UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended March 31, 20112012

or

For the transition period from            to.

Commission File Number: 000-24248

LRAD CORPORATION

(Exact name of registrant as specified in its charter)

(858) 676-1112

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of shares of Common Stock, $0.00001 par value, outstanding on May 3, 2011April 26, 2012 was 32,330,234.32,374,499.

LRAD CORPORATION

INDEX

PART I. FINANCIAL INFORMATION

LRAD Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes

1

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes

2

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes

3

LRAD Corporation

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

1. OPERATIONS

LRAD Corporation, a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed sound technologies and products. The principal markets for the Company’s proprietary sound reproduction technologies and products are in North America, Europe, Middle East and Asia.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

General

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and applicable sections of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although, in the opinion of management, the interim financial statements reflect all adjustments necessary and that disclosures included therein are adequate in order to make the financial statements not misleading. The condensed consolidated balance sheet as of September 30, 20102011 was derived from the Company’s most recent audited financial statements. Operating results for the three and six month periodperiods are not necessarily indicative of the results that may be expected for the year. The interim condensed financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 20102011 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on December 1, 2010.5, 2011.

Principles of Consolidation

The Company has a currently inactive wholly owned subsidiary, American Technology Holdings, Inc., which the Company formed to conduct international marketing, sales and distribution activities. The condensed consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.

Discontinued Operations

The financial statements presented herein reflect the spin-off of the Company’s Hypersonic Sound (“HSS”) business as a stand-alone company on September 27, 2010. The results of operations for the HSS business conducted prior to the spin-off, as well asinclude some continued activity by the Company to fulfill some remaining sales and warranty obligations following the spin-off, are designated as discontinued operations in the accompanying financial statements. Amounts reflected as discontinued operations in the accompanying Condensed Consolidated StatementStatements of Operations include direct and allocated costs attributable to the former HSS business, but do not include allocations of general corporate overhead costs.

Restricted Cash

The Company considers any amounts pledged as collateral or otherwise restricted for use in current operations to be restricted cash. Restricted cash is classified as a current asset unless amounts are not expected to be released and available for use in operations within one year.

Reclassifications

Where necessary, the prior year’s information has been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

3. FAIR VALUE MEASUREMENTS

At March 31, 2011,2012, there was no difference between the carrying value and fair market value of the Company’s cash and cash equivalents. For certain financial instruments, including accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities.

4. RESTRICTED CASH

At March 31, 2011, theRestricted cash was reported as follows:

4

The Company’s assets includeincluded restricted cash, in the amounts of $2,425,000 and $606,250, respectively, which are classified as current assets and noncurrent assets, as these amounts arewas pledged to support bank guarantees issuedfor product warranty of product delivered on a sales contract under which products were delivered in the quarter ended March 31, 2011. The current asset portion covered the first year of product warranty, and the noncurrent portion was recently issued and will be renewed annually for seven years to cover each year of the collateral has a term of less than one yearextended warranty and the long-termmaintenance agreement. The current portion securing the Company’s warranty obligation, has a term of greater than one year. As the terms of the contract are fulfilled, the funds will become unrestricted and transferred to cash and cash equivalents. As of March 31, 2011, obligations for $1,818,750equivalents in the current fiscal year upon completion of the bank guarantees have been fulfilledfirst year warranty term, and are in the processnoncurrent will remain for the duration of clearing the restrictions through the banks.seven year term. These assets are carried at cost, which approximates market value.

5. INVENTORIES

Inventories consisted of the following:

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

Depreciation expense was $67,974 and $89,405 for the six months ended March 31, 2011 and 2010, respectively.

7. PATENTSINTANGIBLE ASSETS

PatentsIntangible assets consisted of the following:

Amortization expense for the Company’s patents was $16,018 and $18,619 for the six months ended March 31, 2011 and 2010, respectively.

Each quarter, the Company reviews the ongoing value of its capitalized patent costs. In the first six months of fiscal 2012 and 2011, some of these assets were identified as being associated with patents that are no longer consistent with its business strategy. As a result of this review, the Company reducedrecorded a loss as shown above from the valueimpairment of patents that were previously capitalized patents by $20,433 and $29,946 during the six months endedcapitalized.

5

8. PREPAID MAINTENANCE AGREEMENT

At March 31, 2011, and 2010, respectively.

8. PREPAID EXPENSES

Prepaidprepaid expenses included an aggregate of $1,500,000 of prepaid costs associatedpaid to a third party provider in connection with the Company’s obligations under a sales contract to a foreign military service to provide repair and maintenance services over an eight year period for products sold under this contract. The total prepaid expense will beis being amortized on a straight-line basis at an annual rate of $187,500 over this eight yeareight-year period, and will beis being recognized as a component of cost of sales. Accordingly, as of March 31, 2011,2012, $187,500 of the total prepayment was classified as a current asset and $1,312,500$1,125,000 was classified as noncurrent.

9. ACCRUED LIABILITIES AND OTHER LIABILITIES—NONCURRENT

Accrued liabilities consisted of the following:

Deferred Revenue

Deferred revenue at March 31, 2012 and September 30, 2011 includesincluded $270,559 and $270,941, respectively, collected from a license agreement in advance of recognized revenue, and $36,000$2,106 and $0 of customer prepayments.prepayments, respectively.

Warranty Reserve

Changes in the warranty reserve during the six months ended March 31, 20112012 and 20102011 were as follows:

10. INCOME TAXES

At March 31, 2011,2012, the Company had federal net operating losses (“NOLs”) and related state NOLs, but inNOLs. In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income Taxes” (“ASC 740”), the Company recorded a full valuation allowance as it is more likely than not that some or all of the deferred tax assets will not be realized in the future.

The Company recordeddid not record a tax provision of $112,095 during the threesix months ended March 31, 2011 based upon2012 as the estimatedCompany expects its annual tax rate. The tax provision includes federal taxes, resulting from the Alternative Minimum Tax (“AMT”) where only 90% of taxable income may be applied against NOLs. California state taxes resulting from the suspension of net operating losses for the 2010 tax year have been offset by a state tax R&D credit.

The effective tax rate is lower than the statutory rate as any income recognized for the tax year will permit a decrease in the valuation allowance for net operating losses offset by the AMT and the temporary suspension of California loss carryforwards.to be zero.

6

ASC 740 requires the Company to recognize in its financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company has not recorded any income tax expense or benefit for uncertain tax positions.

The Company expects duringis subject to taxation in the next twelve monthsU.S. and various state jurisdictions. All of the Company’s historical tax years are subject to update unrecognized R&D tax benefits not currently recognized in deferred tax assets.examination by the Internal Revenue Service and various state jurisdictions due to the generation of NOL and credit carryforwards.

11. COMMITMENTS AND CONTINGENCIES

Bank and Other Cash Equivalent Deposits in Excess of FDIC Insurance Limits

The Company maintains cash and cash equivalent accounts with a Federal Deposit Insurance Corporation (“FDIC”) insured financial institution. Effective December 31, 2010,institutions. Under provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank Act”) became effective which included a provision that provided for, unlimited FDIC insurance is provided for all funds in non-interest bearing transaction accounts for the two year period through December 31, 2012. The Company also hasIn addition, certain of the Company’s interest bearing collateral money market and savings accounts that are only securedeach insured up to $250,000 per depositor. The Company maintains additional cash in a money market

account which is covered underby the Securities Investor Protection Program (“SIPC”) which insures up to $500,000 of losses due to broker-dealer insolvency. SIPC insurance does not cover a decline in the market value of securities.FDIC. The Company’s exposure for amounts in excess of FDIC insured limits at March 31, 20112012 was approximately $3.9 million out of total cash of $14.4 million, most of which is required to be held$10,800,000. The Company has not experienced any losses in collateral accounts to secure bank guarantees for a specific time period.such accounts.

Litigation

The Company may at times be involved in litigation in the ordinary course of business. The Company will, from time to time, when appropriate in management’s estimation, record adequate reserves in the Company’s financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

Bonus Plan

The Company has an incentive bonus plan for fiscal year 20112012 designed to motivate its employees to achieve the Company’s financial objectives. All of the Company’s employees are entitled to participate in the incentive plan. Target bonus amountsBonus Amounts (“Target”) vary based on a percentage of the employee’s base salary, which range from 10% to 50% of base salary, and a bonus payment willmay be made at three levels, including at 50% of target,Target, at 100% of targetTarget and at 200% of target,Target, depending upon the achievement by the Company of specified earnings per share goals. Included in such calculation is the cost of the incentive plan and it includes earnings from continuing and discontinued operations.plan. For purposes of the earnings per share calculation, the number of shares outstanding will also be held constant as of October 1, 2010.2011. During the six months ended March 31, 20112012, the Company recorded accrueddid not record any bonus expense ofin connection with the 2012 plan, compared to $583,202 recorded during the three and six months ended March 31, 2011 in connection with the 2011 plan, compared to $218,218 recorded in the same period of the prior year.plan.

12. SHARE-BASED COMPENSATION

Stock Option Plans

At March 31, 2011,2012, the Company had one equity incentive plan. Theplan, the 2005 Equity Incentive Plan (“2005 Equity Plan”),. The 2005 Equity Plan, as amended, authorizes for issuance as stock options, stock appreciation rights, or stock awards an aggregate of 3,250,000 new shares of common stock to employees, directors or consultants. The total plan reserve includes these new shares and shares reserved under prior plans, allowing for the issuance of up to 4,999,564 shares. At March 31, 2011,2012, there were options outstanding covering 4,274,7423,969,714 shares of common stock under the 2005 Equity Plan and an additional 202,839963,602 shares of common stock available for grant.

Stock Option Activity

The following table summarizes information about stock option activity during the six months ended March 31, 2011:2012:

Options outstanding are exercisable at prices ranging from $0.46 to $4.81$3.58 and expire over the period from 20112012 to 20162022 with an average life of 2.062.07 years. The aggregate intrinsic value of options outstanding and exercisable at March 31, 20112012 was $3,442,567$1,029,372 and $2,866,009,$1,007,699, respectively.

7

Share-Based Compensation

The Company recorded $210,670 and $273,654 of share-based compensation expense for the six months ended March 31, 2011 and 2010, respectively. The amounts of share-based compensation expense are classified it in the condensed consolidated statements of operations as follows:

The weighted-average estimated fair value of employee stock options granted during the six months ended March 31, 2011 and 2010 was $1.61 and $1.06, per share, respectively,periods below were calculated using the Black-Scholes option pricing model with the following weighted-average assumptions above (annualized percentages):.

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates or if the Company updates its estimated forfeiture rate. Such amounts will be recorded as a cumulative adjustment in the period in which the estimate is changed. The forfeiture rate was revised in the quarter ended December 31, 2010, from 20% to 10%, and a cumulative adjustment of $6,478 was recorded in that period.

Since the Company has a net operating lossNOL carryforward as of March 31, 2011,2012, no excess tax benefit for the tax deductions related to share-based awards was recognized for the six months ended March 31, 20112012 and 2010.

2011. As of March 31, 2011,2012, there was approximately $600,000$500,000 of total unrecognized compensation cost related to non-vested share-based employee compensation arrangements. The cost is expected to be recognized over a weighted-average period of 1.71.3 years.

13. STOCKHOLDERS’ EQUITYSTOCK PURCHASE WARRANTS

Summary

The following table summarizes changes in stockholders’ equity components during the six months endedAt March 31, 2011:

Stock Purchase Warrants

During the six months ended March 31, 2011, 1,627,945 stock purchase warrants originally issued on August 7, 2006 (the “2006 Warrants”) were exercised at a price of $2.67 for total proceeds of $4,346,613. The remaining 12,564 of the 2006 Warrants expired. On February 4, 2011, in consideration of the Warrant Holders exercising the 2006 Warrants at an exercise price above the current market price of the Company’s common stock,2012, the Company issued to the Warrant Holders new warrants exercisable for an aggregate ofhad 1,627,945 shares of common stockpurchasable under outstanding warrants (the “2011 Warrants”) at an exercise price of $2.67, per share (the “2011 Warrants”). The 2011 Warrantswhich are exercisable from August 4, 2011 through February 4, 2016. The fair value of the 2011 Warrants, which was recorded as an offset to the proceeds from the exercise of the 2006 Warrants, was estimated to be $2,164,773 using a Black-Scholes pricing model, assuming a 5.0 year expected life, a volatility of 88.5%, a risk-free interest rate of 2.26% and no expected forfeitures or dividend yield.

The Company entered into a Registration Rights Agreement with the Warrant Holders. Under this agreement, the Company agreed to prepare and file, within 30 days following the issuanceholders of the 2011 Warrants a registration statement covering the resale of the shares of common stock issuable upon exercise of the 2011 Warrants. If the registration statement is not declared effective within 90 days following the date of issuance of the securities, or(“Warrant Holders”). Under this agreement, if the Warrant Holders are otherwise unable to re-sell the shares purchased upon exercise of the 2011 Warrants, the companyCompany will be obligated to pay liquidated damages to the purchasers in the amount of $0.01335 per day per applicable share until 180 days after the date the registration statement is required to be filed, and $0.0267 per day per applicable share, thereafter, but not to exceed a total of $0.534 per applicable share or a maximum of $869,323. This obligation will be effective for the five year term of the Warrants, or until all 2011 Warrants have been exercised.

On March 2, 2011, the Company filed a registration statement on Form S-3, which satisfied its initial registration obligations under this agreement. On April 7, 2011, this registration statement became effective, which satisfied the 90 day effectiveness obligation.

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14. (LOSS) INCOME (LOSS) PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of potentially dilutive common shares outstanding during the period. The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method, which assumes that the proceeds from the exercise of the outstanding options and warrants are used to repurchase common stock at market value. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. In addition, under the treasury stock method, the inclusion of stock options and warrants with an exercise price greater than the per share market value, would be antidilutive. Potential common shares that would be antidilutive are excluded from the calculation of diluted income per share.

The following table sets forth the computation of basic and diluted earnings per share:

		Three Months Ended March 31,								Six Months Ended March 31,
		2012				2011				2012				2011
Basic
(Loss) income from continuing operations		$	(291,888	)		$	5,704,157			$	22,058			$	5,267,270
Income from discontinued operations			—				105				—				81,625
(Loss) income available to common stockholders		$	(291,888	)		$	5,704,262			$	22,058			$	5,348,895
Weighted average common shares outstanding			32,374,499				31,687,779				32,374,499				31,154,649
Basic (loss) income per common share, continuing operations		$	(0.01	)		$	0.18			$	—			$	0.17
Basic income per common share, discontinued operations		$	—			$	—			$	—			$	—
Basic (loss) income per common share		$	(0.01	)		$	0.18			$	—			$	0.17
Diluted
(Loss) income from continuing operations		$	(291,888	)		$	5,704,157			$	22,058			$	5,267,270
Income from discontinued operations			—				105				—				81,625
(Loss) income available to common stockholders		$	(291,888	)		$	5,704,262			$	22,058			$	5,348,895
Weighted average common shares outstanding			32,374,499				31,687,779				32,374,499				31,154,649
Assumed exercise of dilutive options and warrants			—				918,635				632,495				913,595
Weighted average dilutive shares outstanding			32,374,499				32,606,414				33,006,994				32,068,244
													��
Diluited (loss) income per common share, continuing operations		$	(0.01	)		$	0.17			$	—			$	0.17
Diluted income per common share, discontinued operations		$	—			$	—			$	—			$	—
Diluted (loss) income per common share		$	(0.01	)		$	0.17			$	—			$	0.17
Potentially dilutive securities outstanding at period end excluded from the diluted computation as the inclusion would have been antidilutive:
Options			2,004,075				2,220,700				1,994,075				2,220,700
Warrants			1,627,945				1,627,945				1,627,945				1,627,945
Total			3,632,020				3,848,645				3,622,020				3,848,645