<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

MARK ONE

        |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 2004; or

        |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to

COMMISSION FILE NUMBER: 0-23723

                               AMBIENT CORPORATION
        (Exact name of small business issuer as specified in its charter)


            Delaware                                     98-0166007
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


                 79 CHAPEL STREET, NEWTON, MASSACHUSETTS, 02458
          (Address of principal executive offices, including zip code)

                                  617- 332-0004
                (Issuer's telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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[ ]

As of November 12, 2004, Ambient Corporation had outstanding 145,112,397 shares
of common stock, par value $.001 per share.

Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]

<PAGE>

                                   INDEX PAGE
                         PART I -- FINANCIAL INFORMATION

Forward Looking Statements                                               (ii)

Item 1 - Financial Statements*

     Consolidated Balance Sheet
      September 30, 2004 (Unaudited) and December 31, 2003                1

     Unaudited Consolidated Statements of Operations for
      the nine and three months ended September 30, 2004 and 2003         2

     Unaudited Consolidated Statements of Cash Flows for
      the nine and three months ended September 30, 2004 and 2003         3

     Notes to Consolidated Financial Statements                           4

Item 2 - Plan of Operation                                                8

Item 3 - Controls and Procedures                                         11

                           PART II--OTHER INFORMATION

Item 1 - Legal Proceedings                                               11

Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
         of Equity Securities                                            11

Item 3 - Defaults upon Senior Securities                                 12

Item 4 - Submission of Matters to a Vote of Security Holders             12

Item 5 - Other Information                                               12

Item 6 - Exhibits and Reports on Form 8-K                                12

Signatures



* The Balance Sheet at December 31, 2003 has been derived from audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. All other financial statements are unaudited.

                           FORWARD LOOKING STATEMENTS

The following discussion and explanations should be read in conjunction with the
financial statements and related notes contained elsewhere in this quarterly
report on Form 10-QSB. Certain statements made in this discussion are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements can be identified by
terminology such as "may", "will", "should", "expects", "intends",
"anticipates", "believes", "estimates", "predicts", or "continue" or the
negative of these terms or other comparable terminology and include, without
limitation, statements below regarding: the Company's intended business plans;
expectations as to product performance; intentions to acquire or develop other
technologies; and belief as to the sufficiency of cash reserves. Because
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied


                                       (i)
<PAGE>

by these forward-looking statements. These factors include, but are not limited
to, the competitive environment generally and in the Company's specific market
areas; changes in technology; the availability of and the terms of financing,
inflation, changes in costs and availability of goods and services, economic
conditions in general and in the Company's specific market areas, demographic
changes, changes in federal, state and /or local government law and regulations;
changes in operating strategy or development plans; the ability to attract and
retain qualified personnel; and changes in the Company's acquisitions and
capital expenditure plans. Although the Company believes that expectations
reflected in the forward-looking statements are reasonable, it cannot guarantee
future results, performance or achievements. Moreover, neither the Company nor
any other person assumes responsibility for the accuracy and completeness of
these forward-looking statements. The Company is under no duty to update any
forward-looking statements after the date of this report to conform such
statements to actual results.


                                      (ii)

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

                                                                            September 30,         December 31,
                                                                                2004                 2003
                                                                                ----                 ----
ASSETS                                                                      (Unaudited)           (Unaudited)
CURRENT ASSETS
     Cash and  cash equivalents                                             $  3,611,515         $  2,621,643
     Accounts receivable                                                          44,996               53,134
     Inventory                                                                   386,657              141,695
     Prepaid expenses and other current assets                                    92,342               84,422
                                                                            ------------         ------------

               Total current assets                                            4,135,510            2,900,894

Property and equipment, net                                                      311,090               84,456
Prepaid licensing fees                                                           336,608                  -
                                                                            ------------         ------------

               Total assets                                                 $  4,783,208         $  2,985,350
                                                                            ============         ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                                       $    574,602         $    468,590
     Accrued expenses and other current liabilities                              118,483              195,818
     Advances                                                                    325,000              325,000
                                                                            ------------         ------------

               Total current liabilities                                       1,018,085              989,408
                                                                            ------------         ------------

Non-current liabilities
     Convertible debentures (net of discount of $2,254,923 in 2003)                  -                135,077
                                                                            ------------         ------------

               Total  liabilities                                              1,018,085            1,124,485

STOCKHOLDERS' EQUITY
     Convertible Preferred Stock, $.001 par value;
       5,000,000 shares authorized; none issued and outstanding                      -                    -
    Common stock, $.001 par value;
      300,000,000 shares authorized; 144,401,170 and 97,222,247
        issued; 143,401,170 and 96,222,247 outstanding, respectively             144,401               97,222
     Additional paid-in capital                                               76,981,219           69,428,975
     Deficit accumulated during the development stage                        (73,114,456)         (67,465,332)
      Less: deferred compensation                                                (46,041)                 -
      Less: treasury stock; 1,000,000 shares at cost                            (200,000)            (200,000)
                                                                            ------------         ------------

               Total stockholders' equity                                      3,765,123            1,860,865
                                                                            ------------         ------------

               Total liabilities and stockholders' equity                   $  4,783,208         $  2,985,350
                                                                            ============         ============
</TABLE>

                                                      -1-

                                See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>

                                                         AMBIENT CORPORATION
                                                    (A Development Stage Company)
                                                CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                         Cumulative
                                                                Nine Months            From Inception           Three Months
                                                                   Ended                     to                     Ended
                                                               September 30,            September 30,          September 30,
                                                           2004             2003           2004              2004          2003
                                                           ----             ----           ----              ----          ----
                                                       (Unaudited)      (Unaudited)     (Unaudited)       (Unaudited)    (Unaudited)
<S>                                                   <C>              <C>             <C>              <C>              <C>
Revenues                                              $        -       $   101,200     $    123,000     $        -       $    1,200

Expenses
     Research and Development (1)                        1,524,394         731,941        8,496,538          649,004        272,085
     Less - Participation by the Office of the
       Chief Scientist of the State of Israel                  -               -            558,195              -              -
                                                      -------------    ------------    -------------    -------------    -----------
                                                         1,524,394         731,941        7,938,343          649,004        272,085

Operating, general and administrative expenses (1)       1,574,292         841,364       15,894,871          485,188        253,507
Stock based compensation - net                              62,274         105,910       17,507,447            6,037         13,247
                                                      -------------    ------------    -------------    -------------    -----------

Total expenses                                           3,160,960       1,679,215       41,340,661        1,140,229        538,839
                                                      -------------    ------------    -------------    -------------    -----------

Operating loss                                          (3,160,960)     (1,578,015)     (41,217,661)      (1,140,229)      (537,639)

Legal settlement                                               -               -         (1,512,500)             -              -
Interest expense                                           (22,182)            -           (727,264)           1,056            -
Noncash financing expense                                      -               -         (1,600,000)             -              -
Amortization of beneficial conversion feature of
  convertible debt                                             -          (230,627)      (4,095,676)             -         (230,627)
Amortization of deferred financing costs                (2,504,923)        (71,175)     (10,910,120)             -          (71,175)
Interest income                                             38,941             334          364,998           16,363            151
Write-off of convertible note receivable                       -               -           (490,000)             -              -
Company's share in net losses of affiliate                     -               -         (1,352,207)             -              -
                                                      -------------    ------------    -------------    -------------    -----------

Loss before minority interest and extraordinary item    (5,649,124)     (1,879,483)     (61,540,430)      (1,122,810)      (839,290)

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

Loss before extraordinary item                          (5,649,124)     (1,879,483)     (61,515,430)      (1,122,810)      (839,290)

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

Net loss                                                (5,649,124)     (1,879,483)     (71,293,597)      (1,122,810)      (839,290)

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

Net loss attributable to common stockholders          $ (5,649,124)    $(1,879,483)    $(73,114,456)    $ (1,122,810)    $ (839,290)
                                                      =============    ============    =============    =============    ===========

Basic and diluted loss per share:
         Net loss before  extraordinary item          $      (0.04)    $     (0.03)                     $      (0.01)    $    (0.01)
         Extraordinary loss from extinguishment
           of debt                                             -               -                                 -              -
                                                      -------------    ------------                     -------------    -----------

      Net loss                                        $      (0.04)    $     (0.03)                     $      (0.01)    $    (0.01)
                                                      =============    ============                     =============    ===========

Weighted average number of shares outstanding          132,065,862      72,495,193                       143,401,170     76,403,334
                                                      =============    ============                     =============    ===========

(1) Excludes non-cash,  stock based compensation
    expense as follows:
     Research and development, net                    $        -       $    23,855     $  1,454,192     $        -       $        0
     Operating, general and administrative, net             62,274          82,055       16,053,255            6,037         13,247
                                                      -------------    ------------    -------------    -------------    -----------

                                                      $     62,274     $   105,910     $ 17,507,447     $      6,037     $   13,247
                                                      =============    ============    =============    =============    ===========


                                                                 -2-

                                           See Notes to Consolidated Financial Statements.
</TABLE>

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


                                                                                                                     Cumulative
                                                                                            Nine Months            From Inception
                                                                                               Ended                     to
                                                                                           September 30,            September 30,
                                                                                        2004            2003            2004
                                                                                        ----            ----            ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    (Unaudited)     (Unaudited)     (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                      $ (5,649,124)   $ (1,879,483)   $(73,114,456)
     Adjustments to reconcile net loss to net cash used in operating
       activities:
         Depreciation and amortization                                                   57,585          44,453         524,735
         Amortization of note discount                                                2,504,923          71,175      10,265,249
         Cancellation of Officer loans in settlement of employment contract                 -               -           724,447
         Loss on sale of fixed assets                                                       -               -            20,135
         Beneficial conversion feature of convertible debt                                  -           230,627       4,095,676
         Deemed dividends on convertible preferred stock                                    -               -         1,820,859
         Financing,  consulting and other expenses paid via the
                  issuance of common stock and warrants                                 105,208         105,910      30,899,442
         Increase (decrease) in net liability for severance pay                             -               -            15,141
         Accrued interest on loans and notes payable                                        -               -           210,016
         Company's share in net losses of affiliates                                        -               -         1,352,207
         Minority interest in subsidiary loss                                               -               -           (25,000)
         Write-off of convertible note receivable                                           -               -           400,000
         Write-down of long term investment                                                 -               -           835,000
         Write-off of fixed assets                                                          -               -           136,066
         Increase (decrease) in cash attributable to changes in assets and
                  liabilities
              Accounts receivable                                                         8,138         (95,517)        (24,471)
              Inventory                                                                (244,962)            -          (386,657)
              Prepaid expenses and other current assets                                  (7,920)            -           (23,637)
              Prepaid licensing fees                                                   (201,608)            -          (201,608)
              Accounts payable                                                          121,012          89,925         850,896
              Accrued expenses and other current liabilities                            (77,335)        132,543         269,139
                                                                                   ------------    ------------    ------------

Net cash used in operating activities                                                (3,384,083)     (1,300,367)    (21,356,821)
                                                                                   ------------    ------------    ------------

CASH FLOWS FROM  INVESTING ACTIVITIES
         Loan provided to another company                                                   -               -          (835,000)
         Purchase of convertible promissory note                                            -               -          (400,000)
         Investment in affiliated company                                                   -               -          (375,000)
         Additions to property and equipment                                           (284,219)        (21,217)     (1,033,261)
         Proceeds from disposal of fixed assets                                             -               -            42,100
         Loans to Officers                                                                  -               -        (2,137,677)
         Repayment of loans to Officer                                                      -               -         1,431,226
                                                                                   ------------    ------------    ------------

Net cash used in investing activities                                                  (284,219)        (21,217)     (3,307,612)
                                                                                   ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
         Net proceeds from issuance of share capital                                  4,408,174         915,612      11,068,353
         Proceeds from loans and advances                                                   -               -           690,000
         Proceeds from issuance of notes payable                                            -           360,000       1,360,000
         Net proceeds from issuance of convertible debentures                           250,000             -        13,550,168
         Repayment of notes payable                                                         -               -          (800,000)
         Proceeds of loans from shareholders, net                                           -               -           919,600
         Repayment of loans from shareholders                                               -               -          (968,000)
         Proceeds from long-term bank credit                                                -               -            95,969
         Repayment of long-term bank credit                                                 -               -           (87,996)
         Increase (decrease) in short term bank credit                                      -               -           (32,004)
         Public offering of common stock                                                    -               -         3,433,027
         Repayment of short-term debt                                                       -               -          (250,000)
         Proceeds from short-term debt                                                      -               -           274,038
         Loans to affiliate                                                                 -               -          (977,207)
                                                                                   ------------    ------------    ------------

Net cash provided by financing activities                                             4,658,174       1,275,612      28,275,948
                                                                                   ------------    ------------    ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                        989,872         (45,972)      3,611,515

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

CASH AND CASH EQUIVALENTS - END OF PERIOD                                          $  3,611,515    $     29,279    $  3,611,515
                                                                                   ============    ============    ============

Noncash financing and investing activities:
        Issuance of common stock and warrants in respect of
          amounts payable                                                          $    150,000    $    120,000
                                                                                   ============    ============


                                                                 -3-

                                         See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>

                               AMBIENT CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

        The accompanying unaudited consolidated financial statements of Ambient
        Corporation and its subsidiaries (collectively the "Company") have been
        prepared in accordance with generally accepted accounting principles for
        interim financial information and with Item 310(b) of Regulation S-B.
        Accordingly, they do not include all of the information and footnotes
        required by generally accepted accounting principles for complete
        financial statements. In the opinion of management, all adjustments
        (consisting of normal recurring accruals) considered necessary for a
        fair presentation have been included. Operating results for the nine
        months ended September 30, 2004, are not necessarily indicative of the
        results that may be expected for the year ending December 31, 2004.
        These unaudited consolidated financial statements should be read in
        conjunction with the audited consolidated financial statements and
        footnotes thereto included in the Company's Form 10-KSB for the year
        ended December 31, 2003, as filed with the Securities and Exchange
        Commission.

        The Company is in the development stage, has a limited operating history
        and has sustained losses since its inception. However, as more fully
        described in Note 5, From January through June 2004 the Company received
        approximately $4.7 million of net cash proceeds from the exercise of
        outstanding warrants and the issuance of its securities. Management
        believes that the available cash resources will enable the Company to
        sustain operations through the second quarter of 2005. However, the
        Company's existing resources may not be sufficient to support the
        commercial introduction, production and delivery of its technologies.
        The Company is seeking to raise additional funds through public or
        private equity offerings, debt financings or additional corporate
        collaboration and licensing arrangements. Accordingly, the accompanying
        financial statements have been prepared assuming that the Company will
        continue as a going-concern, which contemplates the realization of
        assets and the satisfaction of liabilities in the normal course of
        business.

NOTE 2 - NET LOSS PER SHARE

        Basic earnings (loss) per share EPS is computed by dividing net income
        (loss) applicable to common shares by the weighted-average of shares of
        common stock, par value $0.001 per share (the "Common Stock")
        outstanding during the period. Diluted earnings (loss) per share adjusts
        basic earnings (loss) per share for the effects of convertible
        securities, stock options and other potentially dilutive instruments,
        only in the periods in which such effect is dilutive. The following
        securities have been excluded from the calculation of net loss per
        share, as their effect would be antidilutive.

                                                2004             2003
                Stock options             19,896,500       11,212,000
                Warrants                  16,711,860       20,012,283


                                       -4-
<PAGE>

                               AMBIENT CORPORATION

                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED


NOTE 3 - STOCK BASED COMPENSATION PLANS

        The Company accounts for stock-based employee and outside director
        compensation under Accounting Principles Board ("APB") Opinion No. 25,
        "Accounting for Stock Issued to Employees", and related interpretations.
        The Company has adopted the disclosure-only provisions of Statement of
        Financial Accounting Standards ("SFAS") No. 123, "Accounting for
        Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
        Compensation - Transition and Disclosure", which was released in
        December 2002 as an amendment of SFAS No. 123. The following table
        illustrates the effect on net income and earnings per share if the fair
        value based method had been applied to all awards:

<TABLE>
<CAPTION>
                                                     Nine Months Ended              Three Months Ended
                                                                     September 30,
                                                   2004             2003           2004           2003
                                             ----------------- ------------------------------ -------------
<S>                                          <C>             <C>            <C>             <C>
Net loss, as reported                            ($5,649,124)    ($1,879,483)   $(1,122,810)    ($839,290)
Add: Stock based compensation
     expense, as reported                                  -               -              -             -
Deduct: Total stock-based compensation
     expense determined under the fair
     value based method for all awards              (666,408)       (447,106)      (338,208)     (173,466)
                                             ----------------- ------------------------------ -------------

Pro forma net loss                               ($6,315,532)    ($2,326,589)   ($1,461,018)  ($1,012,756)
                                             ================= ============================== =============

Basic and diluted loss per share, as                  ($0.04)         ($0.03)        ($0.01)       ($0.01)
reported
Basic and diluted loss per share, pro forma           ($0.05)         ($0.03)        ($0.01)       ($0.01)
</TABLE>

        The weighted average per share fair value of options granted during the
        nine months ended September 30, 2004 and 2003 was $.186 and $.09,
        respectively. The fair value of each option granted in 2004 and 2003 was
        estimated using the Black-Scholes option-pricing model with a volatility
        of 168% and 150%, expected life of options of 8 and 8 years, risk free
        interest rate of 3.65% and 3.88% and a dividend yield of 0% and 0%,
        respectively.


                                       -5-
<PAGE>

                               AMBIENT CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED


NOTE 4 - LICENSING AGREEMENT

        Effective January 31, 2004, the Company, entered into a five-year
        licensing agreement with DS2, a supplier of components of the Company's
        power line communications technology, pursuant to which DS2 has granted
        Ambient a license of the DS2 power line related technology on a world
        wide nonexclusive basis. The license fee is being amortized over the
        five year term on a straight-line basis.

NOTE 5 - STOCKHOLDERS' EQUITY

        STRATEGIC INVESTMENT

        In February 2004, the Company raised $500,000 from the private sale to
        Earthlink Inc. ("EarthLink") of 2,083,333 shares of Common Stock and a
        $250,000 principal amount three-year 6% convertible debenture. The
        debenture is convertible into shares of the Common Stock at a per share
        conversion rate of $0.12. On March 11, 2004, the principal and accrued
        interest on the convertible debenture were converted into 2,087,100
        shares of Common Stock. The Company also issued to EarthLink, in
        connection with that sale, three-year warrants to purchase up to an
        additional 2,083,333 shares of Common Stock. The warrants are
        exercisable at a per share exercise price of $0.25 provided that the
        exercise period may be reduced under certain conditions. For financial
        reporting purposes, the Company recorded a discount on the debenture of
        $250,000 and charged off this amount when the debenture was converted.

        Stock Issuance

        In January, 2004 the Company issued 964,286 shares of common stock to a
        supplier in lieu of payments totaling $135,000.

        Warrant Issuance

        In February 2004, the Company issued to a vendor three year warrants to
        purchase up to 75,000 shares of Common Stock, at a per share exercise
        price of $0.25, in lieu of $15,000 then owed to such vendor.

        Debenture Conversions

        From January through June 2004, approximately $2.4 million principal
        amount of the Company's three year 6% Convertible Debentures issued in
        October and November 2003 (collectively, the "2003 Debentures"),
        together with accrued interest, were converted into approximately 22.4
        million shares of Common Stock. By their terms, the 2003 Debentures are
        convertible into shares of the Common Stock at a per share conversion
        rate of $0.12. In connection with the conversions of these 2003
        Debentures, the Company paid approximately $450,000 in commissions.


                                       -6-
<PAGE>

                               AMBIENT CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


        NOTE 5 - STOCKHOLDERS' EQUITY - continued

        Warrant Exercises

        From January through June 2004, the Company received net proceeds of
        approximately $4.4 million upon exercise of warrants (collectively the
        "2003 Warrants") for approximately 19.9 million shares of Common Stock.
        The 2003 Warrants were issued in connection with the sale of the 2003
        Debentures and other financings that the Company concluded in 2003.

        In April 2004, an investor exercised outstanding warrants for 2,561,005
        shares of Common Stock pursuant to cashless exercise provisions.
        Pursuant to the cashless exercise provisions, the Company issued
        1,743,662 shares of Common Stock upon the exercise in full of such
        warrant.

        Increase in Authorized Shares

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

        NOTE 6 - EMPLOYMENT AGREEMENTS

        On July 8, 2004, the Board of Directors approved an amended and restated
        employment agreement with its Chief Executive Officer. The agreement is
        for an initial term ending December 31, 2007 and provides for an annual
        base salary of $285,000, subject to annual cost of living adjustments.
        Additionally, the Company granted the officer options under the
        Company's 2000 Equity Incentive Plan to purchase 1,000,000 shares of
        Common Stock, 500,000 of which are immediately exercisable at $.30 per
        share, and 500,000 of which vest in May 2005 and are exercisable at $.50
        per share. After expiration of the initial term, the agreement will
        automatically renew for additional one-year terms, unless terminated by
        the Company upon written notice given not less than 90 days prior to the
        expiration of the term. The agreement also contains certain provisions
        for early termination, including in the event of a change in control,
        which may result in a severance payment equal to two years of base
        salary then in effect and the continuation of certain benefits.

        On August 11, 2004, the Company entered into an amended and restated
        employment agreement with its Chief Network Architect. The agreement is
        for an initial term of two years and provides for an annual base salary
        of $171,000, subject to review. The Company has granted the officer
        options under the Company's 2000 Equity Incentive Plan to purchase
        750,000 shares of the Company's Common Stock, vesting in equal monthly
        installments over 24 months, of which options for 375,000 shares shall
        have an exercise price equal to $0.30 and options for 375,000 shares
        have an exercise price of $0.50 per share. After expiration of the
        initial term, the agreement provides for the renewal of the agreement
        for additional one-year terms, unless terminated in accordance with the
        agreement upon 60 days prior notice. The agreement also contains certain
        provisions for early termination, which may result in a severance
        payment equal to one year of base salary then in effect.


                                       -7-
<PAGE>

ITEM 2. PLAN OF OPERATION

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS. SOME OF THE DISCUSSION IS
FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING
RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO
THE RISK FACTORS SECTION OF THE ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31,
2003 ON FORM 10-KSB.

OVERVIEW

        Ambient Corporation ("Ambient" or the "Company") is engaged in the
design, development and marketing of equipment and technologies designed to
utilize existing electrical power medium voltage and low voltage distribution
lines as a medium for the delivery of broadband and other services
(collectively, the "PLC Technologies"). Ambient is currently working with
leading utilities and technology companies in the design, development and
testing of the principal equipment, components and technologies that comprise
the PLC Technologies. Prototypes of these components and technologies presently
are being evaluated in field trials. The Company's objective over the next
twelve months is to complete the design, development and testing of all of the
equipment, components and technologies comprising the PLC Technologies.

        Ambient is a development stage company that has generated significant
losses since its inception in June 1996. The Company been engaged in the power
line communications field since December 1999. Ambient expects to continue to
incur substantial losses for the foreseeable future as it continues and
completes the design and development of the PLC Technologies and establishes a
commercial infrastructure for their exploitation. To date, the Company has
devoted substantially all of its efforts towards research and development
activities. As of September 30, 2004, the Company had an accumulated deficit of
approximately $73 million (which includes approximately $47 million in stock
based charges).

        As a development stage company, Ambient has a limited operating history
upon which an evaluation of its prospects can be made. The Company's prospects
must therefore be evaluated in light of the problems, expenses, delays and
complications associated with a development stage company.

DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES

        To further the commercialization of the PLC Technologies, Ambient
intends to continue to pursue development activities and other collaborative
efforts with utilities and technology parties as well as Internet service
providers. Ambient is in the process of increasing the scope of its field
trials.

        Since the beginning of the year, Ambient has significantly increased its
design and development activities and its product commercialization efforts. As
of September 30, 2004, the Company had 20 employees. The Company expects to
continue making substantial investment in equipment and to acquire inventory to
facilitate the expansion of existing pilots and to prepare for
commercialization. Additionally, the Company expects to shortly initiate an
aggressive program to market its equipment and technology.

FINANCIAL OPERATIONS OVERVIEW

        REVENUES. The Company recorded first time revenues of $123,000 for the
year ended December 31, 2003, representing field trial and consulting fees. No
revenues were recorded for the nine months ended September 30, 2004. If and when
the PLC Technologies are ready to be used in a commercial deployment of a power
line communications system, the


                                       -8-
<PAGE>

Company anticipates that it will be able to generate revenue principally from
one or more of the following: power line communications network design and
installation, sale and support of the underlying components and potential
license fees collected from utilities, technology companies or Internet service
providers. The Company believes that as PLC Technologies approach
commercialization it will be able to refine the potential or likely sources of
revenue.

        Ambient presently has no revenue generating agreements with any utility
or other provider of electric power or Internet service provider or reseller or
other party respecting the PLC Technologies. The Company's ability to
successfully conclude any revenue generating commercial agreements is premised,
in part, on the integration by one or more leading utilities of the PLC
Technologies into a commercially deployed power line communications network.

        RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
consist of expenses incurred primarily in designing, developing and field
testing the PLC Technologies. These expenses consist primarily of salaries and
related expenses for personnel, contract design and testing services, supplies
used and consulting and license fees paid to third parties. Research and
development expenses for the nine months ended September 30, 2004 were
approximately $1.5 million The Company expects that its research and development
expense will increase significantly over the course of fiscal 2004 as it
increases its efforts to further the design and development of the PLC
Technologies.

        GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
consist primarily of compensation and other related costs associated with the
stewardship management and other supporting functions. Other significant costs
include professional fees for legal, accounting and other services. General and
administrative expenses for the nine months ended September 30, 2004 were
approximately $1.6 million. The Company expects that general and administrative
expenses will increase over the course of fiscal 2004 as it increases its
investment in personnel.

        A portion of the Company's operating expenses are attributable to
non-cash charges associated with the compensation of consultants and senior
personnel through the issuance of stock options and stock grants. Stock-based
compensation is non-cash and will therefore have no impact on the Company's cash
flow or liquidity.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

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

        Ambient has identified the accounting policies below as critical to its
business operations and the understanding of its results of operations.

VALUATION OF STOCK-BASED COMPENSATION

        Ambient accounts for its stock-based compensation (see Note 3 of the
Notes to


                                       -9-
<PAGE>

Consolidated Financial Statements) under Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost is recognized for options issued to employees at fair market
value on the date of grant. In 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148. SFAS 123 establishes
a fair value-based method of accounting for stock-based compensation plans. SFAS
123 requires that a company's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for the plan. Ambient accounts for its stock option and warrant
grants to non-employees in exchange for goods or services in accordance with
SFAS 123 and Emerging Issues Task Force No. 96- 18 (EITF 96-18). SFAS 123 and
EITF 96-18 require that the Company account for any option and warrant grants to
non-employees based on the fair value of the options and warrants granted.

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

DEFERRED INCOME TAXES

        Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. At September 30, 2004, Ambient's
deferred income tax assets consisted primarily of net operating loss carry
forwards and stock based compensation charges which have been fully offset with
a valuation allowance due to the uncertainty that a tax benefit will be realized
from the assets in the future.

LIQUIDITY AND CAPITAL RESOURCES

        From inception through September 30, 2004, the Company has funded its
operations primarily through the issuance of securities. Ambient's recent
financings are as follows:

        From January through June 2004, the Company received approximately $4.4
million from the exercise of outstanding warrants (the "2003 Warrants") for
approximately 19.9 million shares of Common Stock.

        In February 2004, EarthLink, Inc. ("EarthLink") invested $500,000 in
Ambient though the purchase of (i) a three-year convertible debenture in the
aggregate amount of $250,000, (ii) 2,083,333 shares of Common Stock and (iii)
three-year warrants to purchase an additional 2,083,333 shares of Common stock
at a per share exercise price of $0.25. In March 2004, the outstanding principal
amount and accrued interest on EarthLink's debenture were converted into
2,087,100 shares of Common Stock.

        At September 30, 2004, the Company had cash and cash equivalents of
approximately $3.6 million, representing an increase of $1 million over its
available cash resources at December 31, 2003. The increase in available cash
resources is primarily attributable to the proceeds of the exercise of the 2003
Warrants and the investment by EarthLink. The Company's cash and cash
equivalents are generally held in a variety of interest bearing instruments.


                                      -10-
<PAGE>

        Net cash used in operating activities during the nine months ended
September 30, 2004 was $3.4 million and is primarily attributable to ongoing
research and development and general and administrative expenses. To facilitate
the expansion of ongoing pilots and to further prepare for the commercializing
phase, the Company has established inventory of approximately $390,000 as of
September 30, 2004.

        Management believes that the Company's existing cash and cash
equivalents will be sufficient to maintain its operations through the second
quarter of 2005. However, the Company's existing resources may not be sufficient
to support the commercial introduction, production and delivery of its
technologies. Unless it raises funds, the Company may need to curtail
expenditures which may result in a delay in its commercialization efforts. The
Company is seeking to raise additional funds through public or private sales of
equity securities or from borrowings. The Company's auditors have included a
"going concern" qualification in their auditors report for the year ended
December 31, 2003. Such "going concern" qualification may make it more difficult
for the Company to raise funds when needed.

        Additional equity financings may be dilutive to holders of the Company's
Common Stock and debt financing, if available, may involve significant payment
obligations and covenants that restrict how the Company operates its business.

ITEM 3. CONTROLS AND PROCEDURES

        EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its reports is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to management, including Ambient's Chief Executive Officer (and
Principal Financial and Accounting Officer), as appropriate, to allow timely
decisions regarding required disclosure based closely on the definition of
"disclosure controls and procedures" in Rule 13a-14(c).

        As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with participation of management,
including the Chief Executive Officer and Principal Financial and Accounting
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, Ambient's Chief
Executive Officer (and Principal Financial and Accounting Officer) concluded
that the Company's disclosure controls and procedures were effective.

        CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the
quarter ended September 30, 2004, there have been no changes in the Company's
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 2. CHANGES IN SECURITIES,USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.

None.


                                      -11-
<PAGE>

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

31. Rule 13a-14(a) / 15d-14(a) Certification

32. Section 1350 Certification

(b) Reports on Form 8-K

None


                                      -12-
<PAGE>

                                   SIGNATURES

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



DATE: NOVEMBER 15, 2004         AMBIENT CORPORATION

                                /S/ JOHN J. JOYCE
                                ----------------------------------------
                                JOHN J. JOYCE
                                CHIEF EXECUTIVE OFFICER
                                (AND PRINCIPAL FINANCIAL AND ACCOUNTING
                                OFFICER)


                                      -13-