have been convertible into
35,915 shares of Common Stock.

In connection with the Series C Stock financing, the Company incurred placement
fees, legal and related costs of $75,000 and issued a warrant to purchase 75,000
shares of Common Stock at $11.00 per share until March 31, 2005 as a placement
fee. The value assigned to the warrant issued as a placement fee was $468,783.

During December 1998 and January 1999, the Company issued 250,000 shares of
Series B Preferred Stock, par value $0.00001 ("Preferred Stock") for cash at
$10.00 per share for net proceeds of $2,480,000. The dollar amount of Preferred
Stock, increased by $0.60 per share accretion per annum and other adjustments,
is convertible one or more times into fully paid shares of Common Stock of the
Company at a conversion price which is the lower of (a) $5.00 per share or (b)
92% of the average of the five days closing bid market price prior to
conversion, but in no event less than $3.50 per share. The shares of Preferred
Stock may be called by the Company for conversion if the market price of the
Common Stock exceeds $12.00 per share for ten days and certain conditions are
met. The Preferred Stock is subject to automatic conversion on November 30,
2001. During fiscal year ended September 30, 2000, an aggregate of 57,740 shares
of Series B Preferred Stock were converted into 122,716 shares of Common Stock.

In connection with the sale of Preferred Stock the Company issued warrants to
purchase 250,000 shares of Common Stock at $6.00 per share until November 30,
2001. At September 30, 2000 the Series B Preferred Stock would have been
convertible into 425,079 shares of Common Stock.

During the year, the Company adopted Emerging Issues Task Force Issue No. 00-27,
"Application of EITF Issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to
Certain Convertible Instruments", which is effective for all such instruments.
This issue clarifies the accounting for instruments with beneficial conversion
features or contingently adjustable conversion ratios. The Company has modified
the previous calculation of the beneficial conversion features associated with
previously issued Convertible Preferred Stock. Based on further clarification,
the beneficial conversion feature should be calculated by allocating the
proceeds received in the financing to the convertible instrument and to any
detachable warrants included in the transaction, and measuring the intrinsic
value based on the effective conversion price based on the allocated proceeds.
The previous calculation was based on a comparison of the stated conversion
price in the term of the instrument to the fair value of the issuer's stock at
the commitment date.

                                                                            F-14
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================

The Company has presented the effect of adoption as a cumulative effect of a
change in accounting principles as allowed for in EITF 00-27. Accordingly, the
Company has recognized an additional $2,073,750 in imputed deemed dividends
based on a discount at issuance.

Warrants
--------

During fiscal 1999 the Company granted a warrant to purchase 50,000 shares at
$10.00 per share, valued at $128,000 in connection with consulting services.
This amount was treated as a cost of the Preferred stock offering. During fiscal
1998 the Company granted warrants to purchase 75,000 shares at $16.00 per share
in connection with consulting services. These warrants were valued at $122,000.
During fiscal 1997 the Company granted warrants to purchase 90,000 shares at
$5.00 per share in connection with consulting services. The warrants were valued
at $33,300.

During fiscal 1998, the Company amended the terms of a warrant to purchase
100,000 shares of Common Stock previously granted to a director in connection
with a 1992 financing transaction. The amendment provided for a cashless
exercise, which was completed in May 1998. The Company recorded non-cash
interest expense of $920,000 in connection with the cashless exercise.

At September 30, 2000, the Company had the following warrants outstanding
arising from the offerings and transactions, each exercisable into one Common
Share:

<TABLE>
<CAPTION>
                Number         Exercise Price          Expiration Date
              ----------       --------------         -----------------
              <S>              <C>                    <C>
               240,000                 $ 6.00         November 30, 2001
                50,000                 $16.00              May 12, 2003
                50,000                 $10.00           January 5, 2004
               375,000                 $11.00            March 31, 2005
               -------
               715,000
               =======
</TABLE>

At September 30, 1999, the Company had the following warrants outstanding
arising from the offerings and transactions, each exercisable into one Common
Share:

<TABLE>
<CAPTION>
                Number           Exercise Price        Expiration Date
                ------           --------------       -----------------
               <S>               <C>                  <C>
                60,000               $ 5.00            February 5, 2000
                47,500               $ 5.00               March 1, 2000
               172,500               $ 7.50              August 1, 2000
                25,000               $16.00               June 18, 2000
               250,000               $ 6.00           November 30, 2001
                50,000               $16.00                May 12, 2003
                50,000               $10.00             January 5, 2004
               -------
               655,000
               =======
</TABLE>

8. BENEFIT PLANS

1997 Employee Stock Compensation Plan ("ESC")
---------------------------------------------

Effective March 10, 1997, the Company adopted the 1997 Employee Stock
Compensation Plan, expiring March 9, 2002, the plan was modified on February 22,
2000 reserving for issuance of an aggregate of 650,000 shares of the Company's
Common Stock and extending the expiration date until 2002. The Plan provides for
compensation awards of the Company's common stock to non-executive employees (as
defined), at the discretion of the ESC Plan committee. During fiscal 2000, the
Company issued 8,233 shares of common stock under the Plan recording general and
administrative expense of $81,110 for awards valued at an estimated fair market
value ranging from $7.00 to $10.53 per share

During fiscal 1999, the Company issued 25,699 shares of common stock under the
Plan recording general and administrative expense of $140,137 for awards valued
at an estimated fair market value ranging from $4.40 to $7.125 per share. During
fiscal 1998, the Company issued 14,750 shares of Common Stock under the plan
recording

                                                                            F-15
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================

general and administrative expense of $91,919 for awards valued at an estimated
fair market value ranging from $3.875 to $8.53 per share.

1997 Stock Option Plan
-----------------------

The Company has a Stock Option Plan, expiring January 22, 2008, reserving for
issuance 1,000,000 shares of the Company's Common Stock, as amended March 5,
1999. The Options issued under the Plan shall, in the discretion of the Board,
be either Incentive Stock Options or Nonstatutory Stock Options. The Stock
Option Plan provides for grants to employees, directors or consultants, both at
the discretion of the Board of Directors. Options to purchase Common Stock of
the Company at a price not less than the fair market value of the shares on the
date of grant. In the case of a significant stockholder, the option price of
shares will not be less than 110 percent of the fair market value of the share
on the date of grant. Any options granted under the Stock Option Plan must be
exercised within ten years of the date they were granted (five years in the case
of a significant stockholder). As of September 30, 2000, there were options
outstanding covering 389,333 shares of Common Stock under this Plan.

1992 Incentive Stock Option Plan ("ISO")
----------------------------------------

The Company has an ISO Plan, expiring March 2, 2002, originally reserving for
issuance 1,000,000 shares of the Company's Common Stock. The ISO Plan provides
for grants to either full or part time employees, at the discretion of the Board
of Directors, options to purchase Common Stock of the Company at a price not
less than the fair market value of the shares on the date of grant. In the case
of a significant stockholder, the option price of shares will not be less than
110 percent of the fair market value of the share on the date of grant. Any
options granted under the ISO Plan must be exercised within ten years of the
date they were granted (five years in the case of a significant stockholder). As
of September 30, 2000, there were options outstanding covering 185,000 shares of
Common Stock under this Plan.

1992 Non-Statutory Stock Option Plan ("NSO")
--------------------------------------------

The Company has an NSO Plan, expiring March 2, 2002, originally reserving for
issuance 1,000,000 shares of the Company's Common Stock. The NSO Plan provides
for grants to either full or part-time employees, directors or consultants, at
the discretion of the Board of Directors, options to purchase Common Stock of
the Company at a price not less than the fair market value of the shares on the
date of grant. Any options granted under the NSO Plan must be exercised within
10 years of the date they were granted. As of September 30, 2000, there were
options outstanding covering 234,500 shares under this Plan.

Other Stock Options
-------------------

During fiscal 2000, in connection with an executive officer's separation
agreement an aggregate of 260,000 options were cancelled and 180,000 options are
vested and exercisable at $8.50 per share until October 12, 2001 and 50,000
options are exercisable at $16.00 per share until October 12, 2001. In
connection with employment offers to new employees the Company issued an
aggregate of 115,000 options ranging in exercisable price of $6.38 to $9.03.

Non-Cash Stock Option Compensation Expense
------------------------------------------

During fiscal 1999, and 1998, the Company recorded non-cash compensation expense
of $131,000, $316,000 respectively, under its stock option plans to non-
employees through the granting of 50,000 options, 80,000 options and 97,500
options, respectively. Of the non-cash compensation expense recorded in fiscal
1998, $136,000 pertained to the fourth quarter. Also during fiscal 1998, 292,963
common shares were issued in connection with the cashless exercise of stock
options relating to 350,000 shares.

Stock Option Pro Forma and Summary Information
----------------------------------------------

The Financial Accounting Standard Boards Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro
forma information regarding net loss and net loss per share as if compensation
costs for the Company's stock options plans and other stock awards had been
determined in accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock award (those under the
stock option plans described above plus warrants for consulting services) (see
note 7) at the grant date by using the Black-Scholes option-pricing model with
the following weighted average assumptions used respectively; dividend yield of
zero percent for all years; expected volatility of 71 percent; risk-free
interest rates between 6 and 6.72 percent; and expected lives of 2.21 to 5.01
years.

                                                                            F-16
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================

Under the accounting provisions for SFAS No. 123, the Company's net loss
available to Common Shareholders and basic and diluted loss per Common Share
would have been increased by the pro forma amounts indicated below:

<TABLE>
<CAPTION>
Years ended September 30,                           2000          1999          1998
------------------------------------------------------------------------------------
<S>                                          <C>           <C>           <C>
Net Loss available to Common Shareholders
  As reported                                $(7,948,994)  $(3,809,486)  $(4,593,713)
  Pro forma                                   (8,908,065)   (4,703,717)   (4,906,273)
Net loss per Common Share
  As reported                                $      (.67)  $      (.33)  $      (.42)
  Pro forma                                  $      (.75)  $      (.41)  $      (.45)
</TABLE>

During the initial phase-in period of SFAS No. 123, the effect on pro forma
results are not likely to be representative of the effects on pro forma results
in future years since options vest over several years and additional awards
could be made each year.

A summary of the status of the Company's stock option plans as of September 30,
2000, 1999 and 1998 and the changes during the years ended on those dates is
presented below:

<TABLE>
<CAPTION>
Fiscal 1998:                                                        Shares    Exercise Price
                                                                  ----------  --------------
<S>                                                               <C>         <C>
Outstanding October 1, 1997                                       1,672,500            $3.79
  Granted                                                           567,600            $7.46
  Canceled/expired                                                 (743,200)           $5.81
  Exercised                                                        (158,800)           $1.35
                                                                  ---------
Outstanding September 30, 1998                                    1,338,100            $4.51
                                                                  =========
Exercisable at September 30, 1998                                   898,568            $2.84
                                                                  =========

Weighted average fair value of options granted during the year                         $0.52
                                                                                       =====

Fiscal 1999:
Outstanding October 1, 1998                                       1,338,100            $4.51
  Granted                                                           471,800            $7.06
  Canceled/expired                                                 (145,100)           $6.09
  Exercised                                                         (82,500)           $3.88
                                                                  ---------
Outstanding September 30, 1999                                    1,582,300            $5.16
                                                                  =========
Exercisable at September 30, 1999                                   975,666            $3.45
                                                                  =========

Weighted average fair value of options granted during the year                         $3.93
                                                                                       =====

Fiscal 2000:
Outstanding October 1, 1999                                       1,582,300            $5.16
  Granted                                                           133,600            $7.84
  Canceled/expired                                                 (293,467)           $9.10
  Exercised                                                        (268,600)           $2.01
                                                                  ---------
Outstanding September 30, 2000                                    1,153,833            $5.20
                                                                  =========
Exercisable at September 30, 2000                                   964,483            $4.89
                                                                  =========

Weighted average fair value of options granted during the year                         $5.00
                                                                                       =====
</TABLE>

                                                                            F-17
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================

The following table summarizes information about stock options outstanding at
September 30, 2000:

<TABLE>
<CAPTION>
                                        Weighted Average  Weighted                    Weighted
                Range of                       Remaining   Average                     Average
                Exercise         Number      Contractual  Exercise         Number     Exercise
                  Prices    Outstanding             Life     Price    Exercisable        Price
----------------------------------------------------------------------------------------------
          <S>               <C>         <C>               <C>         <C>             <C>
          $         0.50         300,000            0.39    $ 0.50        300,000       $ 0.50
          $   3.59-$4.98         184,000            2.32    $ 4.05        174,000       $ 4.07
          $   5.00-$5.90         263,333            2.82    $ 5.27        207,633       $ 5.35
          $   6.38-$7.81          79,100            2.66    $ 7.01         38,150       $ 7.62
          $   8.50-$9.03         277,400            3.23    $ 8.52        194,700       $ 8.51
          $        16.00          50,000            2.01    $16.00         50,000       $16.00
----------------------------------------------------------------------------------------------
          $  0.50-$16.00       1,153,833            2.16    $ 5.20        964,483       $ 4.89
==============================================================================================
</TABLE>

Employee Benefit  - 401K Plan
-----------------------------

On January 1, 1998, the Company established a 401(k) plan covering its
employees. The plan originated service effectively in June 1998. Matching
contributions are made on behalf of all participants at the discretion of the
Board of Directors. During the fiscal years ended September 30, 2000 and 1999,
the Company made matching contributions of approximately $15,046 and $10,500
respectively, no matching contributions were made in fiscal 1998.

9. COMMITMENTS AND CONTINGENCIES

Facility Lease
--------------

In June 1997, the Company entered into a joint three-year sublease agreement
with e.Digital, an affiliated company. In September 2000, the Company amended
the three-year lease to become an independent lessee and to acquire an
additional 3,500 square feet of improved research and development space. The
amended lease agreement expires on July 31, 2003. The Company is occupying
approximately 12,100 square feet with aggregate monthly payments of $14,772
inclusive of utilities and costs. Office rent expense recorded by the Company
for the years ended September 30, 2000, 1999 and 1998 was $106,191, $96,500 and
$91,515 respectively. The total operating lease obligation under the lease for
office space is $524,112 of which the Company's minimum commitments is as
follows:

<TABLE>
<CAPTION>
Year ending:
-------------------------------------------------------------------------------
<S>                                                                    <C>
2001                                                                   $178,457
2002                                                                    185,742
2003                                                                    159,913
-------------------------------------------------------------------------------
                                                                       $524,112
===============================================================================
</TABLE>

Automobile Leases
-----------------

The Company has two automobile lease obligations with terms of 35 months. The
leases will expire as of February 2003 and are reported as operating leases
within the financial statements. The obligations under these leases are as
follows:

<TABLE>
<CAPTION>
Year ending:
-------------------------------------------------------------------------------
<S>                                                                     <C>
2001                                                                    $23,249
2002                                                                     14,519
2003                                                                      4,840
-------------------------------------------------------------------------------
                                                                        $42,608
===============================================================================
</TABLE>

Employment Agreements
---------------------

The company has entered into six employment agreements with executive officers
and key employees. These agreements are each for three-year terms expiring from
August 2000 to February 2003. The agreements may be automatically renewed for
one-year terms. The agreements provide for minimum annual salaries ranging from
$60,000 to $180,000, a total of $690,000, in the aggregate. Certain of the
agreements provide for up to twelve

                                                                            F-18
<PAGE>

American Technology Corporation
Notes to Financial Statements
================================================================================

months severance for certain terminations and payments for the term of the
agreement (or in one case twelve months, if longer) on certain changes in
control.

10. MAJOR CUSTOMERS

For the year ended September 30, 2000, sales to two individual customers
accounted for 23% and 12% of total revenue. During the year ended September 30,
1999, sales to two individual customers accounted for 20% and 13% of total
revenue. During the year ended September 30, 1998, sales to three individual
customers accounted for 19%, 18% and 10% of total revenues.

11. SUPPLIER AGREEMENTS

Finished consumer products are purchased from a variety of foreign sources under
contract or by purchase order. In fiscal 2000 and 1999, the Company sourced from
outside foreign manufacturers all finished products. The Company has
relationships with a number of high quality, low-cost foreign manufacturers who
provide the Company with a diverse line of consumer electronic products. The
Company believes this diversification is such that it is not reliant on any one
supplier.

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
<S>                                                                <C>         <C>       <C>
Years ended September 30,                                             2000        1999         1998
----------------------------------------------------------------------------------------------------
Non-cash financing activities:
  Convertible notes exchanged for Common Stock                     $         - $      -     $375,000
  Purchased technology exchanged for Common Stock                      962,500        -            -
  Common stock issued on conversion of Series C preferred stock      5,925,000        -            -
  Interest paid by issuance of Common Stock                                  -        -       18,206
  Cash paid for interest                                                     -        -            -
     Bonus paid in exchange for payment on officer note receivable           -        -      125,255
</TABLE>

13. SUMMARIZED QUARTERLY RESULTS

The following table presents unaudited operating results for each quarter within
the two most recent years. The Company believes that all necessary adjustments
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the following quarterly results when read
in conjunction with our financial statements included elsewhere in this report.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full fiscal year.

<TABLE>
<CAPTION>
                                                1st                       2nd                      3rd                       4th
                                              Quarter                   Quarter                  Quarter                   Quarter
<S>                                         <C>                      <C>                       <C>                     <C>
Fiscal 1999
Revenues                                    $ 164,457                $ 116,398                 $ 320,250               $   222,648
Gross Profit (1)                               44,987                   22,593                   132,548                     3,960
Loss before extraordinary item               (812,944)                (724,441)                 (603,979)                 (900,270)
Net loss                                    $(812,944)               $(724,441)                $(603,979)              $  (900,270)
Loss per Share (2)                          $   (0.11)               $   (0.08)                $   (0.06)              $     (0.08)
Fiscal 2000
Revenues                                    $ 621,919                $ 179,261                 $ 340,074               $   291,796
Gross Profit (loss) (1)                       227,753                  (37,837)                  175,143                    17,096
Loss before extraordinary item               (541,535)                (372,344)                 (824,475)               (1,329,692)
Net loss                                    $(541,535)               $(372,344)                $(824,475)              $(1,329,692)
Loss per Share (2)                          $   (0.05)               $   (0.25)                $   (0.08)              $     (0.64)
</TABLE>


1.   Gross profit is calculated by subtracting cost of revenues from total
     revenues.
2.   Earnings per share are computed independently for each quarter and the full
     year based upon respective average shares outstanding. Therefore, the sum
     of the quarterly net earnings per share amounts may not equal the annual
     amounts reported.

                                                                            F-19
<PAGE>

American Technology Corporation
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
================================================================================

ALLOWANCE FOR DOUBTFUL ACCOUNTS

<TABLE>
<CAPTION>
                                           Balance at               Charged to                                             Balance
                                            Beginning                 Cost and                                           At end of
Description                                 Of period                 Expenses                Deductions                    Period
----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                      <C>                       <C>                        <C>
Year ended September 30, 2000               $   8,000                $  32,703                 $  20,703               $    20,000

Year ended September 30, 1999               $  17,000                $  24,209                 $  33,209               $     8,000

Year ended September 30, 1998               $   7,842                $  15,000                 $   5,842               $    17,000
</TABLE>

                                                                            F-20
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                              AMERICAN TECHNOLOGY CORPORATION

                              December 29, 2000


                              By: /s/ ELWOOD G. NORRIS
                                  --------------------
                                  Elwood G. Norris
                                  Chairman, and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of Registrant in the
capacities and on the dates indicated.

Date: December 29, 2000        By /s/ ELWOOD G. NORRIS
                                  --------------------
                                  Elwood G. Norris
                                  Chairman, Chief Executive Officer and Director

Date: December 29, 2000        By /s/ TERRY CONRAD
                                  ----------------
                                  President

Date: December 29, 2000        By /s/ RENEE WARDEN
                                  ----------------
                                  Renee Warden, Chief Accounting Officer,
                                  Treasurer and Secretary
                                  (Principal Financial and Accounting Officer)

Date: December 29, 2000        By /s/ RICHARD M. WAGNER
                                  ---------------------
                                  Richard M. Wagner
                                  Director

Date: December 29, 2000        By /s/ O'CONNELL J. BENJAMIN
                                  -------------------------
                                  O'Connell J. Benjamin
                                  Director

Date: December 29, 2000        By /s/ DAVID J. CARTER
                                  -------------------
                                  David J. Carter
                                  Director