<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 June 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 August 16, 2004, Ambient Corporation had outstanding 143,401,170
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
      June 30, 2004 (Unaudited) and December 31, 2003                       1

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

     Unaudited Consolidated Statements of Cash Flows for
      the six and three months ended June 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                                                 12

Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
         of Equity Securities                                              12

Item 3 - Defaults upon Senior Securities                                   12

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

Item 5 - Other Information                                                 13

Item 6 - Exhibits and Reports on Form 8-K                                  13

Signatures                                                                 14


* 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.

<PAGE>

                           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 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>

                                            AMBIENT CORPORATION
                                       (A Development Stage Company)
                                        CONSOLIDATED BALANCE SHEETS


                                                                             June            December 31,
                                                                             2004                 2003
                                                                             ----                 ----
ASSETS                                                                   (Unaudited)
CURRENT ASSET
<S>                                                                     <C>                  <C>
  Cash and cash equivalents                                             $  4,853,373         $  2,621,643
  Accounts receivable                                                         30,387               53,134
  Inventory                                                                  381,856              141,695
  Prepaid expenses and other current assets                                  100,259               84,422
                                                                        ------------         ------------

      Total current assets                                                 5,365,875            2,900,894

  Property and equipment, net                                                173,862               84,456
  Prepaid licensing fees                                                     356,408                   --
                                                                        ------------         ------------

      Total assets                                                      $  5,896,145         $  2,985,350
                                                                        ============         ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                                      $    514,120         $    468,590
  Accrued expenses and other current liabilities                             157,599              195,818
  Advances                                                                   325,000              325,000
                                                                        ------------         ------------

      Total current liabilities                                              996,719              989,408
                                                                        ------------         ------------

Non-current liabilities
  Convertible debentures (net of discount of $2,254,923 in 2003)                   0              135,077
                                                                        ------------         ------------

      Total liabilities                                                      996,719            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                                              76,960,585           69,428,975
  Deficit accumulated during the development stage                       (71,991,646)         (67,465,332)
  Less: note receivable - stockholder                                             --                   --
  Less: deferred compensation                                                (13,914)                  --
  Less: treasury stock; 1,000,000 shares at cost                            (200,000)            (200,000)
                                                                        ------------         ------------

      Total stockholders' equity                                           4,899,426            1,860,865
                                                                        ------------         ------------

      Total liabilities and stockholders' equity                        $  5,896,145         $  2,985,350
                                                                        ============         ============
</TABLE>


                              See Notes to Consolidated Financial Statements.

                                                     1

<PAGE>
<TABLE>
<CAPTION>

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


                                                                                        Cumulative
                                                                 Six Months           From Inception           Three Months
                                                                   Ended                    to                    Ended
                                                                  June 30,               June 30,                June 30,
                                                            2004            2003            2004           2004            2003
                                                            ----            ----            ----           ----            ----
                                                        (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)
<S>                                                    <C>             <C>             <C>             <C>             <C>
Revenues                                               $          -    $    100,000    $     123,000   $          -    $     20,000

Expenses
  Research and Development (1)                              875,390         459,856        7,847,534        448,011         259,407
  Less - Participation by the Office of the
    Chief Scientist of the State of Israel                        -               -          558,195              -               -
                                                       ------------    ------------    -------------   ------------    ------------
                                                            875,390         459,856        7,289,339        448,011         259,407

Operating, general and administrative expenses (1)        1,089,104         587,857       15,409,683        541,068         278,844
Stock based compensation - net                               56,237          92,663       17,501,410          5,970          41,334
                                                       ------------    ------------    -------------   ------------    ------------

Total expenses                                            2,020,731       1,140,376       40,200,432        995,049         579,585
                                                       ------------    ------------    -------------   ------------    ------------

Operating loss                                           (2,020,731)     (1,040,376)     (40,077,432)      (995,049)       (559,585)

Legal settlement                                                  -               -       (1,512,500)             -               -
Interest expense                                            (23,238)              -         (728,320)        (1,905)              -
Noncash financing expense                                         -               -       (1,600,000)             -               -
Amortization of beneficial conversion feature of
  convertible debt                                                -               -       (4,095,676)             0               -
Amortization of deferred financing costs                 (2,504,923)              -      (10,910,120)      (211,260)              0
Interest income                                              22,578             183          348,635         15,162             105
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     (4,526,314)     (1,040,193)     (60,417,620)    (1,193,052)       (559,480)

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

Loss before extraordinary item                           (4,526,314)     (1,040,193)     (60,392,620)    (1,193,052)       (559,480)

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

Net loss                                                 (4,526,314)     (1,040,193)     (70,170,787)    (1,193,052)       (559,480)

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

Net loss attributable to common stockholders           $ (4,526,314)   $ (1,040,193)   $ (71,991,646)  $ (1,193,052)   $   (559,480)
                                                       ============    ============    =============   ============    ============
Basic and diluted loss per share:
  Net loss before extraordinary item                   $      (0.04)   $      (0.01)                   $      (0.01)   $      (0.01)
  Extraordinary loss from extinguishment of debt                  -               -                               -               -
                                                       ------------    ------------                    ------------    ------------

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

Weighted average number of shares outstanding           126,335,926      70,915,284                     141,820,841      73,507,009
                                                       ============    ============                    ============    ============

(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               56,237          68,808       16,047,218          5,970          41,334
                                                       ------------    ------------    -------------   ------------    ------------

                                                       $     56,237    $     92,663    $  17,501,410   $      5,970    $     41,334
                                                       ============    ============    =============   ============    ============


                                           See Notes to Consolidated Financial Statements.

                                                                  2
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                         AMBIENT CORPORATION
                                                    (A Development Stage Company)
                                                CONSOLIDATED STATEMENT OF CASH FLOWS


                                                                                                 Six                  Cumulative
                                                                                               Months               From Inception
                                                                                                Ended                      to
                                                                                               June 30,                 June 30,
                                                                                         2004             2003            2004
                                                                                         ----             ----            ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     (Unaudited)      (Unaudited)     (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>              <C>             <C>
  Net loss                                                                          $ (4,526,314)    $ (1,040,193)   $(71,991,646)
  Adjustments to reconcile net loss to net cash in operating activities:
    Depreciation and amortization                                                         26,446           31,178         493,596
    Amortization of note discount                                                      2,504,923             --        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                                       --               --         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                                               99,172           92,663      30,893,406
    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                                                                 22,747                           (9,862)
      Inventory                                                                         (240,161)            --          (381,856)
      Prepaid expenses and other current assets                                          (15,837)         (14,800)        (31,554)
      Prepaid licensing fees                                                            (221,408)            --          (221,408)
      Accounts payable                                                                    60,530           35,579         790,414
      Accrued expenses and other current liabilities                                     (38,219)         151,604         308,255
                                                                                    ------------     ------------    ------------

Net cash used in operating activities                                                 (2,328,121)        (743,969)    (20,300,859)
                                                                                    ------------     ------------    ------------

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                                                 (115,852)         (20,360)       (864,894)
    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                                                   (115,852)         (20,360)     (3,139,245)
                                                                                    ------------     ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net proceeds from issuance of share capital                                        4,425,703          915,312      11,085,882
    Proceeds from loans and advances                                                        --               --           690,000
    Proceeds from issuance of notes payable                                                 --               --         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                                              4,675,703          915,312      28,293,477
                                                                                    ------------     ------------    ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       2,231,730          150,983       4,853,373

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

CASH AND CASH EQUIVALENTS - END OF PERIOD                                           $  4,853,373     $    226,234    $  4,853,373
                                                                                    ============     ============    ============
Noncash financing and investing activities:
    Issuance of common stock and warrants in respect of
      amounts payable.                                                              $    150,000     $    120,000
                                                                                    ============     ============


                                           See Notes to Consolidated Financial Statements.

                                                                  3
</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 statements 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 six months ended June 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, during the six months ended June 30, 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 available cash
resources will enable the Company to sustain operations at least through the
next twelve months. Nonetheless, the Company's existing resources may not be
sufficient to support the full commercial introduction, production and delivery
of its technologies. The Company may need to raise additional funds through
public or private equity offerings, debt financings or additional corporate
collaboration and licensing arrangements. 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                   15,970,250       11,242,000
        Warrants                        22,872,662       19,132,283



                                       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>
                                                             Six Months Ended           Three Months Ended
                                                                               June 30,
                                                            2004          2003          2004          2003
                                                        ------------  ------------  ------------  ------------
<S>                                                     <C>           <C>           <C>             <C>
Net loss, as reported                                   ($4,526,314)  ($1,040,193)  $(1,193,052)    ($559,480)
Add: Stock based compensation expense, as reported                -             -             -             -
Deduct: Total stock-based compensation expense
  determined under the fair value based method for
  all awards                                               (328,200)     (273,640)     (164,100)     (114,802)
                                                        ------------  ------------  ------------  ------------

Pro forma net loss                                      ($4,854,514)  ($1,313,833)  ($1,357,152)    ($674,282)
                                                        ============  ============  ============  ============

Basic and diluted loss per share, as reported                ($0.04)       ($0.01)       ($0.01)       ($0.01)
Basic and diluted loss per share, pro forma                  ($0.04)       ($0.02)       ($0.01)       ($0.01)
</TABLE>


The weighted average per share fair value of options granted during the six
months ended June 30, 2004 and 2003 was $.147 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 - STOCKHOLDER'S 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 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 same 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 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 $200,000 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 number
of shares of Common Stock from 200 million to 300 million shares.

NOTE 6 - SUBSEQUENT EVENTS

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 June 30, 2004, the Company had an accumulated deficit of
approximately $72 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 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 June 30, 2004, the Company employs 20 employees and other personnel in the
design and development area. The Company expects to continue making substantial
investment in equipment.


                                       8
<PAGE>

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 six months ended June 30, 2004. If and when the
PLC Technologies are ready to be used in a commercial deployment of a power line
communications system, the 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 six months ended June 30, 2004 were approximately
$875,000. 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 six months ended June 30, 2004 were
approximately $1,089,000. 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


                                       9
<PAGE>

prepared in accordance with generally accepted accounting principles in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, 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 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 June 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.


                                       10
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

        From inception through June 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 $.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 June 30, 2004, the Company had cash and cash equivalents of
approximately $4.85 million, representing an increase of $2.2 million over its
available cash resources at December 31, 2003. The increase in available cash
resources is 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.

        Net cash used in operating activities during the six months ended June
30, 2004 was $2.3 million and is primarily attributable to ongoing research and
development and general and administrative expenses. To facilitate the expansion
of ongoing trials and to further prepare for the commercializing phase, the
Company has increased its inventory to approximately $382,000 as of June 30,
2004.

        Management believes that the Company's existing cash and cash
equivalents will be sufficient to fund its operations through the next twelve
months. The Company may, however raise additional funds from time to time
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


                                       11
<PAGE>

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 June 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

        None.

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

        The Company's Annual Meeting of Stockholders was held on June 4, 2004.
The following matters were voted on: (1) Election of Directors; (2) increase the
number of authorized shares of Common Stock; and (3) Appointment of Auditors.
The vote tally was as follows:

        (1) Proposal to Elect Directors to Serve until the 2005 Annual Meeting
of Stockholders.

                                      FOR            WITHHOLD
                                 --------------    ------------
        John Joyce                 125,327,624        3,150,013
        Michael Widland            125,358,624        3,119,013
        Michael Braunold           124,381,512        4,096,125
        Henry Seduski              128,291,512          186,125

        (2) Proposal to ratify the amendment to the Company's certificate of
incorporation to increase the number of shares of Common Stock that the Company
is authorized to issue from time to time to 300 million shares.


                                       12
<PAGE>

                 FOR               AGAINST            ABSTAIN
            ---------------    ---------------    ---------------
              124,589,728         3,702,218           185,691

        (3) Proposal to ratify the appointment of Rotenberg, Meril Solomon
Bertiger & Guttilla, PC as the Company's auditors for the year ending December
31, 2004.

                 FOR               AGAINST            ABSTAIN
            ---------------    ---------------    ---------------
              128,132,926           217,830           126,881

ITEM 5. OTHER INFORMATION.

        None.

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

(a)     Exhibits

        10.1 Amended and Restated Employment Agreement effective as of May 22,
2004 between Ambient Corporation and John Joyce.

        10.2 Amended and Restated Employment Agreement effective as of August
11, 2004 between Ambient Corporation and Ram Rao.

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

        32. Section 1350 Certification

(b)     Reports on Form 8-K

        None


                                       13
<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: AUGUST __, 2004              AMBIENT CORPORATION

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


                                       14