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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Balance Sheets as of March 31, 2002 (unaudited) and September 30, 2001 3 Statements of Operations for the three months ended December 31, 2001 and 2000 (unaudited) 4 Statements of Cash Flows for the three months ended December 31, 2001 and 2000 (unaudited) 5 Notes to Interim Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II. OTHER INFORMATION 14 Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 2

American Technology Corporation BALANCE SHEETS (unaudited) December 31, September 30, 2001
	3

Statements of Operations for the three and six months ended March 31, 2002 and 2001 ~~========================================================================================================~~ ~~~~ASSETS Current Assets:~~(unaudited)~~		4

Statements of Cash ~~$1,512,485 $1,354,072 Trade accounts receivable, less allowance~~Flows for the six months ended March 31, 2002 and 2001 (unaudited)		5

Notes to Interim Financial Statements		6

Item 2. Management’s Discussion and Analysis of $20,191 for doubtful accounts each period 94,269 117,584 Inventories [note 5] 156,437 197,013 Prepaid expensesFinancial Condition and other 38,158 67,160 - -------------------------------------------------------------------------------------------------------- Total current assets 1,801,349 1,735,829 ======================================================================================================== Equipment, net 462,211 516,208 Patents, netResults of ~~accumulated amortization~~Operations		10

Item 3. Quantitative and Qualitative Disclosures about Market Risk		18

PART II. OTHER INFORMATION		18

Item 1. Legal Proceedings		18
Item 2. Changes in Securities and Use of ~~$93,471~~Proceeds		18
Item 3. Defaults upon Senior Securities		19
Item 4. Submission of Matters to a Vote of Security Holders		19
Item 5. Other Information		19
Item 6. Exhibits and $74,584 851,648 848,783 Purchased technology, net of accumulated amortization of of $631,243 and $526,036 [note 6] 631,257 736,464 - -------------------------------------------------------------------------------------------------------- Total assets $3,746,465 $3,837,284 ======================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $364,406 $321,775 Accrued liabilities: Payroll and related 121,749 159,311 Deferred revenue 219,444 248,611 Other 29,612 114,092 12% Convertible Promissory Note, net of $1,620,000 and $800,000 for 405,000 - for debt discount [note 7] Accrued interest 59,556 - - -------------------------------------------------------------------------------------------------------- Total current liabilities 1,199,767 843,789 ======================================================================================================== Commitments and contingencies [notes 6 and 8] Stockholders' equity [note 8]: Preferred stock, $0.00001 par value; 5,000,000 shares authorized Series B Preferred stock 250,000 shares designated: 0 and 168,860 issued and outstanding, respectively - 2 Series C Preferred stock 300,000 shares designated: 10,000 issued and outstanding. - - Common stock, $0.00001 par value; 20,000,000 shares authorized 14,272,522 and 13,704,139 shares issued and outstanding 143 137 Additional paid-in capital 24,175,608 22,913,268 Accumulated deficit (21,629,053) (19,919,912) - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,546,698 2,993,495 - -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,746,465 $3,837,284 ======================================================================================================== Reports on Form 8-K		19

SIGNATURES		20

AMERICAN TECHNOLOGY CORPORATION

BALANCE SHEETS

	March 31, 2002			September 30, 2001
	(unaudited)
ASSETS
Current Assets:
Cash	$	509,016		$	1,354,072
Trade accounts receivable, less allowance of $20,191 for doubtful accounts each period		166,135			117,584
Inventories [note 5]		170,008			197,013
Prepaid expenses and other		32,658			67,160

Total current assets		877,817			1,735,829

Equipment, net		418,655			516,208
Patents, net of accumulated amortization of $107,358 and $74,584		876,485			848,783
Purchased technology, net of accumulated amortization of $736,450 and $526,036 [note 6]		526,050			736,464

Total assets	$	2,699,007		$	3,837,284

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	576,254		$	321,775
Accrued liabilities and other:
Payroll and related		90,996			159,311
Deferred revenue		387,492			248,611
Interest		119,474			—
Other		36,133			114,092
12% Convertible Promissory Note, net of $1,215,000 and $800,000 for debt discount [note 7]		810,000			—

Total current liabilities		2,020,349			843,789


Commitments and contingencies [notes 6 and 8]

Stockholders’ equity [note 8]:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized
Series B Preferred stock 250,000 shares designated: 0 and 168,860 issued and outstanding, respectively		—			2
Series C Preferred stock 300,000 shares designated: 10,000 issued and outstanding.		—			—
Common stock, $0.00001 par value; 20,000,000 shares authorized 14,273,951 and 13,704,139 shares issued and outstanding		143			137
Additional paid-in capital		24,283,053			22,913,268
Accumulated deficit		(23,604,538	)		(19,919,912	)

Total stockholders’ equity		678,658			2,993,495

Total liabilities and stockholders’ equity	$	2,699,007		$	3,837,284

See accompanying ~~summary of accounting policies and~~ notes to the interim financial statements 3 ~~American Technology Corporation~~

AMERICAN TECHNOLOGY CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months ended March 31,						For the six months ended March 31,
	2002			2001			2002			2001
Revenues:
Product sales	$	99,155		$	135,334		$	324,110		$	294,750
Contract and license		100,278			205,000			131,944			238,306

Total revenues		199,433			340,334			456,054			533,056

Cost of revenues		122,385			192,863			238,845			367,973


Gross profit		77,048			147,471			217,209			165,083


Operating expenses:
Selling, general and administrative		610,463			537,718			1,103,120			1,148,913
Research and development		987,060			731,494			1,880,997			1,595,414

Total operating expenses		1,597,523			1,269,212			2,984,117			2,744,327


Loss from operations		(1,520,475	)		(1,121,741	)		(2,766,908	)		(2,579,244	)


Other income (expense):
Interest income		9,910			40,169			12,556			104,092
Interest expense		(464,918	)		—			(929,474	)		—
Gain on sale of asset		—			3,000			—			3,000
Other		—			(800	)		(800	)		(800	)

Total other income (expense)		(455,008	)		42,369			(917,718	)		106,292


Net loss	$	(1,975,483	)	$	(1,079,372	)	$	(3,684,626	)	$	(2,472,952	)

Net loss available to common stockholders [note 3]	$	(1,978,442	)	$	(1,110,687	)	$	(3,707,541	)	$	(2,536,367	)

Net loss per share of common stock—basic and diluted	$	(0.14	)	$	(0.08	)	$	(0.26	)	$	(0.19	)

Average weighted number of common shares outstanding		14,273,238			13,578,428			14,074,903			13,434,584

See accompanying ~~summary of accounting policies and~~ notes to the interim financial statements 4

~~See accompanying summary of accounting policies and notes to financial statements 5~~

AMERICAN TECHNOLOGY CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended March 31,
	2002			2001
Decrease in Cash Operating Activities:
Net loss	$	(3,684,626	)	$	(2,472,952	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization		362,826			292,696
Allowance for doubtful account		—			191
Gain on sale of asset		—			(3,000	)
Stock issued for services		7,199			39,181
Options issued for services		137,590			—
Amortization of debt discount		810,000			—
Changes in assets and liabilities:
Trade accounts receivable		(48,551	)		91,347
Inventories		27,005			(78,995	)
Prepaid expenses and other		34,503			(82,923	)
Accounts payable		254,479			71,175
Accrued liabilities		112,081			(4,707	)

Net cash used in operating activities		(1,987,494	)		(2,147,987	)

Investing Activities:
Purchase of equipment		(27,086	)		(186,928	)
Patent costs paid		(55,476	)		(91,764	)
Proceeds loaned on notes receivable—officer		—			(40,000	)
Proceeds on sale of asset		—			3,000

Net cash used in investing activities		(82,562	)		(315,692	)

Financing Activities:
Proceeds from exercise of stock options		—			150,000
Proceeds from issuance of convertible promissory notes		1,225,000			—

Net cash provided by financing activities		1,225,000			150,000

Net decrease in cash		(845,056	)		(2,313,679	)
Cash, beginning of year		1,354,072			4,645,615

Cash, end of year	$	509,016		$	2,331,936

Supplemental Disclosure of Cash Flow Information:
Non-cash financing activities:					—
Supplemental disclosure of noncash investing and financing activities
Issuance of stock warrants in connection with convertible debt	$	624,750			—
Increase in additional paid in capital for the beneficial conversion feature of convertible debt	$	600,250			—
Common stock issued on conversion of Series B Preferred Stock	$	2,102,412		$	134,000
Dividends on conversion of Series B Preferred Stock		—			17,972

See accompanying notes to the interim financial statements.

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS

(Unaudited)

1. OPERATIONS

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

2. STATEMENT PRESENTATION

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for interim periods. Operating results for the three and six month periods are not necessarily indicative of the results that may be expected for the year. The interim financial statements and notes thereto should be read in conjunction with the ~~Company's~~Company’s audited financial statements and notes thereto for the year ended September 30, 2001.

3. NET LOSS PER SHARE

The Company applies Statement of Financial Accounting Standards ~~("SFAS"~~(“SFAS”) No. 128, ~~"Earnings~~“Earnings Per Share."” SFAS No. 128 provides for the calculation of ~~"Basic"~~“Basic” and ~~"Diluted"~~“Diluted” earnings per share ~~("EPS"~~(“EPS”). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. The ~~Company's~~Company’s net losses for the periods presented cause the inclusion of potential common stock instruments outstanding to be antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not required to present a diluted EPS. Convertible preferred stock, convertible promissory notes, stock options and warrants convertible or exercisable into approximately ~~3,735,957~~3,786,805 and 2,624,643 shares of common stock were outstanding at ~~December~~March 31, 2002 and 2001, ~~and stock options, warrants, preferred stock and debt convertible or exercisable into approximately 2,648,505 shares of common stock were outstanding as of December 31, 2000.~~respectively. These securities were not included in the computation of diluted EPS because of the net losses but could potentially dilute EPS in future periods.

The provisions of the ~~Company's~~Company’s Series B Preferred Stock ~~provide~~provided for an accretion in the conversion value (similar to a dividend) of 6% or $0.60 per share per annum. The Series C Preferred Stock provides for an accretion in the conversion value of 6% or $1.20 per share per annum. The accrued accretion of the Series B and Series C Preferred Stock for the ~~three~~six months ended ~~December~~March 31, 2002 and 2001 was ~~$19,956~~$22,915 and ~~$38,610,~~$63,415, respectively, which increases the net loss available to common stockholders. Net loss available to common stockholders is computed as follows: Three months ended December 31 2001 2000 ----------- ----------- Net Loss $(1,709,141) $(1,393,580) Accretion on Series B and Series C Preferred Stock at stated rate (19,956) (38,610) ----------- ----------- Net loss available to common stockholders $(1,729,097) $(1,432,190) =========== ===========

	Three months ended March 31						Six months ended March 31
	2002			2001			2002			2001
Net Loss	$	(1,975,483	)	$	(1,079,372	)	$	(3,684,626	)	$	(2,472,952	)
Accretion on Series B and Series C Preferred Stock at stated rate		(2,959	)		(31,315	)		(22,915	)		(63,415	)

Net loss available to common stockholders	$	(1,978,442	)	$	(1,110,687	)	$	(3,707,541	)	$	(2,536,367	)

4. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141 ~~Business Combinations~~“Business Combinations” (SFAS 141) and No. 142; ~~Goodwill~~“Goodwill and Other Intangible ~~Assets~~Assets” (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142 requires among other things, that companies no longer amortize goodwill but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company has not entered into any business combinations and has no recorded goodwill. The Company is assessing, but has not yet determined how the adoption of SFAS 142 will impact its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 143, ~~"Accounting~~“Accounting for Asset Retirement Obligations."” SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part 6

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL ~~STATEMENTS~~ STATEMENTS—(Continued)

(Unaudited) ~~4. RECENT ACCOUNTING PRONOUNCEMENTS (cont'd)~~

of the carrying amount of the long-lived asset. SFAS No. 143 is effective for the Company, for the fiscal year ending September 30, 2003. The Company believes the adoption of this statement will have no material impact on its financial statements.

In October 2001, the SFAS issued SFAS No. 144, ~~"Accounting~~“Accounting for the Impairment or Disposal of Long-Lives ~~Assets"~~Assets”. SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value, less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. The Company has not yet determined what effect, if any, SFAS 144 will have on its financial statements once implemented.

5. INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of the following: December 31, 2001 September 30, 2001 Finished goods $124,153 $137,890 Raw materials 52,284 79,123 Reserve for obsolete inventory (20,000) (20,000) -------- -------- $156,437 $197,013 ======== ========

	March 31, 2002			September 30, 2001
Finished goods	$	96,954		$	137,890
Raw materials		93,054			79,123
Reserve for obsolete inventory		(20,000	)		(20,000	)

	$	170,008		$	197,013

6. PURCHASED TECHNOLOGY

In April 2000, the Company acquired all rights to certain loudspeaker technology owned by David Graebener ~~("Graebener"~~(“Graebener”), Stephen M. Williams ~~("Williams"~~(“Williams”) and Hucon Limited, a Washington corporation ~~("Hucon"~~(“Hucon”). The purchase price consisted of $300,000 cash plus 200,000 shares of common stock. The 200,000 shares of common stock were issued in June 2000 and were valued at $962,500. The Company will pay up to an additional 159,843 shares of common stock to Williams and Graebener contingent upon the achievement of certain performance milestones relating to gross revenues received by the Company from the purchased ~~technology, any shares not earned within four years will be cancelled.~~technology. These contingent shares will be recorded as compensation expense when ~~earned.~~earned and issued. The Company agreed to employ Mr. Williams and Mr. Graebener for a term of three years subject to certain terms and conditions.

7. CONVERTIBLE PROMISSORY NOTES On

In September ~~28,~~and October, 2001 the Company sold for cash in a private offering ~~an aggregate of~~ $800,000 and $1,225,000, respectively of unsecured 12% Convertible Subordinated Promissory Notes due December 31, 2002 ~~("Notes"~~(“Notes”) ~~to accredited investors. On October 12, 2001 the Company completed the sale of an additional $1,225,000 of the Notes~~ to accredited investors. The principal and interest amount of each Note may at the election of the Note holder be converted one or more times into fully paid and nonassessable shares of common stock, at a price of $2.00 per share. The Notes may be called by the Company for conversion if the market price exceeds $5.00 per share for five days and certain conditions are met. ~~Each purchaser was~~The purchasers were granted ~~a warrant~~warrants to purchase ~~one~~1,012,500 common ~~share~~shares of the Company at $2.00 per share until September 30, 2006 ~~("Warrant"~~(“Warrants”) ~~for each $2.00 of Notes (aggregate Warrants exercisable into 1,012,500 shares)~~. As of ~~December~~March 31, ~~2001~~2002 the Notes and accrued interest would have been convertible into ~~1,042,279~~1,072,238 shares of common stock.

The ~~notes~~Notes and ~~warrants~~Warrants have antidilution rights reducing the conversion and exercise price for certain issuances of equity securities by the Company at an effective price below the applicable conversion or exercise price. In connection with the Notes and Warrants, the Company ~~has~~ recorded $2,025,000 as the value of the beneficial conversion feature of the Notes and the value of the Warrants. ~~These warrants~~The Warrants were valued using the Black-Scholes model and the value was reflected as a discount to the debt. This debt discount ~~will be~~is being amortized as non-cash interest expense over the term of the Notes. As of ~~December~~March 31, ~~2001, $405,000~~2002, $810,000 was amortized as non-cash interest expense.

8. ~~STOCKHOLDERS'~~STOCKHOLDERS’ EQUITY

The Company has 10,000 shares of Series C Preferred Stock outstanding convertible into ~~38,528~~39,042 shares of Common stock as of ~~December~~March 31, ~~2001.~~2002. The dollar amount of Series C Preferred Stock, increased by $1.20 per share accretion per annum and other adjustments, is convertible one or more times into fully paid shares of common stock at a conversion price which is the lower of (i) $8.00 per share or (ii) 92% of the average of the five days closing bid market price prior to conversion, but in no event less than $5.75 per share. The shares of Series C Preferred Stock may be called by the Company for conversion if the market price of the common stock exceeds $20.00 per share for ten days and certain conditions are met. The Series C Preferred Stock is subject to automatic conversion on March 31, 2003. 7 ~~8. STOCKHOLDERS' EQUITY (cont'd)~~

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes changes in equity components from transactions during the ~~three~~six months ended ~~December~~March 31, ~~2001:~~

2002:

	Series B Preferred Stock					Common Stock			Additional Additional Paid-In Capital			Accumulated Deficit
	Shares		Amount			Shares	Amount		Additional Additional Paid-In Capital			Accumulated Deficit
Balance as of October 1, 2001	168,860		$	2		13,704,139	$	137	$	22,913,268		$	(19,919,912	)
Issuance of Common Stock for compensation and services	—			—		2,854		—		7,199			—
Options issued for services	—			—		—		—		137,590			—
Debt discount on promissory notes	—			—		—		—		1,225,000			—
Conversion of Series B preferred stock and cumulative dividends	(168,860	)		(2	)	566,958		6		(4	)		—
Net loss	—			—		—		—		—			(3,684,626	)

Balance as of March 31, 2002	—		$	—		14,273,951	$	143		24,283,053			(23,604,538	)

The following table summarizes information about stock option activity during the ~~first quarter~~six months ended ~~December~~March 31, 2001: Weighted Average Shares Exercise Price --------- -------------- Outstanding October 1, 2001 1,338,200 $5.17 Granted 110,000 $2.50 Canceled/expired (280,550) $9.04 --------- Outstanding December 31, 2001 1,167,650 $3.99 ========= ===== Exercisable at December 31, 2001 652,706 $4.33 ========= ===== 2002:

	Shares		Weighted Average Exercise Price
Outstanding October 1, 2001	1,338,200		$	5.17
Granted	140,000		$	2.55
Canceled/expired	(290,175	)	$	8.87

Outstanding March 31, 2002	1,188,025		$	3.96

Exercisable at March 31, 2002	768,175		$	4.14

Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and expire over the period from ~~2001~~2002 to 2006 with an average life of ~~3.34~~three years.

At ~~December~~March 31, ~~2001,~~2002, the Company had warrants outstanding, exercisable into the following number of common shares: Number Exercise Price Expiration Date ------- -------------- --------------- 50,000 $16.00 May 12, 2003 50,000 $10.00 January 5, 2004 375,000 $11.00 March 31, 2005 1,012,500 $2.00 September 30, 2006 --------- 1,487,500 ========= On

Number	Exercise Price	Expiration Date
50,000	$16.00	May 12, 2003
50,000	$10.00	January 5, 2004
375,000	$11.00	March 31, 2005
1,012,500	$ 2.00	September 30, 2006

1,487,500

AMERICAN TECHNOLOGY CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In October 2001, the Company granted a total of 110,000 stock options to a consultant in conjunction with related development and manufacturing agreements. Options to purchase 65,000 shares of common stock vest depending on the ~~consultant's~~consultant’s completion of various project milestones as well as the ~~Company's~~Company’s acceptance of the specified work. The Company estimates the period required to complete the specified milestones each reporting period and records consulting expense based on the current market price of the ~~Company's~~Company’s stock and the estimated percentage of the work completed. Consulting expense ~~will be~~is adjusted each reporting period until vesting occurs. The Company has recorded consulting expense of ~~$8,468~~$29,797 for the Black Scholes value of 10,000 milestone options vested at March 31, 2002 and consulting expense of $14,898 for the Black Scholes value of 10,000 milestone options to be vested ~~March~~April 2002. Options to purchase 45,000 shares of common stock vest based on the consultant meeting certain performance criteria. ~~As a result, the~~The Company ~~will record~~records consulting expense at each vesting date. The Company has recorded consulting expense of ~~$25,276~~$49,998 for the Black Scholes value of ~~15,000~~30,000 performance options vested during the ~~three~~six month period ended ~~December~~March 31, ~~2001.~~ 2002.

9. INCOME TAXES

At ~~December~~March 31, ~~2001,~~2002, a valuation allowance has been provided to offset the net deferred tax asset as management has determined that it is more likely than not that the deferred tax asset will not be realized. The Company has for federal income tax purposes net operating loss carryforwards of approximately $17,600,000, which expire through 2021 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended. 8

10. SUBSEQUENT EVENT

On April 17, 2002, the Company entered into a letter of intent for the acquisition of HST, Inc. (“HST”) in a stock transaction. HST is a designer and manufacturer of technologically advanced material components for branded consumer products. The Company currently uses HST as an outsourced manufacturer of its HSS^® and NeoPlanar^® components. The letter of intent outlines the Company’s agreement to issue 13 million shares of common stock to acquire HST in a tax-free reorganization. HST executives and employees will also be granted options to purchase an aggregate of one million common shares after closing under the Company’s stock option plan, and HST executives will enter into three-year non-compete and employment agreements at their current base salary levels. The letter of intent is non-binding, and completion of the transaction is subject to a number of conditions precedents, including satisfactory completion of due diligence, completion and execution of definitive documentation, and the approval of shareowners of both companies. Provided all conditions are satisfied, the Company expects to consummate the transaction by end of the fiscal year ending September 30, 2002. However, there can be no assurance that all conditions will be satisfied or that if satisfied, the transaction will close when expected.

In May 2002, the Company sold 235,400 shares of Series D Convertible Preferred Stock (“Series D Stock”), par value $.00001 per share, at $10.00 per share for gross cash proceeds of $2,354,000. A total of 250,000 shares of Series D Stock have been authorized. The dollar amount of Series D Stock, increased by $0.60 per share accretion per annum and other adjustments, is convertible one or more times into fully paid shares of common stock at a conversion price which is the lower of (i) $4.50 per share or (ii) 90% of the volume weighted average market price for the five days prior to conversion, but in no event less than $2.00 per share, subject to adjustment. The shares of Series D Stock may be called by the Company for conversion if the market price of the common stock exceeds $9.50 per share for ten days and certain conditions are met. The Series D Stock is subject to automatic conversion on March 31, 2006. The purchasers of the Series D Stock were granted warrants to purchase an aggregate of 517,880 common shares of the Company at $4.50 per share until March 31, 2007 (“D Warrants”). The Series D Stock and the D Warrants have antidilution rights reducing the floor conversion and warrant exercise price for certain issuances of equity securities by the Company at an effective price below the applicable floor conversion or warrant exercise price. In connection with the Series D Stock financing, the Company incurred closing cost of $90,000.

Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, ~~"BUSINESS~~“BUSINESS RISKS."” ALSO SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2001.

Overview

We are focused on commercializing our proprietary HyperSonic, NeoPlanar, PureBass and Stratified Field sound technologies. Our HyperSonic Sound (HSS) technology employs a laser-like beam to project sound to any listening environment. Our NeoPlanar technology is a thin film magnetic speaker that uses unique films and materials, which we believe results in superior sound quality and volume for any given size with low distortion. PureBass is an extended range woofer designed to complement our high performance Stratified Field and NeoPlanar technologies. PureBass employs unique cabinet construction and vent configurations along with multiple acoustic filters, which we believe produces improved performance. Our Stratified Field technology features a thin form factor, in a variety of shapes and sizes, producing high-fidelity, low distortion sound reproduction. Our strategy is to commercialize these technologies through OEMs primarily through licensing or supply agreements.

On April 18, 2002 we announced a letter of intent for the strategic acquisition of HST, Inc. in a stock transaction. We entered into a letter of intent for the acquisition of HST, Inc. in a stock transaction. HST is a rapidly growing, profitable designer and manufacturer of technologically advanced material components for branded consumer products. HST’s leading customers include Callaway Golf, Ping, JBL, Fender, Dunlop, Answer Products and Blackhawk Archery. We currently use HST as an outsourced manufacturer of our HSS and NeoPlanar components.

The letter of intent outlines our agreement to issue 13 million common shares to acquire HST in a tax-free reorganization. HST executives and employees will also be granted options to purchase an aggregate of one million common shares after closing under our stock option plan, and HST executives will enter into three-year non-compete and employment agreements at their current base salary levels. The letter of intent is non-binding, and completion of the transaction is subject to a number of conditions precedents, including satisfactory completion of due diligence, completion and execution of definitive documentation, and the approval of stockholders. Provided all conditions are satisfied, we expect to consummate the transaction by end of our fiscal year ending September 30, 2002. However, there can be no assurance that all conditions will be satisfied or that if satisfied, the transaction will close when expected.

Unless otherwise indicated, the discussions in this report relate to ATC as a stand-alone entity and do not reflect the impact of the proposed business combination transaction with HST.

We believe our NeoPlanar, PureBass and Stratified Field technologies currently meet OEM commercial requirements. These technologies have been licensed to OEMs (including Harman International and Amtech Manufacturing Inc.) and are being transferred to commercial production. We expect product royalties to commence in fiscal 2002 from these technologies. We are also completing second generation HSS electronic packages and ultrasonic emitters that can be supplied to OEMs to be incorporated into end-user products. We expect that these components will be supplied to HSS licensees in fiscal 2002 for use in HSS products. We are however in the early stage of licensing of our sound technologies and have not generated significant revenues from such technologies to date.

When we license an audio technology, we typically receive a flat fee up-front, with the balance of payments based upon a percentage of net revenues of the products in which our technology is incorporated. Revenues from up-front license fees are recognized ratably over the specified term of the particular license. Contract fees are recorded as services are performed.

Our various technologies are high risk in nature. Unanticipated technical obstacles can arise at any time and disrupt licensing activities or OEM product sales or result in lengthy and costly delays. There can be no assurance commercially viable sound products being developed by OEMs will meet with market acceptance or that such products will perform on a cost-effective basis.

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

To date substantially all of our revenues have been derived from the sale of portable consumer products. We have sourced a total of 16 products targeted for niche markets at retail prices ranging from $11.99 to $29.99. Sourcing is on both an exclusive and nonexclusive basis and for different market territories on a product by product basis. Our market focus is in North America. We inventory finished goods as well as provide direct factory shipment to certain customers. There can be no assurance that our line of products can be marketed successfully. We have also produced high-end NeoPlanar speakers for sale to the marine market and expect to target other high-end sales to selected niche markets. ~~Demand for~~

Critical Accounting Policies

We have identified the policies below as critical to our ~~portable consumer and speaker products is subject to significant month to month variability resulting from seasonal demand fluctuations~~business operations and the ~~limited number~~understandings of ~~customers~~our results of operations. The impact and ~~market penetration achieved by us~~any associated risks related to ~~date. Further, sales have been concentrated with a few customers. We are also reliant~~these policies on ~~outside manufacturers to supply~~ our ~~products or components~~business operations is discusses throughout Management’s Discussion and ~~there can be no assurance~~Analysis of ~~future supply. The markets for our products~~Financial Condition and future products and technologies are subject to rapidly changing customer tastes and a high level of competition. Demographic trends in society, marketing and advertising expenditures, and product positioning in retail outlets, technological developments, seasonal variations and general economic conditions influence demand for our products. Because these factors can change rapidly, customer demand can also shift quickly. We may not be able to respond to changes in customer demand because of the time required to change or introduce products, production limitations and because of limited financial resources. Results of Operations when such policies affect our reported and expected financial results.

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition

We derive our revenue from primarily two sources (i) product revenue and (ii) contract and license fee revenue. We recognize revenue on product sales in the periods that products are shipped. We recognize revenue from on going per unit license fees based on units shipped incorporating the Company’s patented proprietary technologies and in the period when the manufacturers’ units shipped information is available to the Company and collectibility is reasonably assured. We recognize revenue from up-front license and other fees and annual license fees ratably over the specified term of the particular license or agreement.

Research and Development Expenses

Research and development expenses are salaries and related expenses associated with the development of our proprietary sound technologies and include compensation paid to engineering personnel and fees to outside contractors and consultants.

Deferred Tax Asset

The Company has provided a full valuation reserve related to its substantial deferred tax assets. In the future, if sufficient evidence of the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce its valuation allowances, resulting in income tax benefits in the Company’s consolidated statement of operations. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for valuation allowance quarterly.

Results of Operations

Total revenues for the six months ended March 31, 2002 were $456,054 a 14% decrease from the comparable six months of the prior year. Revenue for the three month period ended ~~December~~March 31, 2002 and 2001 were $199,433 and ~~2000 were $256,621 and $192,722,~~$340,334, respectively. Product ~~sales~~revenue for the ~~three~~six months ended ~~December~~March 31, ~~2001 were $224,954~~2002 was $324,110 a ~~41%~~10% increase from the comparable ~~three month total~~six months of ~~$159,416 for~~ the prior year. Contract and license revenues for the ~~quarters~~six months ended ~~December~~March 31, 2002 and 2001 were $131,944 and ~~2000 were $31,667 and $33,306,~~$238,306, respectively. Consumer product sales are subject to significant month to month and quarter to quarter variability based on the timing of orders, new accounts, lost accounts and other factors. At ~~December~~March 31, ~~2001~~2002 and ~~2000~~2001 we had ~~$219,444~~$387,492 and ~~$19,444,~~$15,278, respectively, collected and recorded 9 as ~~unrecognized~~deferred revenue for existing contracts and licenses. We recognize upfront fees and advance revenues over the term of the license agreements At December 31, 2001, we had open purchase orders for approximately $36,000 of product, of which approximately $23,205 has been received as customer deposits. The product is expected to be shipped in the next four months. There was no material backlog at December 31, 2000. Anticipated shipments are subject to change due to a variety of factors, many outside our control. Our customers may modify or cancel orders and delay or change schedules. Shipments may also be delayed due to production delay, component shortages and other production related issues. agreements.

Cost of ~~revenues~~sales for the ~~three~~six months ended ~~December~~March 31, ~~2001~~2002 was ~~$116,459~~$238,845 resulting in a gross profit of ~~$140,162~~$217,209 or ~~55%~~48%. This compares to a gross profit of ~~$17,612~~$165,083 or 9%31% gross profit percentage for the comparable period of the prior year. ~~The profit~~Cost of sales for the ~~period ending December~~three months ended March 31, 2002 and 2001 were $122,385 and $192,863, representing gross profit percentages of 39% and 43%, respectively. The fiscal 2002 second quarter gross profit can be attributed to the increase in margins for new products introduced in the retail radio division accompanied with higher margins for our acoustic technologies. Product cost of sales for the six months ended March 31, 2002 and 2001 were $190,721 and 249,795, respectively, representing a gross profit of 41% and 15% on product sales. Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and overhead allocations.

Selling, general and administrative expenses for the six months ended March 31, 2002 and 2001 were $1,103,120 and $1,148,913, respectively. The $45,793 decrease resulted primarily from a reduction in personnel and related costs. Selling, general and administrative expenses for the three ~~months~~month period ended ~~December~~March 31, 2002 and 2001 were $610,463 and ~~2000 were $492,656 and $611,195,~~$537,718, respectively. The ~~$118,539 decrease~~$72,745 increase resulted from a ~~reduction of $113,663~~$21,376 increase in personnel and related costs, $45,898 increase in non-cash compensation expense for stock options granted for professional services and ~~a $5,809 reduction in legal costs.~~other increases of $5,471. We may expend additional resources on marketing HSS, ~~PMT~~NeoPlanar and other technologies in future quarters, which may increase selling, general and administrative expenses. If the acquisition of HST is consummated, selling, general and administrative expenses will increase substantially.

Research and development ~~expenses~~costs for the ~~three~~six months ended ~~December~~March 31, ~~2001~~2002 were ~~$893,937~~$1,880,997 compared to ~~$863,920~~$1,595,414 for the comparable ~~three~~six months of the prior year. The ~~$30,017~~$285,583 increase resulted from an increase of $152,557 for materials and film cost associated with our HSS technology, an increase of $244,239 for consulting and professional services, offset by a reduction of $70,055 in material costs of our Stratified Field and NeoPlanar technologies, reduction of $56,151 in personnel and related costs and other increases of $14,993. HST has a significant research and development initiative, so research and development expenses will increase substantially if the ~~issuance~~acquisition of ~~options for services.~~ HST is consummated.

Research and development ~~expenses~~costs vary quarter by quarter due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. We expect fiscal 2002 research and development costs to ~~increase over~~remain at higher levels than the prior year due to increased staffing and the use of outside design and consultants.

We recorded in selling, general and administrative expenses ~~$3,600~~non-cash compensation expenses of $7,199 and $39,181 for the ~~three months~~six month periods ended ~~December~~March 31, ~~2001~~2002 and 2001. The non-cash compensation expense was for services paid through the issuance of ~~1,425~~2,855 and 11,500 shares of common ~~stock. Included in selling, general and administrative expense for~~stock, respectively. Non-cash compensation costs vary depending on elections regarding the ~~quarter ended December 31, 2000 is $34,381, which is the result of services paid through the issuance of 10,000 shares~~use of common ~~stock.~~ stock to pay services and other factors related to warrant and option valuations.

We experienced a loss from operations of ~~$1,246,431~~$2,766,908 during the ~~three~~six months ended ~~December~~March 31, ~~2001,~~2002, compared to a loss from operations of ~~$1,457,503~~$2,579,244 for the comparable ~~three~~six months ended ~~December~~March 31, ~~2000.~~2001. The ~~$211,072 decrease~~$187,664 increase is primarily due to the ~~decrease in selling, general and administrative expenses and an~~ increase in ~~retail sales for the first quarter of fiscal 2002.~~ research and development expenses.

The net loss available to common stockholders for the ~~three~~six months ended ~~December~~March 31, 2002 and 2001 of $3,707,541 and ~~2000 of $1,729,097 and $1,432,190,~~$2,536,367, respectively, included ~~$19,956~~$22,915 and ~~$38,610~~$63,415 of accretion on the Series B and Series C Preferred Stock, respectively. ~~These amounts are included in net loss available to common stockholders.~~

We have federal net loss carryforwards of approximately $17,600,000 for federal tax purposes expiring through 2021. The amount and timing of the utilization of our net loss carryforwards may be limited under Section 382 of the Internal Revenue Code. A valuation allowance has been recorded to offset the related net deferred tax asset as management was unable to determine that it is more likely than not that the deferred tax asset will be realized. Future operations are subject to significant variability as a result of licensing activities, product sales and margins, timing of new product offerings, the success and timing of new technology exploitation, decisions regarding future research and development and variability in other expenditures.

Liquidity and Capital Resources

Since we recommenced operations in January 1992, we have had significant negative cash flow from operating activities. During the ~~three~~six months ended ~~December~~March 31, ~~2001, the Company experienced~~2002, operating activities used cash of $1,987,494. This amount consisted primarily of a net loss of ~~$1,709,141. A total~~$3,684,626 and a $48,551 increase in accounts receivable, offset by $362,826 of ~~$1,042,176~~depreciation and amortization, $810,000 of ~~cash was used~~debt discount amortization, $144,790 of compensation paid in ~~operating activities through~~options, a ~~$91,653~~ decrease ~~in accrued liabilities. Operating cash was provided by a $40,576 decrease~~of $27,005 in inventory, a ~~$23,315~~ decrease of $34,502 in ~~accounts receivable,~~prepaid expenses and other, an increase of ~~$42,631~~$254,479 in accounts payable and ~~a $29,002 decrease~~an increase of $112,081 in ~~prepaid expenses.~~ accrued liabilities.

At ~~December~~March 31, ~~2001,~~2002, we had gross accounts receivable of ~~$114,460~~$186,326 as compared to $137,775 at September 30, 2001. This represented approximately ~~135~~92 days of sales. Receivables can vary dramatically due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers, many of which demand extended terms of 90-120 days.

For the ~~three~~six months ended ~~December~~March 31, ~~2001, the Company~~2002, net cash used ~~approximately $7,659~~in investing activities was $82,562, consisting primarily of $27,086 for the purchase of ~~laboratory and~~ computer equipment, website development costs and ~~made a $16,752 investment~~leasehold improvements, and $55,476 in patents and new patent applications. We anticipate significant investments in patents in fiscal ~~2002.~~2002 and requirements for additional equipment for developing NeoPlanar, HSS and other technologies. We cannot currently estimate the dollar amounts of these patent ~~investments. 10~~ investments and equipment additions.

At ~~December~~March 31, ~~2001,~~2002, we had working capital deficit of ~~$601,582~~$1,142,532 compared to working capital of $892,040 at September 30, 2001.

We have financed our operations primarily through the sale of preferred stock, exercise of stock options, issuances of convertible notes, proceeds from the sale of investment securities and margins from consumer product sales. At ~~December~~March 31, ~~2001,~~2002, we had cash of ~~$1,512,485.~~$509,016. As a result of the ~~sale of the $1,225,000 of convertible~~cash used in operations offset by proceeds from notes, ~~during the first quarter,~~ our cash position ~~increased~~decreased by approximately ~~$158,400~~$845,056 from September 30, 2001. Subsequent to March 31, 2002 we received gross proceeds of $2,354,000 from the sale of Series D Convertible Preferred Stock. The terms of the Series D stock are described further under “Changes in Securities” below. Based on our present cash position assuming (a) currently planned expenditures and level of operations, (b) continuation of sales to existing retail customers and (c) royalty revenue against existing license agreements, we believe we have sufficient capital resources for the next twelve months. ~~However, there~~There can be no guarantee that the funds required during the next twelve months or thereafter can be generated from our operations or that such required funds will be available from the aforementioned or other potential sources. The lack of sufficient funds from operations or additional capital could force us to curtail or scale back operations and would therefore have an adverse effect on our business. Other than cash and cash equivalents, we have no unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for our sound and other products and technologies. The timing and amounts of these expenditures and the extent of our operating losses will depend on many factors, some of which are beyond our control. We anticipate that the commercialization of our technologies may require increased operating costs, however we cannot currently estimate the amounts of these costs. If the acquisition of HST is consummated, we anticipate that the combined entity will have sufficient cash on hand and cash generated from combined operations to fund such combined operations for at least twelve months after such acquisition.

Contractual Commitments and Commercial Commitments

The following table sets forth a summary of our contractual obligations and commercial commitments as of March 31, 2002:

Year Ending September 30,	Convertible Promissory Notes		Operating Leases		Employment Agreements		Total
2002 (6 months)	$	—	$	100,100	$	286,500	$	386,600
2003		2,025,000		164,800		124,200		2,314,000

Total	$	2,025,000	$	264,900	$	410,700	$	2,700,600

Employment Agreements

The Company has entered into six employment agreements with executive officers and key employees. These agreements are each for one to three-year terms expiring from September 2002 to February 2003. Certain of the agreements provide for up to twelve months severance for certain terminations and payments for the term of the agreement (or in one case twelve months, if longer) on certain changes in control.

New Accounting Pronouncements

A number of new pronouncements have been issued for future implementation as discussed in the footnotes to ~~the Company's~~our interim financial statements (see page 6, Note 4). As discussed in the notes to the interim financial statements, the implementation of these new pronouncements is not expected to have a material effect on ~~the Company's~~our financial ~~statements.~~ position or results of operations.

Business Risks

You should consider each of the following factors as well as the other information in this Quarterly Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report of Form 10-K for the fiscal year ended September 30, 2001, including our financial statements and the related notes.

We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability. We have incurred significant operating losses and anticipate continued losses in fiscal 2002. At ~~December~~March 31, ~~2001~~2002 we had an accumulated deficit of ~~$21,629,053.~~$23,604,538. We need to generate additional revenue to be profitable in future periods. Failure to achieve profitability, or maintain profitability if achieved may have a material adverse effect on our stock price.

We face numerous additional risks in connection with the proposed transaction with HST, which may adversely affect our results of operations whether or not the transaction is completed, and the transaction may not be completed on a timely basis or at all. Risks and uncertainties associated with the negotiation phase of the HST transaction include:

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Completion of the transaction is subject to numerous risks and uncertainties. The transaction remains subject to satisfactory completion of due diligence investigations by both parties and the negotiation and execution of definitive documentation. ATC and HST are each required to obtain shareowner approvals in connection with the transaction. ATC or HST may be unable to obtain shareowner approvals required to complete the transaction in a timely manner or at all.

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,Shareowners of each entity who do not vote in favor of the transaction may have dissenters’ rights to receive a cash payment in lieu of continuing as an ATC stockholder after the merger. It is anticipated that even after ATC stockholders approve the transaction, closing will be conditioned on no more than a minimal percentage of ATC stockholders exercising statutory dissenters’ rights. The risk of ATC stockholders exercising dissenters’ rights increases if, during the thirty-day period after ATC stockholders approve the transaction, the market price of ATC stock declines below the fair market value of ATC’s common stock on the day before the terms were first announced. It may not be feasible to proceed with the transaction if it appears that a significant percentage of ATC stockholders may exercise dissenters’

rights, as the combined company will likely not have sufficient cash reserves to discharge the dissenters’ rights claims and fund its ongoing operations.

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Uncertainty surrounding ATC’s proposed acquisition of HST may have an adverse effect on employee morale and retention, and result in the diversion of management attention and resources.

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The market value of our common stock will continue to vary prior to completion of the transaction due to changes in the business, operations or prospects of ATC or HST, market assessments of the transaction, market and economic considerations, or other factors. However, the letter of intent contemplates that there will be no adjustment to the number of shares of common stock to be issued for the acquisition of HST, and it is not currently contemplated that the parties will have a right to terminate the definitive acquisition agreement based upon changes in the market price of ATC common stock. The effective purchase price for HST might therefore increase substantially.

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ATC will be required to pay significant costs incurred in connection with the transaction, including legal, accounting and financial advisory fees, whether or not the transaction is completed.

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Some of the directors and executive officers of ATC and HST may have interests and arrangements that could have affected their decision to support or approve the merger.

If the transaction is completed, the combined company will face numerous risks and uncertainties, including:

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The combined company will face all of the risks and uncertainties of HST’s business, the full extent of which have not yet been evaluated by ATC management. These risks include HST’s rapid growth in recent quarters, which may not be able to be sustained, the highly competitive environment in which HST operates, HST’s dependence on a single customer, Callaway Golf Company, for a very large percentage of its current revenues, and other risks and uncertainties which will be detailed in the proxy statement to be delivered to ATC stockholders if and after the parties reach a definitive agreement.

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A significant portion of HST’s product and component manufacturing is located in Mexico, and will be subject to substantial risks of doing business outside the United States. These risks include being subject to many foreign regulatory requirements which may change without notice, the possibility of future export restrictions and/or foreign tariffs and other trade barriers, changes in tax rates in Mexico, possible political and economic instability, and difficulties in managing foreign operations.

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In order to be successful, the combined company must retain and motivate key employees. The change in management and structure caused by the transaction may impact the morale of employees and result in a loss of key employees. Failure to retain and properly provide incentives to key employees could seriously harm the combined company.

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The combined company will be highly dependent on the services of the executive officers and key employees of HST, as ATC management has little or no experience in HST’s business.

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The combined company may not effectively manage the transition from the existing products and strategic models of the separate companies to the new products and strategic model contemplated for the combined company. Failure to manage this transition could seriously harm the combined company.

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We may experience difficulties in the integration of operations, personnel, technologies, products and the information systems of ATC and HST. Integration will divert management’s attention from other business concerns, integration may divert resources from the existing businesses, products or technologies of ATC and/or HST.

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We may not realize the intended benefits and synergies of the transaction.

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The combined company will be required to make substantial salary payments to executive officers and key employees of HST for an anticipated period of at least three years. The combined company may be required to make these payments for the full period of an employment agreement even if it is unsatisfied with the performance of an employee, or if it elects to terminate an employee without cause.

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Charges to earnings resulting from the application of the purchase method of accounting may adversely affect the market value of our common stock following the transaction, as we will incur additional depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in connection with the transaction, and, to the extent the value of goodwill or intangible assets with indefinite lives acquired in connection with the transaction becomes impaired, we may be required to incur material charges relating to the impairment of those assets.

If the transaction is not completed, we face the following risks and uncertainties:

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The price of ATC common stock may decline to the extent that the current market price of ATC common stock reflects a market assumption that the transaction will be completed.

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ATC would not derive the strategic benefits expected to result from the transaction, such as creating a near-term source of revenue and profits, and leveraging our business model from a licensing model to a product and component business model.

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Our business may be harmed to the extent that customers, suppliers or investors believe that we cannot effectively compete in the marketplace without the transaction or there is customer and employee uncertainty surrounding the future direction of ATC on a standalone basis.

We are an early stage company introducing new technologies. If commercially successful products do not result from our efforts, we may be unprofitable or forced to cease ~~operations.~~operations. Our HSS, NeoPlanar, PureBass and SFT technologies have only recently been introduced to market and are still being improved. Commercially viable sound technology systems may not be successfully and timely produced by OEMs due to the inherent risks of technology development, new product introduction, limitations on financing, competition,

obsolescence, loss of key technical personnel and other factors. We have not generated significant revenues from our sound technology to date, and we cannot guarantee significant revenues in the future. The development and introduction of our sound technology has taken longer than anticipated by management and could be subject to additional delays. Even if products employing our sound technology are introduced, they may not achieve market acceptance. Our various sound projects are high risk in nature, and unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in a determination that further exploitation is unfeasible. If we do not successfully exploit our technology, our financial condition and results of operations and business prospects would be adversely ~~effected.~~ affected.

Our quarterly and annual revenues are subject to fluctuations caused by many factors, any of which could result in our failure to achieve our revenue expectations.Our quarterly and annual revenues from portable consumer products have varied significantly in the past and are likely to continue to vary in the future due to a number of factors. Our revenues from licensing our sound reproduction technologies are also expected to vary significantly due to a number of factors. Many of these factors are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue expectations. These factors include: o our ability to develop, introduce, produce in volume quantities and market successfully new or enhanced portable consumer products; o our ability to develop and license to OEMs our sound reproduction technologies; o changes in the relative volume of sales of various products with sometimes significantly different margins or royalties; o market acceptance of and changes in demand for our portable consumer products and products of our licensees; o gains or losses of significant customers, distributors or strategic relationships; 11 o unpredictable volume and timing of customer orders; o the availability, pricing and timeliness of delivery of components for our products and OEM products; o fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs; o the timing of new technological advances, product announcements or introductions by us, by our licensees and by our competitors; o product obsolescence and the management of product transitions and inventory; o production delays; o decreases in the average selling prices of products; o seasonal fluctuations in sales; o general consumer electronics industry conditions, including changes in demand and associated effects on inventory and inventory practices; o the conditions of other industries, such as military and commercial industries, into which our technologies may be licensed; and o general economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling.

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our ability to develop, introduce, produce in volume quantities and market successfully new or enhanced portable consumer products;

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our ability to develop and license to OEMs our sound reproduction technologies or our ability to supply components to OEMs or customers;

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changes in the relative volume of sales of various products or components with sometimes significantly different margins or royalties;

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market acceptance of and changes in demand for our portable consumer products and products of our licensees;

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gains or losses of significant customers, distributors or strategic relationships;

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unpredictable volume and timing of customer orders;

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the availability, pricing and timeliness of delivery of components for our products and OEM products;

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fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs;

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the timing of new technological advances, product announcements or introductions by us, by our licensees and by our competitors;

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product obsolescence and the management of product transitions and inventory;

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production delays by OEMs or by us or our suppliers;

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decreases in the average selling prices of products;

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seasonal fluctuations in sales;

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general consumer electronics industry conditions, including changes in demand and associated effects on inventory and inventory practices;

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the conditions of other industries, such as military and commercial industries, into which our technologies may be licensed; and

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general economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling.

Some or all of these factors could adversely affect demand for our portable consumer products and for OEM products incorporating our sound reproduction technologies, and therefore adversely affect our future operating results.

Most of our operating expenses are relatively fixed in the short term. We may be unable to rapidly adjust spending to compensate for any unexpected sales or license revenue shortfalls, which could harm our quarterly operating results. Because the lead times of firm orders are typically short in the consumer electronics industry, we do not have the ability to predict future operating results with any certainty.

Because of the above factors, you should not rely on period-to-period comparisons of results of operations as an indication of future performance.

Our expenses may vary from period to period, which could affect quarterly results and our stock price.If we incur additional expenses in a quarter in which we do not experience increased revenue, our results of operations would be adversely affected and we may incur larger losses than anticipated for that quarter. Factors that could cause our expenses to fluctuate from period to period include: o the timing and extent of our research and development efforts; o the extent of marketing and sales efforts necessary to promote our technologies; and o the timing of personnel hiring.

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the timing and extent of our research and development efforts;

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the extent of marketing and sales efforts to promote our technologies; and

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the timing of personnel and consultant hiring.

The demand for our portable consumer products has historically been weaker in certain quarters, which makes it difficult to compare our quarterly results.Due to industry seasonality, demand for consumer electronic products is strongest during the fourth quarter of each year and is generally slower in the period from March through July. Because the consumer products market experiences substantial seasonal

fluctuations, with more sales occurring toward the end of the year, our quarterly results will be difficult to compare so long as portable consumer products remains our principal revenue source.

Sound reproduction markets are subject to rapid technological change, so our success will depend ~~heavily~~ on our ability to develop and introduce new technologies.Technology and standards in the sound reproduction markets evolve rapidly, making timely and cost-effective product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render our technologies obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our technologies do not perform well, our business and financial condition will be adversely affected. The life cycles of our technologies are difficult to estimate, particularly those such as HyperSonic sound for which there is no established market. As a result, our technologies, even if successful, may become obsolete before we recoup our investment.

Our HSS technology is subject to government regulation, which could lead to unanticipated expense or ~~litigation.~~litigation. Our HyperSonic Sound technology emits ultrasonic vibrations, and as such is regulated by the Food and Drug Administration. In the event of certain unanticipated defects in an HSS product, a licensee or we may be required to comply with FDA requirements to remedy the defect and/or notify consumers of the problem. This could lead to unanticipated expense, and possible product liability litigation against a licensee or us. Any regulatory impediment to full commercialization of our HSS technology, or any of our other technologies, could adversely affect our results of operation. For a further discussion of the regulation of our HSS technology, see Part I, Item 1 of our Annual Report on Form 10-K, under the heading ~~"Government~~“Government Regulation." ”

Many potential competitors who have greater resources and experience than we do may develop products and technologies that make ours ~~obsolete.~~obsolete. Technological competition from other and longer established electronic and loudspeaker manufacturers are significant and expected to increase. Most of the companies with which we expect to compete have substantially greater capital resources, research and development staffs, marketing and distribution program and facilities, many of them have substantially greater experience in the production and marketing of products. 12 In addition, one or more of our competitors may have developed or may succeed in developing technologies and products that are more effective than any of ours, rendering our technology and products obsolete or noncompetitive.

Commercialization of our sound technologies depends on collaborations with other companies. If we are not able to find collaborators and strategic alliance relationships in the future, we may not be able to develop our sound technologies and ~~products.~~products. As we do not have the production, marketing and selling resources to commercialize our products on our own our strategy is to establish business relationships with leading participants in various segments of the electronics and sound reproduction markets to assist us in producing, marketing and selling consumer electronic ~~products~~components and products that include our sound technologies.

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

Any inability to adequately protect our proprietary technologies could harm our competitive ~~position.~~position. We are heavily dependent on patent protection to secure the economic value of our technologies. We have both issued and pending patents on our sound reproduction technologies and we are considering additional patent applications. Patents may not be issued from some or all of our pending applications. Claims allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Issued patents may be challenged or invalidated. Further, we may not receive patents in all countries where our products can be sold or licensed. Our competitors may also be able to design around our patents. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. There is currently no pending intellectual property litigation against us. Third parties may charge that our technologies or products infringe their patents or proprietary rights. Problems with patents or other rights could potentially increase the cost of our products, or delay or preclude our new product development and commercialization. If infringement claims against us are deemed valid, we may be forced to obtain licenses, which might not be available on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions, or to defend against infringement claims. A successful challenge to our sound technology could have a materially adverse effect on our business prospects.

Our retail products and sound component production are dependent on outside contractors and suppliers. Disruptions in supply could adversely affect ~~us. Product sales have accounted for substantially all of our revenues. However, we~~us. We are dependent on contract suppliers for our finished consumer electronics products. We source products from a variety of suppliers. The loss of a supply of a high selling product could have a material adverse effect on our operations. Disruption of our supply could cause additional costs and delays and could also have an adverse impact on our operations. The

manufacturers of our consumer electronic products are also dependent upon the availability of electronic components. Any significant delays in obtaining components could have a material adverse effect on our financial condition and results of operations.

We have developed component supply arrangements for film and components for our Neoplanar and HSS sound technologies. These are generally sole supplier arrangements and the loss or a disruption of supply could have a material adverse effect on our ability to introduce these technologies, or once introduced in volume, could disrupt future revenues adversely affecting financial condition and results of operations.

Two customers represented a significant amount of our business in the last fiscal year. We do not know if we will receive further orders from ~~them.~~them. ASI and Vulcan Northwest Inc. accounted for 23% and 11% of total revenues for the fiscal year ended September 30, 2001. Neither ASI nor Vulcan have committed to purchase any further products or technology from us. During the quarter ended ~~December~~March 31, ~~2001, Vulcan and ASI accounted for 42% and 0% of total revenues, respectively.~~2002, neither company made significant purchases from us. We cannot provide any assurances that any of our current customers will continue at current or historical levels or that we will be able to obtain orders from new customers.

If our key employees do not continue to work for us, our business will be harmed because competition for replacements is ~~intense.~~intense. Our performance is substantially dependent on the performance of our executive officers and key technical employees. We are dependent on our ability to retain and motivate high quality personnel, especially highly skilled technical personnel. Our future success and growth also depend on our continuing ability to identify, hire, train and retain other highly qualified technical, managerial and sales personnel. Competition for such personnel is intense, there can be no assurance that we will be able to attract, assimilate or retain other highly qualified technical, managerial or sales personnel in the future. The inability to attract and retain the necessary technical, managerial or sales personnel could have a material adverse effect upon our business, operating results or financial condition.

Terrorist acts and acts of war may seriously harm our business and results of operations. Terrorist acts or acts of war (wherever located around the world) may cause damage or disruption to our employees, facilities, OEM partners, suppliers, distributors and resellers, and customers, which could significantly impact our results of operations. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially harm our business and results of operations. The long-term effects of the September 11, 2001 attacks on our business and results of operations are unknown. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of your common stock.We are authorized to issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors may determine the terms of future preferred stock without further action by our stockholders. If we issue additional preferred stock, it could affect your rights or reduce the value of your common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to 13 a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions.

Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and, consequently, decrease the market value of your ~~investment.~~investment. Some provisions of our amended certificate of incorporation and bylaws and Delaware law could delay or prevent a change in control or changes in our management that a stockholder might consider favorable. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

Conversion of all of or part of our outstanding convertible preferred stock and debt or the exercise of outstanding warrants will cause immediate and possibly significant dilution in the net tangible book value of your ~~shares.~~shares. If the holders of our outstanding convertible preferred stock, convertible debt or warrants decide to convert or exercise all or part of their securities, you will experience immediate and possibly significant dilution in the net tangible book value of your shares. The market price of our common stock could also decline upon the resale of the common stock obtained upon conversion of our preferred stock or convertible debt or upon exercise of warrants.

Our stock price is volatile and may continue to be volatile in the future. Our common stock trades on the NASDAQ Small Cap ~~Market.~~Market. The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in (i) our anticipated or actual operating results; (ii) developments concerning our sound reproduction technologies; (iii) technological innovations or setbacks by us or our competitors; (iv) conditions in the consumer electronics market; (v) announcements of merger or acquisition transactions; and (vi) other events or factors and general economic and market conditions. The stock market in recent years has experienced extreme price and volume fluctuations that have ~~effected~~affected the market price of many technology companies, and that have often been unrelated or disproportionate to the operating performance of companies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position, results of operations or cash due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks.

We are exposed to some market risk through interest rates, related to our investment of our current cash of ~~$1,512,485.~~$509,016 We do not consider this risk to be material, and we manage the risk by continuing to evaluate the best investment rates available for short-term high quality investments.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in routine litigation incidental to the conduct of our business. There are currently no material pending legal proceedings to which we are a party or to which any of our property is subject.

Item 2. Changes in Securities ~~During~~

(a) Not applicable

(b) As more particularly described below, we sold 235,400 shares of Series D Convertible Preferred Stock in May 2002. The Series D stock is entitled to a liquidation preference over the common stock equal to the purchase price of the Series D stock increased by 6% per annum. The Series D stock is also entitled to a cash dividend equal to 6% of the liquidation preference when, as and if a cash dividend is declared on the common stock. The Series D dividend must be paid in preference and priority to a dividend on the common stock. The liquidation preference could materially diminish the rights of the common stockholders in the event of a liquidation, and the dividend preference will impair our ability to declare a dividend on the common stock were it to choose to do so. At this time, we do not intend to declare dividends on the common stock in the foreseeable future.

(c) We did not sell any equity securities during the quarter ended ~~December~~March 31, ~~2001,~~2002 without registration under the Securities Act. The following is a description of the Series D Preferred Stock and related warrants we sold ~~for cash~~in May 2002 subsequent to the quarter ended March 31, 2002:

In May 2002 we sold in a private offering anfor cash at $10.00 per share a total of 235,400 shares of Series D Preferred Stock to a limited number of accredited or foreign investors for aggregate gross proceeds of ~~$1,225,000 of unsecured 12% Convertible Subordinated Promissory Notes due December 31, 2002 to accredited investors. We sold $800,000~~$2,354,000. The dollar amount of the ~~identical notes during the quarter ended September 30, 2001. The principal~~Series D stock, increased by $0.60 per share per annum and ~~interest amount of each note may~~other adjustments, at the election of the ~~note~~ holder, may be converted one or more times into ~~fully paid and nonassessable shares of our~~ common stock at a conversion price which is the lower of (i) $4.50 per share or (ii) 90% of the volume weighted average market price of the common stock for the five trading days prior to conversion, but no less than $2.00 per ~~share.~~share, subject to certain adjustments. The Series D stock may not be converted at less than $4.50 per share prior to December 31, 2002. We may call the ~~notes~~shares of Series D stock for conversion if the market price of the common stock exceeds ~~$5.00~~$9.50 per share for ~~five~~ten consecutive trading days and certain conditions are met. The Series D stock will be subject to automatic conversion on March 31, 2006.

Each purchaser was also granted a warrant to purchase ~~one~~2.2 common ~~share~~shares at ~~$2.00~~$4.50 per share, subject to certain future adjustments, until ~~September 30, 2006~~March 31, 2007 for each ~~$2.00~~share of ~~notes~~preferred stock purchased (aggregate warrants exercisable into ~~1,012,500 shares including notes sold in prior quarter)~~517,880 shares). ~~We are not required to register~~

The Series D stock and the ~~stock underlying the notes or~~related warrants ~~but the holders have certain piggyback registration rights. The securities~~ have antidilution rights reducing the floor price for conversion of the Series D stock and the warrant exercise price for certain issuances of equity securities at an effective price below the applicable floor conversion or warrant exercise ~~price~~price.

We sold these securities without an underwriter. We paid finders fees of $78,750 for the ~~notes and warrants. The~~introduction of purchasers. These securities were offered and sold without registration under the Securities Act ~~of 1933,~~ in reliance upon the exemption provided by ~~Section 4(2) and/~~Regulation D or Regulation ~~D. The securities may~~S thereunder, and an appropriate legend was placed on the Series D stock and the warrants and will be placed on the shares issuable upon conversion of the Series D stock or exercise of the warrants unless registered under the Securities Act prior to issuance. We have agreed to file, not ~~be offered or sold in~~later than December 31, 2002, a registration statement for the ~~United States absent registration or an applicable exemption~~resale of the common stock issuable on conversion of the Series D stock and exercise of the warrants.

Net proceeds from the ~~registration requirements~~sale of the ~~Securities Act. We sold securities without an underwriter, but we paid $45,000 in finder's fees~~Series D stock of approximately $2,264,000 are intended primarily to pay for the ~~introduction~~costs of ~~investors. 14~~ the acquisition of HST and for working capital to produce HSS and NeoPlanar components and to market our technologies.

(d) Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 4.1 Form of 12% Convertible Subordinated Promissory Note due December 31, 2002 aggregating $2,025,000 granted to accredited investors (individual notes differ as to holder, amount and issuance date) filed as Exhibit 4.11 on Form 8-K dated October 12, 2001. 4.2 Form of Stock Purchase Warrant exercisable until September 30, 2006 granted to accredited investors for an aggregate of 1,012,500 common shares (individual warrants differ as to holder, number of shares and issuance date) filed as Exhibit 4.12 on Form 8-K dated October 12, 2001.

(a) Exhibits:

3.1		Certificate of Designations of Series D Preferred Stock filed with Delaware on May 3, 2002.

10.1		Stock and Warrant Purchase Agreement dated May 3, 2002.

10.2		Form of Stock Purchase Warrant exercisable until March 31, 2007 granted to investors for an aggregate of 517,880 common shares (individual warrants differ as to holder, number of shares and issuance date)

(b) Reports on Form 8-K ~~We filed a report on Form 8-K on October 12, 2001 disclosing in item 5 the sale of convertible promissory notes. 15~~

Not applicable

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN TECHNOLOGY CORPORATION Date: February 14, 2002 By: /s/ RENEE WARDEN ------------------ Renee Warden, Chief Accounting Officer, Treasurer and Corporate Secretary (Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant) 16

		AMERICAN TECHNOLOGY CORPORATION

Date:	May 15, 2002	By:	/s/ RENEE´ WARDEN
			Renee´ Warden, Chief Accounting Officer, Treasurer and Corporate Secretary (Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant)

Delaware		87-03261799
(State or other jurisdiction of incorporation or organization)		(I.R.S. Empl. Ident. No.)

Common Stock, $0.00001 par value		14,295,226
(Class)		(Outstanding at May 8, 2002)