Agreement of Settlement And Mutual Release

EXHIBIT 10.14

FINAL

AGREEMENT OF SETTLEMENT AND MUTUAL RELEASE

1. PARTIES . The parties to this Agreement of Settlement and Mutual Release (the " Agreement" ) are American Technology Corporation, a Delaware Corporation (" ATC" or the " Company" ) on the one hand, and eSoundIdeas, Inc, a California corporation (" eSound" ), SoundIdeas, a general partnership (" SoundIdeas" ), Greg O. Endsley, an individual (" Endsley" ) and Douglas J. Paschall, an individual (" Paschall" ), on the other hand. eSound, SoundIdeas, Endsley and Paschall are referred to collectively as the " ESI Parties." Gordon & Holmes LLP (" Gordon & Holmes" ) is a party for the limited purposes set forth in Sections 3.2, 3.5, 4 and its sub-parts, and 7.

2. RECITALS . This Agreement is made with reference to the following facts:

2.1 On September 28, 2000, SoundIdeas entered into that certain License, Purchase and Marketing Agreement (the " Original License Agreement" ), pursuant to which ATC granted to SoundIdeas certain rights to use and sell certain of ATC' s products and trademarks in exchange for certain license fees and other commitments. The Original License Agreement was purportedly amended on June 20, 2002 pursuant to a First Amendment to License, Purchase and Marketing Agreement (the " First Amendment" ) to extend the term thereof and amend certain other provisions. ATC has denied the validity of the First Amendment. The Original License Agreement, to the extent the same was amended by the First Amendment, is referred to herein as the " License Agreement."

2.2 On or about April 25, 2001, ATC granted to each of Endsley and Paschall a Nonstatutory Stock Option under ATC' s 1997 Stock Option Plan to purchase 10,000 shares of common stock at an exercise price of $4.50 per share (collectively, the " Stock Options" ). On or about December 11, 2002, ATC sent notices to Endsley and Paschall that the exercise period of the Stock Options terminated on or about October 5, 2002, as a result of the termination of Endsley' s and Paschall' s consulting services to the Company on or about July 5, 2002. Endsley and Paschall have disputed the termination of the exercise periods of the Stock Options.

2.3 On or about May 23, 2003, ATC sent a notice of termination under License Agreement to eSound, which purported to be the successor to SoundIdeas under the License Agreement. ATC believes such notice was effective immediately, subject to a 60-day right of reinstatement, which expired. The ESI Parties have disputed the validity of such termination.

2.4 On or about September 17, 2003, ATC filed a civil lawsuit in the Superior Court of the State of California for the County of San Diego entitled, after subsequent amendment, American Technology Corporation v. SOUNDideas, Greg O. Endsley, Douglas J. Paschall, eSOUNDideas, Inc. and Does 1 through 20 , Case No. GIC 818015 (the " Original Action" ). On or about November 19, 2003, ATC filed separate civil lawsuits against Endsley and Paschall in the same court entitled, respectively, American Technology Corporation v. Greg O. Endsley , Case No. GIC 821375, and American Technology Corporation v. Douglas J. Paschall , Case No. GIC 821376 (together, the " Stock Option Actions" ). Endsley, Paschall and eSound subsequently filed a cross-action against ATC in the Original Action on or about December 5, 2003. The Original Action and the Stock Option Actions (collectively the " Lawsuits" ) were thereafter consolidated by the court, with the Original Action designated as the lead case.

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2.5 It is the intention of the parties hereto to settle and dispose of, fully and completely, any and all claims, demands, causes of action, obligations, damages, and liabilities of any nature whatsoever, existing prior to the effective date hereof, whether known or unknown, asserted in, arising out of, connected with or incidental to the relationship and business dealings between ATC and the ESI Parties, the License Agreement, the Stock Options and the Lawsuits.

3. TERMS .

3.1 ATC agrees that within seven (7) days following the date of last signature on this Agreement (the " Effective Date" ), ATC will pay the aggregate of One Hundred Fifty Thousand Dollars ($150,000) to the Gordon & Holmes Client Trust Account for the benefit of eSound. Payment shall be made by ATC corporate check sent to Gordon & Holmes in accordance with Section 11.3. For tax and other reporting purposes, ATC shall treat such payment as having been made to eSound.

3.2 ATC further agrees that within seven (7) days following the Effective Date, ATC will cause its transfer agent to issue the aggregate of Seventeen Thousand Five Hundred (17,500) shares (the " Shares" ) of ATC common stock, $0.00001 par value (" Common Stock" ), to be divided as follows: 8,750 shares to Endsley and 8,750 shares to Paschall; provided that each of Endsley and Paschall hereby instructs ATC to cause 3,500 shares of his shares (for a total of 7,000 shares) to be issued in the name of Gordon & Holmes as compensation for legal fees incurred by the ESI Parties in the defense and prosecution of the claims described in Section 2.4. The share certificates to be issued by ATC shall therefore be in the following denominations: Endsley 5,250 shares Paschall 5,250 shares Gordon & Holmes 7,000 shares

ATC' s transfer agent shall be directed to deliver such share certificates by certified mail to Gordon & Holmes as promptly as practicable after issuance, but transfer agent records evidencing such issuances shall be deemed to satisfy the delivery requirement in this Section 3.2. All such shares shall be " restricted securities" as that term is defined in Rule 144(a)(3) promulgated under the Securities Act of 1933, as amended (the " Securities Act" ), and shall bear an appropriate restrictive legend.

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3.3 ATC further agrees that within seven (7) days following the Effective Date, ATC will deliver to Gordon & Holmes for the benefit of eSound two (2) HSS Generation III emitters, model number T220 (the " Emitters" ). eSound will have two (2) business days after receipt to confirm that the Emitters are in good working order. If either Emitter is not in good working order, eSound shall notify ATC in writing and provide the non-confirming Emitter with such correspondence. ATC shall replace such non-conforming Emitter with a new Emitter within seven (7) days of receipt, subject to the same two (2) business day acceptance period in favor of eSound. Emitters not rejected within such two (2) business day period shall be deemed accepted. EXCEPT AS SET FORTH ABOVE, THE EMITTERS ARE BEING DELIVERED ON AN " AS IS, WHERE IS" BASIS, WITHOUT ANY REPRESENTATIONS OR WARRANTIES AS TO CONDITION, OPERATION OR SUFFICIENCY WHATSOEVER. EXCEPT AS SET FORTH ABOVE, ATC HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO THE EMITTERS, INCLUDING ANY AND ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

3.4 ATC further agrees that Endsley and Paschall shall be entitled to receive a commission based on future sales of HSS Products (as defined below) in certain Product Categories (as defined in Exhibit B ), for the period beginning April 1, 2005 and ending September 28, 2007, equal to an aggregate of 1% of Net Sales Value (defined below), divided equally between Endsley and Paschall (i.e., 0.5% to Endsley and 0.5% to Paschall), subject to a maximum of Five Hundred Thousand Dollars ($500,000) in the aggregate (i.e., $250,000 to Endsley and $250,000 to Paschall), all as more particularly described in this Section 3.4, including its sub-parts. The term " HSS Products" shall mean products (including but not limited to Parametric Speakers (defined below), and products incorporating power modulation devices and related systems, devices, methods and processes to cause the generation of desired acoustic frequencies by means of propagation from ultrasonic frequencies), which products, if produced without an appropriate license or assignment of patent, would infringe the protectable rights in the patents and patent applications (to the extent patents were or will be granted upon such applications) set forth on Exhibit A to the Original License Agreement (the " Patent Rights" ). " Parametric Speakers" are speakers or devices that indirectly generate audible frequency tones from ultrasonic tones. Notwithstanding anything to the contrary set forth above, the term " HSS Products" shall not include any product or device based on ATC' s Long Range Acoustic Device (LRAD) platform and designed for long range hailing and warning, whether or not such product contains methods, features, designs or inventions that would infringe the Patent Rights in the absence of an appropriate license or assignment of patent.

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3.4.1 ATC shall pay to Endsley and Paschall a commission (the " Commission" ) equal to an aggregate of One Percent (1%) of Net Sales Value (as defined below), divided equally between Endsley and Paschall (i.e., 0.5% to Endsley and 0.5% to Paschall), for HSS Products sold by the Company after April 1, 2005, for use in the Product Categories (as defined in Exhibit B ). For purposes of this Agreement, the term Net Sales Value shall mean the invoice price or contract price charged by the Company in connection with the sale of an HSS Product for use in the Product Categories; provided that the invoice price shall be reduced by (i) any allowances actually made and taken for returns; (ii) cash discounts, rebates and promotional allowances actually allowed; (iii) sales, use, value-added and similar taxes and duties and similar governmental assessments to the extent included in the invoice or contract price; and (iv) transportation costs, including packing, shipping, customs and insurance charges to the extend included in the invoice or contract price. Net Sales Value shall not include revenues from: (a) extended warranties not included in the standard invoice price for a product; (b) installation, warranty service, maintenance or repair; (c) royalties or license fees (except such licenses that are incidental to the sale of HSS Products); or (d) consulting services. ATC' s internal use or consumption of an HSS Product for purposes of research, development, testing, promotion or demonstration shall not be deemed a sale. If one HSS Product is exchanged for another HSS Product, the exchange shall be considered a sale of the newly provided product but the invoice or contract price for the newly provided product shall be the monetary differential paid by the customer. The ESI Parties acknowledge that certain sales may at the Company' s discretion be made through one or more third-party distributors, and in such case, Net Sales Value shall be determined based upon the invoice price the Company charges to its distributor, reduced pursuant to clauses (i) through (iv) above. For HSS Products sold in combination with one or more other products for a single invoice or contract price, Net Sales Value shall be calculated by multiplying Net Sales Value of the combination product by the fraction A/(A+B) where A is the sales price of the HSS Product in the combination when sold separately and B is the total sales price of all other products in the combination when sold separately. If the HSS Product or the other products included in the combination are not sold separately, ATC shall allocate the total invoice or contract price among the components in good faith, which allocation shall be binding on the parties absent a showing of bad faith. For purposes of this Section 3.4.1, a sale of an HSS Product shall be deemed made when the revenue from such sale is recognized by ATC in accordance with generally accepted accounting principles.

3.4.2 ATC shall retain all records pertaining to Net Sales Value (i.e., sales and accounting records for transactions) supporting calculation of Commission payments until a date not earlier than September 28, 2008. Endsley and Paschall, through an independent public accounting firm, shall have the right to jointly audit such records. The costs of such audit will be paid entirely by Endsley and Paschall, unless the audit shows an underpayment of more than the greater of (i) ten percent (10%) of the total Commission due to Endsley and Paschall, combined, for the entire period covered by the audit (which period shall commence no earlier than the completion date of the last audit), or (ii) $2,500 (a " Qualifying Underpayment" ). In case of a Qualifying Underpayment, ATC shall pay the reasonable cost of the audit at the same time it pays the Commissions due. Such audit shall be commenced by written notice given by both Endsley and Paschall. Endsley and Paschall shall not be entitled to more than one (1) joint audit per twelve-month period unless a prior audit shall have disclosed a Qualifying Underpayment, in which case, Endsley and Paschall shall thereafter be entitled to two (2) joint audits during any twelve-month period (including the prior audit showing the Qualifying Underpayment). ATC may require Endsley, Paschall and such independent public accountants first to sign a confidentiality and/or a non-disclosure agreement reasonably satisfactory to the Company in which they agree not to use or disclose any confidential information of ATC, including customer identities. The independent public accountants shall provide a written report following each such audit, and shall provide a copy of such report to ATC. Such report shall not be deemed conclusive as to the amount of Commissions due. Disputes concerning the amount of Commissions due shall be handled in the manner set forth in Section 3.4.9 below.

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3.4.3 Notwithstanding any other provision in this Section 3.4, no Commission shall accrue or be payable by ATC with respect to sales deemed made after September 28, 2007 (determined in accordance with the last sentence of Section 3.4.1).

3.4.4 Notwithstanding any provision in this Section 3.4 to the contrary, the maximum Commissions that shall be payable to Endsley and Paschall will be Five Hundred Thousand Dollars ($500,000) in the aggregate (i.e., $250,000 to Endsley and $250,000 to Paschall). Nothing in this Section 3.4 or elsewhere in this Agreement shall be construed to grant to any of the ESI Parties any rights to Commissions in excess of $500,000 in the aggregate.

3.4.5 Commissions payable to Endsley and Paschall under Section 3.4.1 shall be paid on a quarterly basis. Commissions due for sales made during each calendar quarter shall be payable in cash and shall be paid by ATC corporate check made out to the Gordon & Holmes Client Trust Account and delivered to Gordon & Holmes (in accordance with Section 11.3) within forty (40) days following the end of calendar quarter.

3.4.6 The obligations in this Section 3.4 shall be binding upon ATC and each person or entity who takes by assignment, license or other means ATC' s rights to manufacture and sell HSS Products within the Product Categories. For the avoidance of doubt, the obligations in this Section 3.4 are not binding on persons or entities who distribute HSS Products within the Product Categories, where such products are manufactured by or for ATC, whether or not such distributors have exclusive distribution rights and whether or not such distributors provide specifications for the products so manufactured. Sales to such distributors will be deemed sales by ATC as provided in Section 3.4.1.

3.4.7 ATC shall have the right but not the obligation to buy out its obligations pursuant to this Section 3.4 at any time by paying to Endsley and Paschall an aggregate amount in cash equal to Five Hundred Thousand ($500,000) minus all Commissions previously paid pursuant t ...