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<SEC-DOCUMENT>0000950148-03-000616.txt : 20030327
<SEC-HEADER>0000950148-03-000616.hdr.sgml : 20030327
<ACCEPTANCE-DATETIME>20030326205840
ACCESSION NUMBER:		0000950148-03-000616
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		7
CONFORMED PERIOD OF REPORT:	20021231
FILED AS OF DATE:		20030327

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SPATIALIZER AUDIO LABORATORIES INC
		CENTRAL INDEX KEY:			0000890821
		STANDARD INDUSTRIAL CLASSIFICATION:	SEMICONDUCTORS & RELATED DEVICES [3674]
		IRS NUMBER:				954484725
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-26460
		FILM NUMBER:		03619295

	BUSINESS ADDRESS:	
		STREET 1:		20700 VENTURA BOULEVARD SUITE 140
		CITY:			WOODLAND HILLS
		STATE:			CA
		ZIP:			91364
		BUSINESS PHONE:		3102273370

	MAIL ADDRESS:	
		STREET 1:		20700 VENTURA BLVD SUITE 140
		CITY:			WOODLAND HILLS
		STATE:			CA
		ZIP:			91364
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>v88363e10vk.htm
<DESCRIPTION>FORM 10-K
<TEXT>
<HTML>
<HEAD>
<TITLE>Spatializer Audio Laboritories, Inc., Form 10-K</TITLE>
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<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

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<P align="center"><FONT size="2"><B>UNITED STATES</B></FONT>

<P align="center"><FONT size="2"><B>SECURITIES AND EXCHANGE COMMISSION</B></FONT>

<P align="center"><FONT size="2"><B>Washington, D.C. 20549</B></FONT>

<P>
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<P>


<P align="center"><FONT size="2"><B>FORM 10-K</B></FONT>

<P>
<HR width="26%" align="center" size="1" noshade>


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    <TD width="3%">&nbsp;</TD>
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    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="83%">&nbsp;</TD>
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    <TD colspan="3" valign="top" align="center"><FONT size="2"><B>(Mark One)</B></FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2"><BR></FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2"><B>&#091;X&#093;</B></FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2"><B>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2"><BR></FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
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<TR valign="bottom">
    <TD colspan="9" align="center"><FONT size="2"><B>For the period ended: December&nbsp;31, 2002</B><BR></FONT></TD>
</TR>

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    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2"><BR></FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="9" align="center"><FONT size="2"><B>OR</B><BR></FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2"><BR></FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2"><B>&#091;&nbsp;&nbsp;&nbsp;&#093;</B></FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="5" align="left"><FONT size="2"><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B><BR></FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2"><B>Commission File Number: 33-90532</B></FONT>

<P align="center"><FONT size="5"><B>SPATIALIZER AUDIO LABORATORIES,
INC.</B></FONT><BR>
<FONT size="2"><B>(Exact name of registrant as specified in its charter)</B></FONT>

<CENTER>
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    <TD width="10%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><FONT size="2"><B>Delaware<BR>
(State or other jurisdiction of<BR>
incorporation or organization)</B></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
<B>95-4484725<BR>
(I.R.S. Employer<BR>
Identification No.)</B></FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2"><B>920 Hampshire Road, Suite&nbsp;A-34<BR>
Westlake Village, California 91361</B><BR>
(Address of principal executive offices)
</FONT>

<P align="center"><FONT size="2"><B>900 Lafayette Street, Suite&nbsp;710<BR>
Santa Clara, California 95050</B><BR>
(Address of principal corporate offices)
</FONT>

<P align="center"><FONT size="2"><B>Telephone Number:
(408)&nbsp;296-0600</B><BR>
(Registrant&#146;s telephone number, including area code)
</FONT>


<P align="center"><FONT size="2"><B>Securities registered pursuant to
Section&nbsp;12(b) of the Act:<BR>
None</B>
</FONT>

<P align="center"><FONT size="2"><B>Securities registered pursuant to
Section&nbsp;12(g) of the Act:<BR>
Common Stock, $0.01 par value</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant (1)&nbsp;has filed all reports
required to be filed by Section&nbsp;13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12&nbsp;months (or for such shorter period that the
registrant was required to file such reports), and (2)&nbsp;has been subject to such
filing requirements for the past 90&nbsp;days:&nbsp;&nbsp;&nbsp;Yes&nbsp;&nbsp;&#091;X&#093;&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;&nbsp;&#091;&nbsp;&nbsp;&nbsp;&#093;
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation&nbsp;S-K is not contained herein, and will not be contained, to
the best of the registrant&#146;s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form&nbsp;10-K or any
amendment to this Form&nbsp;10-K.&nbsp;&nbsp;&#091;X&#093;
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check
mark whether the registrant is an accelerated filer (as defined in
Rule&nbsp;12b-2 of the Act).&nbsp;&nbsp;&nbsp;Yes&nbsp;&nbsp;&#091;&nbsp;&nbsp;&nbsp;&#093;&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;&nbsp;&#091;X&#093;
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the price at which the common
equity was last sold as of the last business of the registrant&#146;s most
recently completed second quarter (June&nbsp;29, 2002) was
approximately $3,880,000 and at March&nbsp;5, 2003 was approximately
$1,944,000. In addition, affiliates held non-voting preferred stock valued at $879,670, plus
accrued dividends, at both June&nbsp;29, 2002 and March&nbsp;5, 2003.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of March&nbsp;5, 2003, there were 47,406,939 shares of the Registrant&#146;s
Common Stock outstanding.
</FONT>


<P align="center"><FONT size="2"><B>DOCUMENTS INCORPORATED BY REFERENCE</B>
</FONT>


<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Portions of the
definitive proxy statement for the 2003 Annual Meeting are
incorporated by reference into Part&nbsp;III hereof.
</FONT>



<P>
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<HR size="4" noshade color="#000000" style="margin-top: -10px">

<P align="center"><FONT size="2">&nbsp;
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>

<!-- TOC -->
<A name="toc"><DIV align="CENTER" style="page-break-before:always"><U><B>TABLE OF CONTENTS</B></U></DIV></A>

<P><CENTER>
<TABLE border="0" width="90%" cellpadding="0" cellspacing="0">
<TR>
	<TD width="3%"></TD>
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	<TD width="3%"></TD>
	<TD width="76%"></TD>
</TR>
<TR><TD colspan="9"><A HREF="#000">PART I</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#001">Item&nbsp;1.&nbsp;&nbsp;Business</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#002">Item&nbsp;2.&nbsp;&nbsp;Properties</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#003">Item&nbsp;4.&nbsp;&nbsp;Submission of Matters to a Vote of Security Holders</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#004">Item&nbsp;5.&nbsp;&nbsp;Market for Registrant&#146;s Common Equity and Related Stockholder Matters</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#005">Item&nbsp;6.&nbsp;&nbsp;Selected Consolidated Financial Data</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#006">Item&nbsp;7.&nbsp;&nbsp;Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#007">Item 8. Financial Statements</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#008">Item&nbsp;9.&nbsp;&nbsp;Change in and Disagreements with Accountants on Accounting and Financial Disclosure</A></TD></TR>
<TR><TD colspan="9"><A HREF="#009">PART III</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#010">Item&nbsp;10.&nbsp;&nbsp;Directors and Executive Officers of the Registrant</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#011">Item&nbsp;11.&nbsp;&nbsp;Executive Compensation</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#012">Item&nbsp;12.&nbsp;&nbsp;Security Ownership of Certain Beneficial Owners and Management</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#013">Item&nbsp;13.&nbsp;&nbsp;Certain Relationships and Related Transactions</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#014">Item&nbsp;14.&nbsp;&nbsp;Controls and Procedures</A></TD></TR>
<TR><TD colspan="9"><A HREF="#015">PART IV</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#016">Item&nbsp;15.&nbsp;&nbsp;Exhibits, Financial Statement Schedules and Reports on Form&nbsp;8-K</A></TD></TR>
<TR><TD colspan="9"><A HREF="#017">SIGNATURES</A></TD></TR>
<TR><TD colspan="9"><A HREF="v88363exv3w5.txt">EXHIBIT 3.5</A></TD></TR>
<TR><TD colspan="9"><A HREF="v88363exv3w6.txt">EXHIBIT 3.6</A></TD></TR>
<TR><TD colspan="9"><A HREF="v88363exv3w7.txt">EXHIBIT 3.7</A></TD></TR>
<TR><TD colspan="9"><A HREF="v88363exv4w31.txt">EXHIBIT 4.31</A></TD></TR>
<TR><TD colspan="9"><A HREF="v88363exv21w1.txt">Exhibit 21.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="v88363exv99w1.txt">EXHIBIT 99.1</A></TD></TR>
</TABLE>
</CENTER>
<!-- /TOC -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "PART I" -->
<DIV align="left"><A NAME="000"></A></DIV>
<P align="center"><FONT size="2"><B>PART I</B></FONT>

<!-- link2 "Item&nbsp;1.&nbsp;&nbsp;Business" -->
<DIV align="left"><A NAME="001"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;1.&nbsp;&nbsp;</B><B><I>Business</I></B></FONT>

<P align="left"><FONT size="2"><I>Overview</I></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Audio Laboratories, Inc. (&#147;Company&#148; or &#147;we&#148;) is a developer,
licensor and marketer of next generation technologies for the consumer
electronics, personal computing, enterprise computing and entertainment
industries. Our position as a developer of next generation technologies is
based on our business relationships with brand leaders, such as Apple, Toshiba
and Matsushita. We conduct our audio business through our parent company and
our wholly owned subsidiary, Desper Products, Inc. (&#147;DPI&#148;). DPI has developed a
full complement of patented and proprietary 3-D or virtual audio signal
processing technologies directed to the consumer electronics and multimedia PC
markets. We continue to expand our product offerings to take advantage of the
emerging digital audio marketplace specifically for consumer products like
Digital Versatile Disc (&#147;DVD&#148;) players, portable mp3 players, digital
televisions and digital home, portable and auto entertainment devices. As of
December&nbsp;31, 2002, more than 40&nbsp;million licensed units had been shipped
covering all of these applications. DPI&#146;s virtual audio signal processing
technologies are currently incorporated in products offered by global brand
leaders including in consumer electronics, Toshiba, Panasonic, JVC,
Samsung, Sanyo, and Sharp, in the PC multimedia
marketplace by Apple Computer, among others, and on the Internet through our
VSP-11 universal sound processor and in software plug-ins for the WinAmp and
Linux-based XMMS MP3 players. We are focused on broadening recognition of the
Spatializer brand name through association with these and other globally
recognized consumer electronics and multimedia computer brand leaders, and on
broadening our audio technology and software base to position ourselves for
continued growth. We believe that with the accelerating growth in the digital
audio/video marketplace, the market for virtual audio technologies, and
therefore for our products, is entering a new phase of opportunity.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our other wholly owned subsidiary, MultiDisc Technologies, Inc., (&#147;MDT&#148;)
formed in June 1996 when we acquired development stage optical disc storage and
robotics assets and technologies from Home Theater Products International,
Inc., a debtor in possession, is now inactive. In September 1998, we announced
our plan to refocus our business on the exploitation of our core audio
technologies, suspend research and development at MDT and to properly position
the MDT assets for sale. Therefore, MDT has been accounted for as a
discontinued operation. Since 1998, we have been unsuccessful in identifying a
purchaser for the MDT assets or technology. Our repositioning in 1998
recognized that the capital investment required to properly commercialize the
MDT technology was beyond our capacity. We believe this strategy provides a
better opportunity to further solidify our position as a provider of virtual
audio solutions, based on our available capital resources.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We were
incorporated in the State of Delaware in February, 1994. Our corporate office and research center is located at 900 Lafayette
Street, Suite&nbsp;710, Santa Clara, California 95050, Telephone (408)&nbsp;296-0600. We
also maintain offices at 920 Hampshire Road, Suite&nbsp;A-34, Westlake Village,
California 91361. We have a Website at <I>www.spatializer.com</I>. Copies of this Annual
Report, including our financial statements, and our quarterly reports on Form&nbsp;10-Q as well as other
corporate information of interest to our stockholders are available
on our website promptly after filing or distribution.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Desper Products, Inc. &#151; Virtual Audio Signal Processing Technologies</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DPI has developed a suite of proprietary advanced audio signal processing
technologies for the entire spectrum of applications falling under the general
category of virtual audio. The objective in each product category is to create
or simulate the effect of a multi-speaker sonic environment using two ordinary
speakers (or headphones) for playback. The market for virtual audio is
segmented into six broad categories of technology as identified in the listing
below. Each of these technologies utilizes different underlying scientific
principles in accomplishing its design objectives and is targeted to a specific
class of consumer electronics or multimedia computer depending on the intended
product use and functional capability of the product. DPI currently has other
audio signal processing technologies under development which will serve to
expand its market scope and partner product capabilities.
</FONT>

<P align="center"><FONT size="2">2
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
    <TD width="29%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="25%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Virtual Audio</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center"><FONT size="1"><B>Category of Technology</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Product Categories</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Enhancement</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><FONT size="2">3-D Stereo<br>
<I>(Spatializer&#174; 3-D Stereo)<BR>
SpatializerVirtualSurround<BR>
VBX&#153;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Consumer electronics products <I>providing
stereo playback &#151; DVD </I>Players, Stereo TV&#146;s,
VCR&#146;s, Stereo Components and Systems, Car
Audio, Laptop and Desktop Multimedia
Computers, Set-top Boxes
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">Surround Sound enhancement<BR>
from an <I>ordinary<BR>
stereo(two-channel) signal</I></FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>&nbsp;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Two-SpeakerVirtualization<br>
<I>(Spatializer N-2-2&#153;,<BR>
Spatializer N-2-2Ultra&#153;)</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Products incorporating <I>multi-channel audio
sources like </I>Dolby Digital&#174; (AC-3),
DolbyProLogic&#174; or MPEG-2. Home Theater,
DVD-Video, Multimedia
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">Creation of spatially
accurate <I>multi-speaker
cinematic audio </I>experience
from two speakers, and
headphones utilizing
discrete multi-channel
audio information.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>&nbsp;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>Digital Virtual
Surround Sound</I>
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Computers utilizing DVD/MPEG and decoding.
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>&nbsp;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>Bass Enhancement
(Vi.B.E.&#153;)</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Consumer electronics products providing
stereo playback &#151; DVD Players, Stereo TV&#146;s,
VCR&#146;s, Stereo Components and Systems, Car
Audio, Laptop and Desktop Multimedia
Computers and Speakers
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">Simulation of lower
frequency response from
speakers with relatively
high low frequency
capability</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>&nbsp;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Internet Audio Enhancement<br>
<I>(Spatializer&#174;VSP-11,<BR>
StreamFX&#153;)</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Laptop and Desktop Multimedia <I>Computers and
portable music </I>devices running digital media
player Software
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">Surround Sound
and bass <I>enhancement to playback of</I>
ordinary internet audio
files</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>&nbsp;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Headphone Virtualization<br>
<I>(Spatializer Natural<BR>
Headphone&#153;)<BR>
Digital Virtual Surround</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Products incorporating <I>multi-channel audio
sources like </I>Dolby Digital&#174; (AC-3), Dolby
ProLogic&#174;, MPEG-2 or stereo. Home Theater,
DVD-Video, Multimedia Computers utilizing
DVD/MPEG Decoding or stereo.
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">Creation of spatially
accurate <I>multi- speaker
cinematic audio </I>experience
from headphones utilizing
discrete multi-channel
audio information.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>&nbsp;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>Phase Corrected Equalization<BR>
(Spatializer PCE&#153;)</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
All audio products with one or more speakers
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">Creation of more
recognizable and &#147;cleaner&#148;
music or dialog from
broadcast media sources</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>&nbsp;</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2"><I>Matrixed Surround Sound<BR>
(Spatializer enCompass AV&#153;)</I></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
All audio products with five or more speakers
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">Creation of actual
surround sound (5.1 or
more channels) from mono
or stereo sources</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="left"><FONT size="2"><B>Licensed Products</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our current technology product applications are directed to (1)
two-speaker and headphone virtualization of multi-channel audio for DVD players
and home theater applications, (2)&nbsp;stereo and bass enhancement in consumer
electronics products and multimedia PCs, and (3)&nbsp;downloadable software,
purchased directly by consumers, delivering audio enhancement applications for
PCs.
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><B><I>1.</I></B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><B><I>Spatializer</I></B>&#174; <B><I>3D Stereo. </I></B>Based upon proprietary and patented methods
of stereo signal processing, the Company&#146;s <I>Spatializer&#174; 3-D Stereo</I>
technology is designed to create a vivid and expansive three-
dimensional surround sound listening experience from any stereo source
input using only two ordinary speakers. Along with professional audio
quality and coherent stable sonic imaging, the technology includes the
Company&#146;s unique DDP&#153; (Double Detect and Protect&#153;) algorithm. DDP&#153;
continuously monitors the underlying stereo signal and dynamically
optimizes spatial processing, avoiding deleterious sonic artifacts
common in other systems and provides &#147;set and forget&#148; ease of use for
consumers. First introduced in July 1994 by DPI, in the </FONT></TD>
</TR>
</TABLE>

<P align="center"><FONT size="2">3
</FONT>

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<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2">&nbsp;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">form of a 20 pin
analog integrated circuit (IC)&nbsp;from Matsushita Electronics Corporation
(&#147;MEC&#148;), the technology is now incorporated into low-cost, standard
process ICs by four chip foundries (Matsushita, ESS Technologies, Inc.,
OnChip Systems and Luxsonor) for easy and inexpensive implementation in
any consumer electronics or computer products utilizing stereo audio.
The technology is currently available in both analog and digital
formats. Matsushita introduced a new Spatializer IC design in 1999,
offering the <I>Spatializer 3-D Stereo </I>effect in a simplified, lower cost
package. In early 2002, we introduced a new algorithm-based technology
which provides a virtual surround sound effect from a two channel input
for DSP-based environments.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><B><I>2.</I></B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><B>Spatializer</B>&#174; <B><I>N-2-2&#153;Digital Virtual Surround</I></B>. In September 1996, DPI
introduced <I>Spatializer N-2-2, </I>which the Company considers a &#147;core&#148;, and
&#147;enabling&#148; technology for DVD based home theater products and personal
computers. In mid-2001, DPI introduced <I>Spatializer N-2-2 Ultra </I>as the
latest generation of this core audio technology. Through outstanding
performance and continuous enhancement, Spatializer N-2-2 has emerged as
the &#147;de facto standard&#148; for branded virtual surround sound as measured
by most brand adoptions, cumulative shipments and market share of such
brands in the DVD player market. DVD is considered by many to be the
single most important and fastest adopted consumer audio/computer
technology ever introduced. The audio standards for DVD (based upon
geographic region) are multi-channel audio formats (Dolby Digital&#174;
(AC-3) and MPEG-2) which carry six (or more) discrete (independent)
channels of audio &#151; the front left and right channels, a center channel
(for vocal tracks), two rear surround channels and a Low Frequency
Effects (LFE or &#147;sub-woofer&#148;) channel for sound effects. The <I>Spatializer
N-2-2 </I>software- based algorithms permit spatially accurate reproduction
of this multi-channel audio over any ordinary stereo system using two
rather than the five or six speakers normally required in traditional
home theater setups. <I>Spatializer N-2-2 </I>runs in real-time on general
purpose Digital Signal Processing (&#147;DSP&#148;) hardware platforms like those
offered by LSI, Acer Labs, Inc., Motorola, VM Labs and Zoran; may be
integrated with host based software-only MPEG-2 or DVD decoders (like
WinDVD and PowerDVD, offered by InterVideo and Cyberlink, respectively,
for the Intel&#174; Pentium&#174; series of microprocessors); and can be ported to
any of the principal audio codecs or media processor/accelerator
platforms performing Dolby Digital (AC-3) or MPEG-2 audio decoding.
<I>Spatializer N-2-2 </I>has been approved by Dolby Laboratories and qualifies
Spatializer licensees to use the newly created Dolby Digital VIRTUAL&#153;
trademark on products incorporating the technology. We believe our
<I>Spatializer N-2-2 </I>process has helped to widen and accelerate the market
for DVD acceptance, because it delivers the full cinematic audio
experience to ordinary consumers without the additional expense and
complication of multi-speaker home theater playback systems.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><B><I>3.</I></B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><B>Spatializer</B>&#174; <B><I>Vi.B.E</I></B>&#153;. In early 1999, DPI introduced Spatializer
Vi.B.E., a virtual bass enhancement technology. Spatializer Vi.B.E.
produces a dynamic bass response from even the lowest-end speakers or
headphones. This is particularly important in enhancing the audio of all
forms of portable digital audio devices. Spatializer Vi.B.E. uses
proprietary technology to generate the perception of realistic bass
frequencies that are unaffected by actual speaker system frequency
response capability.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><B><I>4.</I></B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><B>Spatializer</B>&#174; <B><I>VSP-11</I></B>&#153;. First introduced by DPI in early 2002,
Spatializer&#174; VSP-11 (Virtual Sound Processor 11) is a stand-alone
application program for Microsoft Windows 95, 98, ME, 2000 and XP
platforms that utilizes Spatializer&#146;s proprietary psychoacoustic
techniques to allow consumers to enjoy the benefits of the renowned
Spatializer audio enhancement technologies on all leading media players,
soft DVD players and file sharing programs. This means that Spatializer
VSP-11 is truly a universal audio enhancement software package that will
enhance output from the Microsoft<I>&#174; </I>Media Player, Real Player<I>&#174;</I>, Real
Jukebox<I>&#174;</I>, WinAmp<I>&#174;</I>, WinDVD<I>&#174;</I>, PowerDVD<I>&#174;</I>, among others, without any special
modification. It will run in conjunction with any sound card, as well as
with USB audio.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><B><I>5.</I></B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><B>Spatializer</B>&#174; <B><I>Natural Headphone</I></B>&#153; Spatializer Natural Headphone,
introduced by DPI in March 2001, renders spatially accurate multiple
speaker positions simulating the typical home theater or stereo
arrangement through a headphone. The headphone algorithm delivers a high
performance simulated surround sound experience, using a reasonable
amount of processing power at a reasonable cost. Thus, this solution is
equally practical and effective for both low-power portable devices and
home theater applications. Unlike typical virtual surround sound
headphone solutions, which rely heavily on reverberation which can sound
unnatural, Spatializer Natural Headphone utilizes a combination of
techniques to provide an expanded, yet natural sound field.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><B><I>6.</I></B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><B>Spatializer</B>&#174; <B><I>PCE</I></B>&#153; Spatializer PCE, introduced in October 2001, makes
high frequencies clearer, crisper and more brilliant while low
frequencies are more dramatic, tighter and have more impact.
Spatializer&#174; PCE gives the manufacturer an inexpensive way to
dramatically improve the sound of low-end loudspeakers, such as the kind
found in televisions, boom boxes and computers. Spatializer PCE is also
ideal for improving the quality of Internet audio, which can sound
rather lackluster and dull due to compression or low bit rates. It can
be applied prior to encoding audio streams, and can just as easily
enhance the playback of the decompressed audio. It can improve the
clarity, intelligibility and impact of both dialog and music.
Spatializer </FONT></TD>
</TR>
</TABLE>

<P align="center"><FONT size="2">4
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2">&nbsp;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">PCE works by both modifying and smoothing non-linear phase
response and by creating psycho-acoustic cues. Typical equalization
techniques cause phase distortion (non-zero group delay) due to
non-linear phase response. Spatializer PCE has a nearly-linear phase
response, which results in a near-zero group delay. This improves the
&#147;naturalness&#148;, or transparency of the dialog or music by not adding to
phase distortion already present in many playback systems.. Spatializer
PCE can be custom tailored for two or an array of speaker
configurations. Indeed, the technology, without a surround sound effect,
can enhance single speaker applications as well.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><B>7.</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><B>Spatializer</B>&#174; <B><I>enCompass AV</I></B>&#153; Spatializer enCompass AV, launched in late
2002, is designed to offer high quality, multi-channel audio, even from
mono or stereo sources. This technology allows owners of home theater
systems with five or more speakers to hear a surround sound effect,
utilizing all of their speakers to deliver full system utility from CDs,
cassettes or VHS tape or records.</FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to these technologies, we offer a series of products
introduced by DPI under the Spatializer DigitalFX&#153; brand, first introduced in
early 2000. The Spatializer DigitalFX series is a comprehensive audio
enhancement software solution based on the Company&#146;s Spatializer N-2-2 virtual
surround sound technology, Spatializer Vi.B.E and Spatializer PCE, combined
with additional audio effects tailored and optimized for specific product
applications. This powerful combination of technologies in a single product
targeted for specific product applications provides a highly efficient and cost
effective solution for the television, portable digital music, PDA, AV
Receiver, PC and car audio markets.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Digital TVFX&#153; is a customized application of Spatializer
technology optimized for digital and analog televisions with an on board
digital signal processor. Spatializer integrates its original, patented 3D
Stereo and N-2-2 technologies with speaker-compensation and Vi.B.E. bass
enhancement algorithms. The digital processing of the stereo signal provides a
striking and immersive audio experience while the virtual bass enhancement
creates apparently deeper bass response from the small speakers utilized by
most televisions. Optional reverb and equalizer features further enhance the
audio experience. The result is a dramatic improvement to the overall audio
sound field provided by the television. Spatializer Digital TVFX is 100%
digital, and applicable to any TV system with an embedded DSP.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Digital OntheGoFX&#153; is targeted specifically for portable
digital music players and Personal Data Assistants (PDAs). According to
industry analysts, the portable digital player market is expected to grow
significantly once the music industry establishes economically feasible, secure
and convenient modes of electronic music distribution. Spatializer Digital
OntheGoFX shares the same core 3D stereo technology as other members of the
Spatializer DigitalFX series, but includes a highly effective headphone
algorithm which produces an expanded headphone audio experience. In addition,
the included Vi.B.E technology is particularly effective in improving the
limited bass response of inexpensive lightweight stereo headphones often
incorporated into these devices. The algorithms are highly efficient, utilizing
a minimal amount of MIPS any standard embedded DSP.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Digital PCFX&#153; combines the entire suite of respected
Spatializer audio technologies into a single, comprehensive and cost effective
software audio solution for the Wintel platform. Since the product runs on the
host CPU, with minimal CPU utilization, no discrete chip is required.
Spatializer Digital PCFX provides Spatializer 3-D stereo, Spatializer N-2-2
virtual surround sound for DVD playback, Vi.B.E virtual bass enhancement and
enCompass&#153; , Spatializer&#146;s positional audio technology for computer games
utilizing the Microsoft DirectX&#153; API. Apple Computer began utilizing
Spatializer technology across their product platforms in October 1999.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Digital AVFX&#153; is tailored for AV Receivers equipped with a
Dolby Digital decoder. Spatializer Digital AVFX provides Spatializer 3-D
stereo, Spatializer N-2-2 virtual surround sound for DVD audio or video
playback, Vi.B.E virtual bass enhancement and in the future, extensive room
modeling and customized effects.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Digital AutoFX&#153; enhances the audio performance of DSP-based
car stereo systems by delivering Spatializer&#146;s 3-D stereo, bass
enhancement, equalizer and reverb technology in a single solution. Optional
positional audio voice cues for on board GPS and navigation systems, virtual
surround sound for on board DVD player systems and space modeling will be
offered on an optional and customized basis based on specific customer need.
</FONT>

<P align="center"><FONT size="2">5
</FONT>

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<P align="left"><FONT size="2"><B>Licensing Activities</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Until 2000, we licensed our technologies primarily through semiconductor
manufacturing and distribution licenses (&#147;Foundry Licenses&#148;) with semiconductor
foundries. In turn, the foundries manufacture and distribute integrated
circuits ICs (integrated circuits) or DSPs (digital signal processors)
incorporating Spatializer technology to consumer electronics and multimedia
computer OEMs.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2000, we began offering foundries the option of entering into a
non-royalty bearing distribution agreement with us. Under this business model,
the foundry offers Spatializer technology as an optional feature, promotes our
technology in their sales materials and cooperates with the Spatializer sales
force in closing license agreements for Spatializer technology with the OEM
customer. This business model provides the foundry with an additional selling
feature at no additional cost to the foundry. The OEM can obtain use of the
technology directly from Spatializer without any additional mark-up from the
foundry.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The terms of all of our licenses are negotiated on an individual basis
requiring the payment of a per unit running royalty according to sliding scales
based upon cumulative volume. Some of our licenses call for the payment of an
up-front license issuance fee either in lieu of, or in addition to the running
royalty. Other agreements require the OEM customer, rather than the foundry, to
pay the royalty. Per unit royalties are generally reportable and payable 45
days after the end of the quarter following shipment from the Foundry to the
OEM or, in the case of a distribution agreement, by the OEM to its accounts.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;OEMs who desire to incorporate these DSPs or ICs into their products are
required to enter into a license (&#147;OEM Licenses&#148;) with us before they may
purchase the ICs in quantity. Foundry Licenses generally have limited the sale
of DSPs or ICs with Spatializer technology to OEMs who have entered into an OEM
License with us. OEM licenses generally provide for the payment of a further
per unit royalty by the OEM for OEM products incorporating a Spatializer IC
(&#147;Licensed Products&#148;) payable in the quarter following shipment by the OEM of
its Licensed Products.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In early 2001, we reached an agreement with C-Cube Semiconductor II (now
LSI Logic Corporation) to unbundle the royalty on their DSPs in order to
facilitate the licensing of multiple technologies to OEM manufacturers and to
help ensure that their products remained highly competitive in the market. As
such, effective April&nbsp;1, 2001, C-Cube&#146;s customers using Spatializer technology
have entered into direct licenses with us.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are currently negotiating new IC/DSP Foundry and OEM licenses with
potential customers for Spatializer N-2-2 Ultra, Spatializer Vi.B.E.,
Spatializer Natural Headphone , Spatializer PCE and combinations and
optimizations of these technologies under the Spatializer DigitalFX series.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>IC/DSP Foundry Licenses</I>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2000 and early 2001, VM Labs, Inc., MIPS Technologies, New Japan Radio
Corporation (&#147;NJRC&#148;), Tvia, Inc. and Link Up Systems entered into Foundry
License or Distribution Agreements for Spatializer N-2-2 and or DigitalFX. All
but the NJRC agreements were non-royalty bearing distribution agreements, with
per unit royalties to be paid by the OEM customer.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2001, we entered into license or distribution agreements with Texas
Instruments, Cirrus Logic, Sanyo, Sharp and Kenwood, among others.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2002, we entered into Distribution agreements with Mediatech, Amlogic,
LSI Logic and Samsung Semiconductor for the porting and distribution of our
technologies to OEM manufacturers. These Distribution agreements grant the
right to port and or distribute our technology only to licensed customers of
Spatializer, who then pay a royalty for the use of such technologies.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2002, we have entered into thirteen non-exclusive
Foundry Licenses for our Virtual Audio Signal Processing technologies with
Matsushita Electronics Corporation (&#147;MEC&#148;), ESS Technology, Inc. (&#147;ESS&#148;),
OnChip Systems, Inc. (&#147;OnChip&#148;), C-Cube Technologies, Inc. (&#147;C-Cube&#148;), Acer
Labs, Inc. (&#147;Ali&#148;), Luxsonor, VM Labs, Inc., MIPS Technologies, NJRC, Tvia,
Inc., Texas Instruments, Cirrus Logic and Link Up Systems. Foundry Licenses
generally require the payment of per unit running royalties based upon a
sliding scale computed on the number of Spatializer ICs or DSPs sold.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2002, more than 40&nbsp;million ICs and DSPs incorporating
Spatializer audio signal processing technology had been manufactured and sold.
</FONT>

<P align="center"><FONT size="2">6
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>OEM Licensees and Customers</I>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2002, our technology has been incorporated in products
offered by more than 100 separate OEM Licensees and customers on various
economic and business terms. Some of these OEM Licenses required a license
issuance fee and/or a separate per unit royalty, while others were licensed
under the LUA or were authorized customers under bundled royalty licenses with
the IC foundries. The OEM licensees and customers offer a wide range of
products, which include DVD players, car stereo systems, direct view TVs, wide
screen and projection TVs, VCRs, powered speakers, portable audio systems
(&#147;Boomboxes&#148;), HiFi stereo systems and components, computer sound cards and
graphics accelerator cards, multimedia desktop personal computers, notebook
computers, LCD projectors, multimedia computer monitors, and arcade pinball and
video games.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2002, four major customers, not presented in order of importance, each
accounted for 10% or more of our total revenues: Apple Computer, Inc., JVC,
Samsung and Toshiba Corporation, each of whom accounted for greater than 10% of
our total 2002 revenues. One OEM accounted for 33%, another accounted for 25%,
another accounted for 17% and one accounted for 10% of our royalty revenues
during 2002. One other account comprised 9% of total 2002 revenues. All other
OEM&#146;s accounted for less than 5% of royalty revenues
individually. During 2003 we anticipate a significant reduction in
the revenues from Apple as it completes its migration to its newest
operating system.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table is a partial list of the OEM Licensees and authorized
customers as of December&nbsp;31, 2002:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
    <TD width="45%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="left"><FONT size="1"><B>Partial List of OEM Licensees or Customers</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><FONT size="2">Amlogic</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
NEC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Apple Computer Inc.</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Panasonic TV &#038; VCR (Matsushita Kotobuki
Electronics Industries, Ltd.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Cirrus Logic</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Panasonic Car Audio (Matsushita Communications
Industrial Co., Ltd.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Emerson</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Proton Electronic Industrial Co., Ltd.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Fujitsu Computer Corp.</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Samsung</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Hewlett Packard</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Seiko Epson Corp.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Hitachi, Ltd.</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Sanyo Corp.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Iiyama Electric Co., Ltd.</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Sharp Corp.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Gateway Computer Corp.</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Toshiba DVD</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Golden Regent</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Toshiba TV</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">LG Electronics</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Taisei Electric, Inc.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">JVC</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Taiyo Electric Company, Ltd.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Labtec Enterprises, Inc.</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Texas Instruments</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Mag Monitors</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Theta Digital</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Marantz</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
VM Labs, Inc.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Mediatech</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Zenith</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Mitsubishi Image and Information Works</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As is evident from
the above list we have extensive relationships with OEM licensees and
customers outside the United States and, in fact, Japanese and Korean
based entities accounted for 50% and 17%, respectively in 2002. The
products incorporating our technology are, in turn, sold throughout
the world, in market segments and amounts that are consistent with the overall general world markets for
consumer electronics and software.
</font>
<P align="left"><FONT size="2"><B>Hardware Products</B></FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="right" nowrap><FONT size="2"><I>&nbsp;</I></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2"><I>MultiDisc Technologies, Inc. &#151; Network Based Modular, Scaleable Compact
Disc/DVD Servers</I></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As its first effort to broaden our technology portfolio and capitalize on
our strong relationships with manufacturers of consumer electronics and
personal computer peripheral products, we acquired certain developmental stage
technologies and assets from Home Theatre Products (&#147;HTP&#148;), for approximately
$1,062,000 in June 1996 and formed a subsidiary, MDT. The MDT transaction,
which was implemented through a court-approved sale in the HTP bankruptcy
proceeding, included an array of compact disc server robotics and software
technologies in various stages of completion. The MDT transaction was intended
to position us for long term growth in a significant new market. Our intention
was to license this technology or enter into third party manufacturing
arrangements for sale of MDT CD/DVD changer products to OEMs.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The MDT transaction brought a combination of proprietary electromechanical
designs, robotics, operating software, firmware, intellectual property, and
engineering know-how and five patent applications acquired in the asset
acquisition. MDT added
</FONT>

<P align="center"><FONT size="2">7
</FONT>

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<P><FONT size="2">an additional forty-seven patent applications filed with
the United States Patent &#038; Trademark Office (&#147;USPTO&#148;) to bring the total to
fifty-two patent applications filed.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;25, 1998, we announced our plan to refocus our business on
the exploitation of our core audio technologies and to properly position the
MDT assets for sale. The repositioning strategy recognized that the capital
investment required to properly commercialize the MDT technology was beyond the
Company&#146;s capacity. As a result, all operations, including research and
development activities, were suspended and the Company has accounted for MDT as
a discontinued operation. The Company has explored the sale of the business or
the patent portfolio with interested parties, but to date, no transaction has
been consummated.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Revenues and Expenses</I>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We generate revenues in our audio business from royalties pursuant to our
Foundry, OEM, and other licenses, and from non-recurring engineering fees to
port our technologies to specific licensees&#146; applications. The Company&#146;s
revenues, which totaled $1,856,000 in 2002, were derived almost entirely from
Foundry and OEM license fees and royalties.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We seek to maximize return on our intellectual property base by
concentrating our efforts in higher margin licensing and software products and
have eliminated our hardware product operations. Licensing operations have been
managed internally by our personnel and through use of an international sales
rep force.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As noted above, in 2002, four major customers, not presented in order of
importance, each accounted for 10% or more of our total revenues: Apple
Computer, Inc., JVC, Samsung and Toshiba Corporation, each of whom accounted
for greater than 10% of our total 2002 revenues. One OEM accounted for 33%,
another accounted for 25%, another accounted for 17% and one accounted for 10%
of our royalty revenues during 2002. One other account comprised 9% of total
2002 revenues. All other OEM&#146;s accounted for less than 5% of royalty revenues
individually.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company achieved profitable operating results in 2000 and 2002 as a
result of overhead reductions combined with the strong growth of DVD-related
revenues. In 2001, we began expanding our headcount, primarily in the
engineering area in anticipation of continued growth. At midyear, in light of a
weakening in market conditions and lower than anticipated royalties from a key
Asian account, expenditures were once again curtailed in order to bring
overhead levels more in line with current revenues. Declining revenues were
experienced from three major customers resulting from sluggish sales of their
products and the cessation of use of our products by the smaller of these
customers. In addition, while overhead reductions were implemented at mid-year,
profitability was further impacted by either the delay or cancellation of
anticipated products using our technology in light of weak market conditions.
As a result, we were not profitable in 2001. With the acquisition of new
accounts and to a lesser degree, growth of existing accounts, we were able to
increase revenues and reduce expenses, which returned the company to
profitability.
</FONT>

<P align="left"><FONT size="2"><B>Competition</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Virtual Audio Signal Processing Marketplace</I>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We compete with a number of entities that produce various audio
enhancement processes, technologies and products, some utilizing traditional
two-speaker playback, others utilizing multiple speakers, and others restricted
to headphone listening. These include the consumer versions of multiple
speakers, matrix and discrete digital technologies developed for theatrical
motion picture exhibition (like Dolby Digital&#174;, Dolby ProLogic&#174;, and DTS&#174;), as
well as other technologies designed to create an enhanced stereo image from two
or more speakers.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal competitors in the field of virtual audio are SRS Labs, Inc.
and Qsound Labs, Inc. In addition, some DSP foundries and OEMs have proprietary
virtual audio technologies that they regularly offer to OEMs at no cost.
Pressure on OEMs to reduce their costs, particularly in the DVD market is
intense. The marketplace is also susceptible to undisciplined competitors who,
from time to time, may offer below market prices to generate short term revenue
and larger market penetrations even if it does not provide for viable margins.
In the future, our products and technologies also may compete with audio
technologies and product applications developed by other companies including
entities that have business relationships with the Company.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that we will favorably compete in this market because we offer
a single source, complete suite of patented and proprietary 3D Stereo,
interactive positional, virtual surround sound, headphone and speaker
virtualization technologies. By virtue of our specialized engineering and OEM
support, we can offer a &#147;turn-key&#148; audio solution to OEMs who do not possess
this expertise
</FONT>

<P align="center"><FONT size="2">8
</FONT>

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<P><FONT size="2">internally. We also have developed new products that address our
customer&#146;s need for a low cost solution. In addition, the strength of our IC
Foundry and OEM relationships and the Spatializer brand name recognition in the
industry are other key differentiators between both our branded and unbranded
competition. Lastly, we continue to explore new and alternative business models
that we believe serve the interests of both our customers and our stockholders.
</FONT>

<P align="left"><FONT size="2"><B>Patents, Trademarks and Copyrights</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our core signal processing technology is covered by U.S. patents
5,412,731, 5,896,456 and 6,307,941. On March&nbsp;20, 1998, we filed a patent on our
enCompass V 2.0 technology with the USPTO covering the Company&#146;s enCompass 2.0
positional audio gaming technology. In June 2000, we filed an additional patent
application for our reduced cost/higher performance 3-D Stereo circuit design.
In late 2002, we filed a patent application covering our Spatializer PCE
technology. Much of our intellectual property consists of trade secrets. We
possess copyright protection for its principal software applications and has
U.S. and foreign trademark protection for its key product names and logo marks.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The MDT transaction brought a combination of proprietary electromechanical
designs, robotics, operating software, firmware, intellectual property, and
engineering know-how and five patent applications acquired in the asset
acquisition. MDT added an additional forty-seven patent applications filed with
the USPTO to bring the total to fifty-two patent applications filed. However,
due to the absence of working capital and suspension of all operating
activities of MDT, MDT cannot pursue these applications and some applications
have lapsed. The core MDT data storage technology is covered by U.S. patents
5,774,431, 5,822,283, 5,886,960 and 5,886,974. MDT has either obtained or
applied for U.S. trademark protection for its principal product names and logo
marks.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;25, 1998, we announced our plan to refocus our business on
the exploitation of our core audio technologies and to properly position the
MultiDisc assets for sale. The repositioning strategy recognized that the
capital investment required to properly commercialize the MDT technology was
beyond our capacity. As a result, operations, including all research and
development activities were suspended and we have accounted for MDT as a
discontinued operation.
</FONT>

<P align="left"><FONT size="2"><B>Employees</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We began 2002 with five full-time and nine part-time employees and sales
representatives and decreased our staff to four full time and eight part-time
employees, consultants and sales representatives by December&nbsp;31, 2002. At
year-end, there were three full-time employees and three consultants engaged in
research and development. We employ the services of outside professional
consultants, particularly in the engineering area, due to the tight labor
market for such professionals in Silicon Valley as well as the need for
specialized expertise in the course of our business. None of our employees are
represented by a labor union or are subject to a collective bargaining
agreement. We consider our relations with our employees and consultants to be
satisfactory.
</FONT>

<!-- link2 "Item&nbsp;2.&nbsp;&nbsp;Properties" -->
<DIV align="left"><A NAME="002"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;2.&nbsp;&nbsp;</B><B><I>Properties</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our corporate office and research center in Santa Clara, CA, is the
primary location for our audio technology division, (&#147;DPI&#148;). We occupy
approximately 2,700 square feet with an annual rent on a full service basis of
approximately $79,000. The lease expired on November&nbsp;30, 2002 and is renewed on
a month to month basis.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Westlake Village, California we occupy approximately 300 square feet
with an annual rent of approximately $9,600. The lease term on this space
expired in April 2002 and is renewed on a month to month basis. This space in
the Los Angeles area is used to facilitate business and contacts with the
entertainment community as well as with our accountants, lawyers and directors.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We lease an apartment in Santa Clara, CA for use by the chief executive
officer when away from the executive office. The annual rent on this apartment
is $18,840. The lease expires on March&nbsp;30, 2003 and will be renewed for another
six months on the same terms.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We lease our space at rental rates and on terms which management believes
are consistent with those available for similar space in the applicable local
area. Our properties are well maintained, considered adequate and are being
utilized for their intended purposes.
</FONT>

<P align="center"><FONT size="2">9
</FONT>

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<P align="center"><FONT size="2"><B>LEGAL PROCEEDINGS</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the downsizing of the Company in 1998, a number of
employees were terminated and have filed, on various dates, employment and
compensation related claims with the California State labor authorities. All
but two of these claims have been settled. Two former officers and employees
of MDT filed labor and employment termination related claims before the Labor
Commissioner in 2000 seeking approximately $400,000 each which was allegedly
due under each of their respective employment agreements, which claims, if
resolved in favor of the claimants, could be material to the financial
statements of the Company. The Labor Commissioner postponed those
proceedings while other litigation proceeded in the Superior Court, Orange County seeking declaratory
relief to bar the labor claims, as well as return of intellectual property and
unspecified damages for breaches of the former officers&#146; and employees&#146;
employment agreements. These employees, however, filed for personal
bankruptcy and, as a result, the state court proceeding was postponed and then dismissed
primarily because of the bankruptcies. The claims became inactive.
While bankruptcy for one employee has been dismissed, the claims
have not been reactivated. We
also anticipate that, from time to time, we may be named as a party to other
legal proceedings that may arise in the ordinary course of our business.
</FONT>

<!-- link2 "Item&nbsp;4.&nbsp;&nbsp;Submission of Matters to a Vote of Security Holders" -->
<DIV align="left"><A NAME="003"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;4.&nbsp;&nbsp;</B><B><I>Submission of Matters to a Vote of Security Holders</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no matters submitted to a vote of the security holders of the
Company either through solicitation of proxies or otherwise in the fourth
quarter of the fiscal year ended December&nbsp;31, 2002.
</FONT>

<!-- link2 "Item&nbsp;5.&nbsp;&nbsp;Market for Registrant&#146;s Common Equity and Related Stockholder Matters" -->
<DIV align="left"><A NAME="004"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;5.&nbsp;&nbsp;</B><B><I>Market for Registrant&#146;s Common Equity and Related Stockholder Matters</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Common Stock was listed and commenced trading on the NASDAQ SmallCap
market on August&nbsp;21, 1995 under the symbol &#147;SPAZ&#148;. In January 1999, the Common
Stock was delisted by the NASDAQ SmallCap Market due to our inability to
maintain listing requirements. Our Common Stock immediately commenced trading
on the OTC Bulletin Board under the same symbol. The following table sets forth
the high and low sales price of our Common Stock on its principal market for
fiscal years 2000, 2001 and 2002:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
    <TD width="5%">&nbsp;</TD>
    <TD width="51%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="left" colspan="2"><FONT size="1"><B>Period:</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>High (U.S. $)</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Low (U.S. $)</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" align="left"><HR size="1" noshade width=34></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">2000</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">First Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2.56</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.94</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Second Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1.56</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.44</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Third Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1.06</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Fourth Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.69</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.19</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">2001</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">First Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.56</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Second Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.23</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Third Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.31</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Fourth Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.21</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">2002</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">First Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.22</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.12</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Second Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.14</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.09</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Third Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.13</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.06</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Fourth Quarter</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.09</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.06</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;5, 2003, the closing price reported by the OTC was U.S. $0.05.
Stockholders are urged to obtain current market prices for our Common Stock.
Beginning April&nbsp;1, 1997, Computershare Investor Services, through its purchase
of the transfer agent business in 2000 of Harris Trust Company of California
has been our transfer agent.
</FONT>

<P align="left"><FONT size="2"><B>Record Holders</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To our knowledge
there were approximately 192 holders of record of the
stock of the Company as of March&nbsp;5, 2003. However, our transfer agent has
indicated that beneficial ownership is in excess of 6,000 stockholders.
</FONT>

<P align="center"><FONT size="2">10
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left"><FONT size="2"><B>Dividends</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not paid any cash dividends on its Common Stock and have no
present intention of paying any dividends. Our current policy is to retain
earnings, if any, for use in operations and in the development of its business.
Our future dividend policy will be determined from time to time by the Board of
Directors.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;However, holders of our Series&nbsp;B Preferred Stock are entitled to a
cumulative dividend, payable only out of assets legally available for such
payments. Holders of our Series&nbsp;B Preferred Stock are entitled to dividends
prior to any holders of our Common Stock or any subsequent series of preferred
stock which we may issue.
</FONT>

<!-- link2 "Item&nbsp;6.&nbsp;&nbsp;Selected Consolidated Financial Data" -->
<DIV align="left"><A NAME="005"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;6.&nbsp;&nbsp;</B><B><I>Selected Consolidated Financial Data</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following selected consolidated financial data should be read in
conjunction with the Company&#146;s Consolidated Financial Statements and related
Notes and with &#147;Management&#146;s Discussion and Analysis of Financial Condition and
Results of Operations&#148;, included in Item&nbsp;7. The selected financial data for the
years ended December&nbsp;31, 2002, 2001, 2000, 1999 and 1998 are derived from the
Company&#146;s consolidated financial statements that have been audited by Farber &#038;
Hass LLP, independent certified public accountants. The consolidated statements
of operation and cash flows for the year ended December&nbsp;31, 2002 and the report
thereon are included elsewhere in this Report.
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="35%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="19"><FONT size="1"><B>Fiscal Year Ended</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="19"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>1998</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>1999</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2000</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2"><B>Consolidated Statement of
Operations Data:</B></FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Revenues</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,680</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,660</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,604</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,856</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cost Of Revenues</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(134</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(49</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(248</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(97</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(131</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Gross Profit</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,546</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,611</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,954</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,507</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,725</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Operating Expenses</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(3,490</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(1,156</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(1,596</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(1,823</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(1,711</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other Income (Expense), Net</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(108</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(94</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">34</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">73</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(2</FONT></TD>
    <TD><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss from Discontinued Operations</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(3,702</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income taxes</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(38</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(6</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(10</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(6</FONT></TD>
    <TD><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Income (Loss)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(5,792</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">355</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">382</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(240</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">18</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Basic Income (Loss) Per Share(5)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(0.29</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(0.01</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Diluted Income (Loss) Per Share(5)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(0.29</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(0.01</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted Average Common Shares</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">22,180,180</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">33,805,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">46,736,224</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">47,388,235</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">47,406,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2"><B>Consolidated Balance Sheet Data</B></FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and Cash Equivalents</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">264</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,022</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,468</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">869</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">859</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Working Capital (Deficit)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(1,975</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">395</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,195</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,124</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Assets</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">893</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,118</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,457</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,753</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,746</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Advances From Related Parties</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">857</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">337</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">337</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">113</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">113</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Shareholders&#146; Equity (Deficit)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(1,553</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">768</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,651</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,411</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,429</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<!-- link2 "Item&nbsp;7.&nbsp;&nbsp;Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations" -->
<DIV align="left"><A NAME="006"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;7.&nbsp;&nbsp;</B><B><I>Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</I></B></FONT>

<P align="left"><FONT size="2"><B>Critical Accounting Policies</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. In consultation with our Board of
Directors and Audit Committee, we have identified three accounting policies
that we believe are key to an understanding of our financial statements. These
are important accounting policies that require management&#146;s most difficult,
subjective judgments.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The first critical accounting policy relates to revenue recognition. We
recognize revenue from product sales upon shipment to the customer. License
revenues are recognized when earned, in accordance with the contractual
provisions. Royalty revenues are recognized upon shipment of products
incorporating the related technology by the original equipment manufacturers
(OEMs) and foundries.
</FONT>

<P align="center"><FONT size="2">11
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The second critical accounting policy relates to research and development
expenses. We expense all research and development expenses as incurred. Costs
incurred to establish the technological feasibility of our algorithms (which is
the primary component of our licensing) is expensed as incurred and included in
Research and Development expenses. Such algorithms are refined based on
customer requirements and licensed for inclusion in the customer&#146;s specific
product. There are no production costs to capitalize as defined in Statement
on Financial Accounting Standards No.&nbsp;86.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The third critical accounting policy relates to intangible assets. Our
intangible assets consist primarily of patents. We capitalize all costs
directly attributable to patents, consisting primarily of legal and filing
fees, and amortize such costs over the remaining life of the patent (which
range from 3 to 20&nbsp;years) using the straight-line method. In accordance with
SFAS 142, &#147;Goodwill and Other Intangible Assets&#148;, only intangible assets with
definite lives are amortized. Non-amortized intangible assets are instead
subject to annual impairment testing.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The fourth critical accounting policy relates to the existence of an Audit
Committee of our Board of Directors.
</FONT>
<P align="left"><FONT size="2">Audit Committee</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This committee is directed to review the scope, cost and results of the independent audit
of the Company&#146;s books and records, the results of the annual audit with Management and the
internal auditors and the adequacy of the Company&#146;s accounting, financial, and operating
controls; to recommend annually to the Board of Directors the selection of the
independent auditors; to consider proposals made by the Company&#146;s independent
auditors for consulting work; and to report to the Board of Directors, when so requested,
on any accounting of financial matters.
</FONT>
<P align="left"><FONT size="2">Compensation and Stock Committee</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Compensation and Stock Option Committee of the Company (the
&#147;Compensation Committee&#148;) currently consists of Messrs.&nbsp;Pace and Segel, each of
whom is a non-employee director of the Company and a &#147;disinterested person&#148; with
respect to the plans administered by such committee, as such term is defined in
Rule&nbsp;16b-3 adopted under the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (collectively, the &#147;Exchange Act&#148;). The
Compensation Committee reviews and approves annual salaries, bonuses and other forms
and items of compensation for senior officers and employees of the
Company. Except for plans that are, in accordance with their terms or
as required by law, administered by the Board of Directors or another
particularly designated group, the Compensation Committee also administers and implements all
of the Company&#146;s stock option and other stock-based and equity-based benefit plans
(including performance-based plans), recommends changes or additions to those plans or awards under the plans.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion and analysis relates to the financial condition
and results of operations of the Company and our subsidiaries for the year
ended December&nbsp;31, 2002 compared to the year ended December&nbsp;31, 2001, and the
year ended December&nbsp;31, 2001 compared to the year ended December&nbsp;31, 2000.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Results of Operations</B>
</FONT>

<P><FONT size="2"><B>For the Year Ended December&nbsp;31, 2002, Compared to the Year Ended December&nbsp;31, 2001</B>
</FONT>

<P align="left"><FONT size="2"><B>Revenues</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues increased to $1,856,000 for the year ended December&nbsp;31, 2002
compared to $1,604,000 for the year ended December&nbsp;31, 2001, an increase of
16%. Revenues are almost entirely comprised royalties pertaining to the
licensing of Spatializer&#174; audio signal processing algorithms.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The increase in revenues is attributed primarily to the addition of two
new accounts which generated in excess of 10% of total revenue each, partially
offset by declining royalties on declining analog chip sales from another
account.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Gross Profit</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit increased to $1,725,000 for the year ended December&nbsp;31, 2002
compared to $1,507,000 in the comparable period last year, an increase of 14%.
Gross margin decreased to 93% of revenue in the year ended December&nbsp;31, 2002
compared with 94% of revenue for the comparable period last year. The increase
in gross profit results from higher revenues in the current year, partially
offset by slightly lower gross margin. This decrease in the gross margin
percentage reflects a slight change in mix to commissionable foreign royalty
revenue compared to non-commissionable U.S. sourced revenue. The Company
maintains a high margin since revenues are from licensing and royalty
activities, which have little or no associated direct manufacturing or selling
costs other than commissions paid to the Company&#146;s independent representatives that solicit and oversee the particular accounts.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Operating Expenses</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses for the year ended December&nbsp;31, 2002 decreased to
$1,711,000 (92% of sales) from $1,823,000 (114% of sales) for the year ended
December&nbsp;31, 2001, a decrease of 6%. The decrease in operating expenses results
primarily from completion of various outside engineering consulting projects in
2001 for which we paid outside engineering fees. In 2002, a much greater level
of applications engineering projects were either done in house or by our
licensed distributors and the fees incurred for such work was significantly
reduced over the prior year. However, levels of pure R&#038;D were unchanged between
the two years, as reflected by the level of new product introductions.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>General and Administrative</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and
administrative costs increased to $766,000 for the year ended
December&nbsp;31, 2002 from $707,000 for the year ended December&nbsp;31, 2001, an
increase of 9%. The increase is primarily due to increased legal expenses
related to public filings and increased travel by the CEO. General operating
costs include rent, telephone, legal, public filing, office supplies and
stationery, postage, depreciation and similar costs.
</FONT>

<P align="center"><FONT size="2">12
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Research and Development</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and
Development costs decreased to $433,000 for the year ended
December&nbsp;31, 2002, compared to $639,000 for the year ended December&nbsp;31, 2001, a
decrease of 32%. The decrease in research and development expense was due
completion of various outside engineering consulting projects in 2001 for which
we paid outside engineering fees. In 2002, a much greater level of applications
engineering projects were either done in house or by our licensed distributors
and as such, the fees incurred for such work were significantly reduced over
the prior year. However, levels of pure R&#038;D were unchanged between the two
years, as reflected by the level of new product introductions.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company continued efforts to identify, validate, and develop new
product ideas at DPI. Specific engineering efforts were directed toward the
launch of encompass AV&#153; , development of Spatializer Audio Alchemy&#153;, refinement
of Spatializer Natural Headphone&#153; and applications engineering to port the
Company&#146;s technology to leading processor platforms.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Sales and Marketing</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and Marketing costs increased to $513,000 for the year ended
December&nbsp;31, 2002, compared to $476,000 for the year ended December&nbsp;31, 2001,
an increase of 8%. Spending was increase in the area of foreign travel, where
the Asian customer visitation frequency was doubled in the second half of 2002.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Net Income (Loss)</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net Income was $18,000 for the year ended December&nbsp;31, 2002, compared to
net loss of $240,000 for the year ended December&nbsp;31, 2001. Net Income for the
current period is primarily the result of higher revenues and improved overhead
management.
</FONT>

<P><FONT size="2"><B>For the Year Ended December&nbsp;31, 2001, Compared to the Year Ended December&nbsp;31,
2000</B>
</FONT>

<P align="left"><FONT size="2"><B>Revenues</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $1,604,000 for the year ended December&nbsp;31, 2001
compared to $2,202,000 for the year ended December&nbsp;31, 2000, a decrease of 27%.
Revenues include license issuance fees and royalties pertaining to the
licensing of Spatializer&#174; audio signal processing designs and non-recurring
engineering fees.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The decrease in revenues is attributed primarily to (i)&nbsp;decreased
royalties from one account resulting from lower unit sales compared to the
prior year, (ii)&nbsp;lower royalties from another account due to a timing
difference between 2000 and 2001 created when royalty reporting shifted from
the DSP foundry (on shipment of DSP) to OEM customer (shipment of DVD player),
(iii)&nbsp;loss of an account in mid 2001 which had comprised less than 10% of sales
in the prior year and (iv)&nbsp;decreases in per unit Spatializer N-2-2 royalties
due to a volume-based sliding scale pricing structure with DSP foundries which
did not stabilize until the beginning of the third quarter of 2000.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit decreased to $1,507,000 for the year ended December&nbsp;31, 2001
compared to $1,954,000 in the comparable period last year. Gross margin
increased to 95% of revenue in the year ended December&nbsp;31, 2001 compared with
89% of revenue for the comparable period last year. The decrease in gross
profit results from lower revenues in the current year, partially offset by
higher gross margin. This increase in the gross margin percentage reflects the
realignment of our Asian sales rep network which included the implementation of
lower commission rates. The Company maintains a high margin since revenues are
from licensing and royalty activities, which have little or no associated
direct manufacturing or selling costs.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Operating Expenses</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses for the year ended December&nbsp;31, 2001 increased to
$1,823,000 (114% of sales) from $1,595,000 (72% of sales) for the year ended
December&nbsp;31, 2000, a increase of 11%. The increase in operating expenses
results from expansion of the Company&#146;s research and development efforts and
higher general and administrative expenses relating to legal and public company
expenses. The Company undertook an expansion of headcount in early 2001. When
it became clear in mid 2001 that anticipated revenue growth was not occurring,
the Company began to curtail the scope of its initiatives in order to bring
spending levels back in line with reported revenue streams.
</FONT>

<P align="center"><FONT size="2">13
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>General and Administrative</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative costs increased to $707,000 for the year ended
December&nbsp;31, 2001 from $599,000 for the year ended December&nbsp;31, 2000, an
increase of 18%. The increase is primarily due to increased legal expenses
related to public filings and increased travel by the CEO. General operating
costs include rent, telephone, legal, public filing, office supplies and
stationery, postage, depreciation and similar costs.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Research and Development</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and Development costs increased to $640,000 for the year ended
December&nbsp;31, 2001, compared to $540,000 for the year ended December&nbsp;31, 2000,
an increase of 19%. The increase in research and development expense was due to
the additions to headcount early in the year, search fees paid for certain
engineers hired by the Company and expanded use of engineering consultants for
specialized projects.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, the Company continued efforts to identify, validate, and
develop new product ideas at DPI. Specific engineering efforts were directed
toward the launch of Spatializer N-2-2 Ultra&#153; , development of Spatializer
PCE&#153;, refinement of Spatializer Natural Headphone&#153; and applications engineering
to port the Company&#146;s technology to leading processor platforms.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Sales and Marketing</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and Marketing costs increased to $476,000 for the year ended
December&nbsp;31, 2001, compared to $456,000 for the year ended December&nbsp;31, 2000,
an increase of less than one percent. Spending was maintained at the prior
year&#146;s level in order to continue the development of markets for existing
products.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Interest Income</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest income on short-term investments decreased $23,499 from 2000 to
2001 due to lower cash investments combined with lower interest rates.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Interest Expense</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest expense decreased $22,862 due to repayment of $225,242 of Notes
Payable to Related Parties in 2001.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Other Income (Expense), Net</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other income (expense)&nbsp;includes approximately $35,000 in gains on
settlements of claims relating to its discontinued operation, MDT.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Net Income (Loss)</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss was $240,000 for the year ended December&nbsp;31, 2001, compared to
net income of $382,000 for the year ended December&nbsp;31, 2000. The net loss for
the current period is primarily the result of lower revenues and higher
overhead, partially offset by improved gross margin.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Liquidity and Capital Resources</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31,
2002, we had $859,000 in cash and cash equivalents as
compared to $869,000 at December&nbsp;31, 2001. The decrease in cash and cash
equivalents is attributed to modest increases in fixed assets and patent filing
expenditures. We had working capital of $1,125,000 at December&nbsp;31, 2002 as
compared with working capital of $1,124,000 at December&nbsp;31, 2001. Our future
cash flow will come primarily from the audio signal processing licensing,
Original Equipment Manufacturers&#146; (&#147;OEM&#148;) royalties and from possible common
stock issuances including warrants and options. We are actively engaged in
negotiations for additional audio signal processing licensing arrangements
which should generate additional cash flow without imposing any substantial
costs on the Company. We anticipate that there will be a wind down of
our licensing program in early 2003 with a large computer account as
that entity completes its migration to its latest operating system.
We added or expanded our relationships with JVC, Sanyo, Orion and
Mediatech this past year. We believe that growth from these and other
licensing arrangements including some that are pending but not
announced or in negotiation, will substantially offset any revenue
shortfalls from the computer account by the third quarter of fiscal
2003. Mediatech, in particular, has been successful in penetrating
the DVD market and our relationship with them positions us well as the
audio solutions provider of choice in these new accounts for 2003 and
2004. Further, by the second half of 2003, we expect to begin
generating revenues from the Company's new products that were
introduced in 2002.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Like other operating enterprises, the events of September&nbsp;11, 2001 in the
United States brought a degree of uncertainty to our operations and hindered
our ability to plan and meet with our contractual partners outside the United
States in this dynamic environment. The operations of our business, and those
of our competitors, may also be impacted by the continued trend in the
</FONT>

<P align="center"><FONT size="2">14
</FONT>

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<P><FONT size="2">semiconductor industry to offer free, but minimal audio solutions to certain
product classes to maintain and attract market share. This challenges our
ability to convert business opportunities to licensing agreements in those
segments that allow us to maintain or rapidly increase revenue. As a result,
the Company must develop and license its products and software solutions in a
market that treats some audio products, including those of our competitors, on
a commodity basis in those cases where the OEM product is considered a
commodity product. While our software applications deliver what we and most
manufacturers who listen to it believe is a significantly superior audio
experience, the competitive market forces that pressure manufacturers to reduce
their costs may create some resistance to new technology adoption or use. In
addition, certain of our competitors appear to be pursuing a business plan that
disregards commercially reasonable pricing to achieve a larger market
penetration even if the penetration will not provide for viable margins or
returns. The Company has responded by offering additional products targeted to
each price/quality segment of the market and continues to aggressively pursue
new opportunities in emerging product categories and complements to our
existing core business. In addition, our products have been positioned as a
means for manufacturers to save money while delivering an enhanced audio
experience. Nevertheless, these market conditions and competitive forces make
it more challenging for the Company, and its rational commercial competitors,
to enhance their operating results.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the extent the
Company maintains or exceeds its projected revenues and is not
required to fund contingencies, it expects to continue to
retain its current cash reserves and therefore, maintain its
liquidity position at a consistent level both on a short-term and
long-term basis. To the extent that the Company does not achieve
current operating levels or is required to fund contingencies, it
will be required to use some of its cash reserves and this could
impact its longer term liquidity. In addition, we wish to achieve
accelerated growth and to take advantage of the dynamic market forces
in which we operate, rather than to be affected by them. To address
these objectives, we retained Neveric
Capital, a San Francisco based investment banking firm, to identify
and evaluate strategic opportunities and to explore
alternatives to enhance stockholder value and support the Company's
growth and overall strategy.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December 1999, we completed a set of financial transactions (the
&#147;1999 Transactions&#148;) with certain existing holders of our equity and debt
and with new institutional investors. The 1999 Transactions included the
private placement of 1,884,254 additional shares of our Common Stock ($1.05
million in new capital or $0.56 per share), the issuance of warrants to acquire
2,100,000 shares of Common Stock exercisable for three years at an exercise
price of $.67 per share), the cancellation of 500,000 warrants to acquire
Common Stock issued in an earlier financing, the conversion of $1&nbsp;million of
short term debt into a new Series&nbsp;B Redeemable Convertible Preferred Stock
(&#147;Series&nbsp;B Preferred Stock&#148;) and the conversion of $225,000 of secured debt
into secured convertible debt.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the 1999 Transactions, $895,000 in short term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into the $1,000,000 in new
Series&nbsp;B Preferred Stock. The Series&nbsp;B Preferred Stock, and
any dividends therefrom not converted into cash, were convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10&nbsp;day average closing
bid price prior to the conversion, but subject to a minimum conversion of $.56
per share and a maximum of $1.12 per share. The Company had an option
to redeem with cash any Series&nbsp;B Preferred
Stock not converted before the end of 2002 and to pay
Series&nbsp;B Preferred Stock accrued and declared cumulative dividends of 10%. In November
2002, the Board of Directors and the holders of the
Series&nbsp;B Preferred Stock, agreed to exchange the Series&nbsp;B
Preferred Stock for a new Series&nbsp;B-1 Preferred Stock which had terms
substantially the same as the Series&nbsp;B Preferred Stock, except
that the conversion date was deferred to December 2005, no future
dividends will accrue and dividends for prior periods on the
Series&nbsp;B Preferred Stock were reset and recalculated to the LIBOR rate
in effect on the first business day of each of 2000, 2001 and 2002,
respectively and were paid through the issuance of the appropriate
number of shares of Series B-1 Preferred Stock.
The exchange was completed in December&nbsp;2002. The 500,000 warrants issued in the 1999 Transactions
expired, without exercise in December&nbsp;2002. In connection with
the exchange the Series&nbsp;B-1 Preferred Stock, we
withdrew the Series&nbsp;A and Series&nbsp;B Preferred Stock and,
therefore, currently the Series&nbsp;B-1 Preferred Stock is our only
authorized or outstanding class of preferred stock.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As noted above, in
the 1999 Transactions, $225,000 of secured debt, including accrued
interest, was converted into secured long term convertible debt. The long term
debt was repaid with interest in 2001. We currently have a related
party obligation of $112,500 which bears interest of 10% per annum, which we pay on a current basis. The debt is due on demand.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We eliminated Net Liabilities of Discontinued Operation since the statute
of limitations for claims has been exceeded. We continue to maintain an accrual
for unasserted claims or settlement costs related to the discontinuation of MDT
in 1999. We do not expect any final liability to be in excess of this balance.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Funds generated by these financing activities as well as cash generated
from our existing operations and customer base is expected to be sufficient for
us to meet our operating obligations and the anticipated additional research
and development for our audio technology business. The Company will also
continue to consider and evaluate capital investment or business arrangements
with financial or strategic participants or investors as such opportunities
become available to the Company on terms that enhance shareholder value and
support the Company&#146;s business strategy.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the extent the Company maintains or exceeds its projected revenues and
is not required to fund significant contingencies, it expects to continue to
retain its current cash reserves and therefore, maintain its liquidity position
at a consistent level both on a short-term and long-term basis. To the extent
that the Company does not achieve current operating levels or is required to
fund contingencies, it will be required to use some of its cash reserves and
this could impact its longer term liquidity.
</FONT>

<P align="center"><FONT size="2">15
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Net Operating Loss Carry forwards</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2002, the Company had net operating loss carry forwards
for Federal income tax purposes of approximately $26,000,000 which are
available to offset future Federal taxable income, if any, through 2013.
Approximately $21,700,000 of these net operating loss carry forwards are
subject to an annual limitation of approximately $1,000,000.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Inflation</I></B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that the moderate inflation rate of the last several years has
not impacted our operations.
</FONT>

<P align="center"><FONT size="2"><B>RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July 2001, the FASB issued SFAS No.&nbsp;141, &#147;Business Combinations,&#148; which
establishes financial accounting and reporting for business combinations and
supersedes APB Opinion No.&nbsp;16, &#147;Business Combinations,&#148; and FASB statement No.
38, &#147;Accounting for Preacquisition Contingencies of Purchased Enterprises.&#148;
SFAS No.&nbsp;141 requires that all business combinations be accounted for using one
method, the purchase method. The provisions apply to all business combinations
initiated after June&nbsp;30, 2001.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July 2001, the FASB issued SFAS No.&nbsp;142, &#147;Goodwill and Other Intangible
Assets,&#148; which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No.&nbsp;17,
&#147;Intangible Assets.&#148; SFAS No.&nbsp;142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired
in a business combination) should be accounted for in financial statements upon
their acquisition, and after they have been initially recognized in the
financial statements. The provisions of SFAS no. 142 were effective for fiscal
years beginning after December&nbsp;15, 2001. We adopted SFAS No.&nbsp;142 during the
first quarter of fiscal 2002, and the adoption of SFAS No.&nbsp;142 had no material
impact on our financial reporting and related disclosures.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August 2001, the FASB issued SFAS No.&nbsp;143, &#147;Accounting for Asset
Retirement Obligations,&#148; which is effective for us beginning fiscal 2003. SFAS
No.&nbsp;143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, with the associated asset retirement costs
capitalized as part of the carrying amount of the long-lived assets. We do not
expect the adoption of SFAS No.&nbsp;143 to have a material impact on our financial
position and results of operations.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In October 2001, the FASB issued SFAS No.&nbsp;144, &#147;Accounting for the
Impairment or Disposal of Long-Lived Assets,&#148; which is effective for fiscal
years beginning after December&nbsp;15, 2001 and interim periods within those fiscal
periods. SFAS No.&nbsp;144 supersedes FASB Statement No.&nbsp;121 and parts of APB
Opinion No.&nbsp;30, &#147;Reporting the Results of Operations &#151; Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions Relating to Extraordinary
Items.&#148; However, SFAS No.&nbsp;144 retains the requirement of APB Opinion No.&nbsp;30 to
report discontinued operations separately from continuing operations and
extends that reporting to a component of an entity that either has been
disposed of (by sale, by abandonment or in a distribution to owners) or is
classified as held for sale. SFAS No.&nbsp;144 addresses financial accounting and
reporting for the impairment of certain long-lived assets and for long-lived
assets to be disposed of. We do not expect the adoption of SFAS No.&nbsp;144 to
have a material impact on our financial position and results of operations.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June 2002, the
FASB issued SFAS&nbsp;146, &#147;Accounting for Costs Associated with
Exit or Disposal Activities&#148;, which nullifies EITF Issue 94-3.
SFAS&nbsp;146 is effective for exit and disposal activities that are
initiated after December&nbsp;31, 2002 and requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred in contrast to the date of an entity's
commitment to an exit plan, as required by EITF Issue 94-3. We do not
expect the adoption of SFAS No.&nbsp;146 to have a material impact on
our financial position and results of operations.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December 2002, the
FASB issued SFAS&nbsp;148 &#147;Accounting for Stock-Based
Compensation&#148; an amendment to SFAS&nbsp;123. SFAS&nbsp;148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement&nbsp;123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of
the method used on reported results. This statement is effective for
fiscal years ending after December&nbsp;15, 2002 for transition
guidance and annual disclosure provisions; for financial reports
containing financial statements for interim periods beginning after
December&nbsp;15, 2002 for interim disclosure provisions. The
adoption of SFAS No.&nbsp;148 did not have a material impact on our
financial position and results of operations.
</FONT>

<P align="center"><FONT size="2"><B>QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not been exposed to material future earnings or cash flow
fluctuations from changes in interest rates on our short-term investments at
December&nbsp;31, 2002. A hypothetical decrease of 100 basis points in interest
rate (ten percent of our overall earnings rate) would not result in a material
fluctuation in future earnings or cash flow. We have not entered into any
derivative financial instruments to manage interest rate risk or for
speculative purposes and we are not currently evaluating the future use of such
financial instruments.
</FONT>

<P align="center"><FONT size="2">16
</FONT>

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<P align="center"><FONT size="2"><B>INDEPENDENT AUDITORS&#146; REPORT</B></FONT>

<P align="left"><FONT size="2"><B>To the Board of Directors Of Spatializer Audio Laboratories, Inc.:</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have audited the accompanying consolidated balance sheets of
Spatializer Audio Laboratories, Inc. and subsidiaries (The &#147;Company&#148;) as of
December&nbsp;31, 2002 and 2001 and the related consolidated statements of
operations, shareholders&#146; equity, and cash flows for the years ended December&nbsp;31,
2002, 2001 and 2000. These consolidated financial statements are the
responsibility of the Company&#146;s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spatializer
Audio Laboratories, Inc. and subsidiaries as of December&nbsp;31,
2002 and 2001, and
the results of its operations and its cash flows for the years ended December&nbsp;31,
2002, 2001 and 2000 in conformity with generally accepted accounting
policies in the United States of America.
</FONT>

<P><FONT size="2">/s/&nbsp;&nbsp;&nbsp;FARBER &#038; HASS LLP
</FONT>

<P><FONT size="2">Oxnard, California<BR>
March&nbsp;18, 2003
</FONT>

<P align="center"><FONT size="2">17
</FONT>

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<P align="left"><FONT size="2"><B>Item&nbsp;8. </B><B><I>Financial Statements</I></B></FONT>

<P align="center"><FONT size="2"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B></FONT>

<P align="center"><FONT size="2"><B>CONSOLIDATED BALANCE SHEETS</B></FONT>

<P align="center"><FONT size="2">ASSETS</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
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    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
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    <TD width="7%">&nbsp;</TD>
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    <TD width="7%">&nbsp;</TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
</TR>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
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</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current Assets:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and Cash Equivalents</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">858,725</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">869,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts Receivable</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">499,023</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">442,555</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>

<TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Prepaid
Expenses and Other Current Assets</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">82,920</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">133,251</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Current Assets</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,440,668</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,465,284</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Property and Equipment, Net</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">70,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">50,586</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intangible Assets, Net</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">225,859</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">255,726</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other Assets</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">8,471</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,510</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,745,840</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,753,106</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="13" align="center"><DIV style="margin-top:10px; margin-bottom:15px"><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; EQUITY<BR></FONT></DIV></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current Liabilities:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Notes Payable to Related Party</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">112,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">112,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts Payable</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">39,027</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">14,872</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued Wages and Benefits</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">108,771</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">72,969</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued Expenses</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">55,682</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">41,197</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Liabilities of Discontinued Operation</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">100,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Current Liabilities</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">315,980</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">341,538</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Commitments and Contingencies</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR><TD><TR><TD><TR><TD><TR><TD>
<TR><TD><TR><TD><TR><TD><TR><TD>

<TR valign="bottom" bgcolor="#eeeeee">
<TD colspan="5"><DIV style="margin-left:40px; text-indent:-40px"><FONT size="2">
Series&nbsp;B-1 Redeemable Convertible Preferred Shares, $0.01 par
value:<BR>
1,000,000 shares authorized;
102,762&nbsp;shares issued and outstanding at December&nbsp;31, 2002 (liquidation preference of $1,027,620)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,028</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Stockholders&#146; Equity (Deficit):</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
<TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">
10% Series&nbsp;B Convertible Preferred Shares $0.01 par value 1,000,000 shares authorized;
87,967 converted to Series&nbsp;B-1</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2"></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">880</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Common shares, $0.01 par value; 65,000,000 shares
authorized; 47,406,939 and 47,406,939 shares
issued
and outstanding at December&nbsp;31, 2002 and 2001,
respectively</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">474,070</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">474,070</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Additional Paid-In Capital</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">46,402,704</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">46,402,852</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated Deficit</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(45,447,942</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(45,466,234</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Shareholders&#146; Equity</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,428,832</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,411,568</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,745,840</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,753,106</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">See accompanying notes to consolidated financial statements
</FONT>

<P align="center"><FONT size="2">18
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center"><FONT size="2"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B></FONT>

<P align="center"><FONT size="2"><B>CONSOLIDATED STATEMENTS OF OPERATIONS</B></FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="11"><FONT size="1"><B>Year Ended December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="11"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2000</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Revenues:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Product Revenues, Net</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Licensing Revenues</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Royalty Revenues</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,855,934</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,603,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,201,812</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,855,934</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,603,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,201,812</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cost of Revenues</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">130,516</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">96,783</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">248,217</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,725,418</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,506,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,953,595</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating Expenses:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">General and Administrative</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">765,637</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">707,115</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">599,291</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Research and Development</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">432,826</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">639,223</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">540,269</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Sales and Marketing</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">512,727</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">476,432</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">455,901</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,711,190</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,822,770</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,595,461</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating Income (Loss)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">14,228</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(315,771</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">358,134</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest Income</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">12,432</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">41,358</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">64,857</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest Expense</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(14,493</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(11,250</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(34,112</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other Income (Expense), Net</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">42,691</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">3,140</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(2,036</FONT></TD>
    <TD><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">72,799</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">33,885</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income (Loss) Before Income Taxes</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">12,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(242,972</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">392,019</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income Taxes</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(6,100</FONT></TD>
    <TD><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,865</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(10,000</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Income (Loss)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">18,292</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(240,107</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">382,019</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Basic and Diluted Income (Loss)
per Share:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(.01</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted-Average Shares Outstanding</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">47,406,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">47,247,455</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">46,736,224</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">See accompanying notes to consolidated financial statements
</FONT>

<P align="center"><FONT size="2">19
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center"><FONT size="2"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B></FONT>

<P align="center"><FONT size="2"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B></FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="55%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="11"><FONT size="1"><B>Year Ended December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="11"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2000</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash Flows from Operating Activities:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Income (Loss)</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">18,292</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(240,107</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">382,019</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Depreciation</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">54,737</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">77,785</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">64,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">50,766</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">61,345</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">21,239</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Stock and Options Issued for Services</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">30,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Change in Assets and Liabilities:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts Receivable</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(56,460</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">64,003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">181,037</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Prepaid Expenses and Deposits</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">43,370</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(63,132</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(3,818</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts Payable</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">24,155</FONT></TD>
    <TD nowrap><FONT size="2"></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(36,910</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(182,335</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued Expenses and Other Liabilities</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">50,286</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(46,819</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(183,268</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Discontinued Operations</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(100,000</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(155,840</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(163,760</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Cash Provided (Used) by Operating Activities</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">85,138</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(339,675</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">145,844</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash Flows from Investing Activities:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchase of Property and Equipment</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(74,993</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(20,311</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(40,489</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Proceeds from Disposal</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intangible Assets</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(20,898</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(14,282</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(116,235</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Cash Used by Investing Activities</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(95,891</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(34,593</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(156,224</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash Flows from Financing Activities:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Exercise of Options and Warrants</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">470,519</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Notes and Amounts Due to (from)&nbsp;Related Parties</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(225,242</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Repayments/Termination of Notes Payable</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(14,149</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Cash Provided by Financing Activities</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(224,242</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">456,370</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Increase (Decrease) in Cash and Cash Equivalents</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(10,753</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(598,510</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">445,990</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and Cash Equivalents, Beginning of Year</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">869,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,467,988</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,021,998</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and Cash Equivalents, End of Year</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">858,725</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">869,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1,467,988</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Supplemental Disclosure of Cash Flow Information:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash Paid During the Year for:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">14,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">11,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">11,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income Taxes</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">3,237</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,569</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">See accompanying notes to consolidated financial statements
</FONT>

<P align="center"><FONT size="2">20
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center"><FONT size="2"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B></FONT>

<P align="center"><FONT size="2"><B>CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY (DEFICIT)</B></FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="37%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="7"><FONT size="1"><B>10%
Series B Convertible</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Common</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="7"><FONT size="1"><B>Preferred Shares</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Shares</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="7"><FONT size="1"><B>Common Shares</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="7"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="7"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Additional</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Total</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number of</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Par</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number of</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Par</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Paid-In-</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Accumulated</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Shareholders'</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Shares</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Value</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Shares</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Value</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Capital</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Deficit</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Equity</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Balance, December&nbsp;31, 1999</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">102,967</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">1,030</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">46,174,970</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">461,750</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">45,913,503</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">(45,608,146</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">768,137</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Options Exercised</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">648,001</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">6,480</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">438,839</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">445,319</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Warrants Exercised</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">210,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">2,100</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">23,100</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">25,200</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Stock Issued for Services</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">55,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">550</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">29,450</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">30,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Net Income</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">382,019</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">382,019</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Balance, December&nbsp;31, 2000</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">102,967</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">1,030</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">47,087,971</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">470,880</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">46,404,892</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">(45,226,127</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">1,650,675</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Conv. of Pfd. Shares, net</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(15,000</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(150</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">313,968</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">3,140</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(2,990</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Options Exercised Warrants Exercised</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">5,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">50</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">950</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">1,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Net Loss</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(240,107</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(240,107</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Balance, December&nbsp;31, 2001</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">87,967</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">880</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">47,406,939</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">474,070</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">46,402,852</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">(45,466,234</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">1,411,568</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Conversion
of 10% Series&nbsp;B to Redeemable Series&nbsp;B-1</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(87,867</FONT></TD>
    <TD><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(880</FONT></TD>
    <TD><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(880</FONT></TD>
    <TD><FONT size="1">)</FONT></TD>
</TR>


<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Series B Pfd. Share dividend</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(148&nbsp;</FONT></TD>
    <TD><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1"></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">(148</FONT></TD>
    <TD><FONT size="1">)</FONT></TD>
</TR>


<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Net Income</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">18,292</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">18,292</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">Balance, December&nbsp;31, 2002</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">-0-</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">-0-</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">47,406,939</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">474,070</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">46,402,704</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">(45,447,942</FONT></TD>
    <TD nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="1">$</FONT></TD>
    <TD align="right"><FONT size="1">1,428,832</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="1">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">See accompanying notes to consolidated financial statements
</FONT>

<P align="center"><FONT size="2">21
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center"><FONT size="2"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B></FONT>

<P align="center"><FONT size="2"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B></FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(1)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Nature of Business</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Audio Laboratories, Inc. and subsidiaries (the &#147;Company&#148;) is
in the business of developing and licensing technology. The Company sales,
research and subsidiary administration are conducted out of facilities in Santa
Clara, California.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s wholly-owned subsidiary, Desper Products, Inc. (&#147;DPI&#148;), is
in the business of developing proprietary advanced audio signal processing
technologies and products for consumer electronics, entertainment, and
multimedia computing. All Company revenues are generated from this subsidiary.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s wholly-owned subsidiary, MultiDisc Technologies, Inc.
(&#147;MDT&#148;), was in the business of developing scaleable, modular compact disc and
digital versatile disc (&#147;DVD&#148;) server technologies associated with a network
based compact disc/DVD server for internet and intranet applications.
Operations of MDT were discontinued in the fourth quarter of 1998 and the
assets have been marketed for sale (see Note 11).
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(2)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Significant Accounting Policies</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Basis of Consolidation &#151; </B>The consolidated financial statements include the
accounts of Spatializer Audio Laboratories, Inc. and its wholly-owned
subsidiary, Desper Products, Inc. MultiDisc Technologies, Inc. has been
presented as a discontinued operation (see Note 11). All significant
intercompany balances and transactions have been eliminated in consolidation.
Corporate administration is not allocated to subsidiaries.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Revenue Recognition &#151; </B>The Company recognizes revenue from product sales
upon shipment to the customer. License revenues are recognized when earned, in
accordance with the contractual provisions. Royalty revenues are recognized
upon shipment of products incorporating the related technology by the original
equipment manufacturers (OEMs) and foundries.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Concentration of Credit Risk &#151; </B>Financial instruments, which potentially
subject the company to concentrations of credit risk, consist principally of
cash, cash equivalents and trade accounts receivable. The Company places its
temporary cash investments in certificates of deposit in excess of FDIC
insurance limits, principally at CitiBank FSB. At December&nbsp;31,
2002
substantially all cash and cash equivalents were on deposit at two financial
institutions.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2002, four major customers, not presented in
order of importance, each accounted for 10% or more of our total
accounts receivable:
Apple Computer, Inc., JVC, Samsung and Toshiba Corporation, each of whom
accounted for greater than 10% of our total 2002 accounts receivable. One OEM accounted
for 28.0%, another accounted for 22.4%, another accounted for 22.0% and one accounted
for 14.6% of our total accounts receivable at December&nbsp;31, 2002.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company performs ongoing credit evaluations of its customers and
normally does not require collateral to support accounts receivable. Due to the
contractual nature of sales agreements and historical trends, no allowance for
doubtful accounts has been provided.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company does not
apply interest charges to past due accounts receivable.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Cash and Cash Equivalents &#151; </B>Cash equivalents consist of highly liquid
investments with original maturities of three months or less.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Customers Outside
of the U.S.- </B>Sales to foreign customers were 67%, 59% and 60%
of total sales in the years ended December&nbsp;31, 2002 and 2001 and
2000, respectively.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Major Customers
&#151; </B>During the year ended December&nbsp;31, 2002, three customers
accounted for 33%, 25%, and 17%, respectively, of the Company&#146;s net sales.
</FONT>

<P align="center"><FONT size="2">22
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Research and Development Costs &#151; </B>The Company expenses research and
development costs as incurred, which is presented as a separate line
on the statement of operations.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Advertising Costs &#151; </B>Costs incurred for producing and communicating
advertising are expensed when incurred and included in selling, general and
administrative expenses. Consolidated advertising expense amounted to $27,645,
$20,568 and $2,968 in 2002, 2001 and 2000, respectively.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Property and
Equipment &#151; </B>Property and equipment are stated at cost. Major
renewals and improvements are charged to the asset accounts while
replacements, maintenance and repairs, which do not improve or extend
the lives of the respective assets, are expensed. At the time
property and equipment are retired or otherwise disposed of, the
asset and related accumulated depreciation accounts are relieved of
the applicable amounts.  Gains or losses from retirements or sales
are credited or charged to income.
Property and equipment are depreciated over the useful lives of the
asset ranging from 3 years to 5 years under
the straight line method.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Intangible Assets &#151; </B>Intangible assets consist of patent costs and
trademarks which are amortized on a straight-line basis over the estimated
useful lives of the patents which range from five to twenty years.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Earnings Per Share &#151; </B>On December&nbsp;31, 1997, the Company retroactively
adopted the provisions of Statement of Financial Accounting Standards No.&nbsp;128,
<I>Earnings Per Share </I>(&#147;SFAS 128&#148;) which replaces the presentation of primary and
fully diluted earnings (loss)&nbsp;per share with a presentation of basic and
diluted earnings (loss)&nbsp;per share. Basic earnings (loss)&nbsp;per share is computed
by dividing net income (loss)&nbsp;available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
(loss)&nbsp;per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. Diluted earnings (loss)&nbsp;per share is computed
similarly to fully diluted earnings (loss)&nbsp;per share pursuant to the Accounting
Principles Board (&#147;APB&#148;) Opinion No.&nbsp;15.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since the Company generated a net loss in 2001, outstanding stock options
and warrants would have been anti-dilutive and are not applicable to this
calculation.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The impact of Statement 128 on the calculation of earnings per share is as
follows:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
    <TD width="85%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Year Ended December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">BASIC:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Income (Loss) Available to Common Shareholders</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">18,292</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted Average Shares Outstanding</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">47,406,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Basic Earnings(Loss)per Share</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">DILUTED:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Income (Loss) Available to Common Shareholders</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">18,292</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted Average Shares Outstanding</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">47,406,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Effect of Dilutive Stock Options and Warrants Based on the
Treasury Stock Method Using Average Market Price</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Shares</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">47,406,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Diluted Earnings per Share</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.0000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Average Market Price of Common Stock</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">.1234</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Ending Market Price of Common Stock</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">.06</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table presents contingently issuable shares, options and
warrants to purchase shares of common stock at December&nbsp;31, 2002. Those that
were outstanding during 2001 were not included in the computation of
diluted loss per share because the impact would have been anti-dilutive:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="50%">
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,671,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">-0-</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,671,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Stock Option Plan &#151; </B>Prior to January&nbsp;1, 1996 the Company accounted for its
stock option plan in accordance with the provisions of APB Opinion No.&nbsp;25,
<I>Accounting for Stock Issued to Employees, </I>and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January&nbsp;1,
1996, the Company adopted SFAS No.&nbsp;123, <I>Accounting for Stock-Based
Compensation, </I>which permits entities to recognize as expense using the
fair-value-based method over the vesting period the fair value of all employee
stock-based awards on the date of grant. Alternatively, SFAS No.&nbsp;123 allows
entities to continue to apply the provisions of APB Opinion No.&nbsp;25 and provide
pro forma
</FONT>

<P align="center"><FONT size="2">23
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P><FONT size="2">net income (loss)&nbsp;and pro forma earnings (loss)&nbsp;per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No.&nbsp;123 has been applied. The Company
has elected to continue to apply the provisions of APB Opinion No.&nbsp;25 and
provide the pro forma disclosure provisions of SFAS No.&nbsp;123 (Note 8).
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Impairment of Long-Lived Assets and Assets to be Disposed of </B>- The Company
adopted the provisions of SFAS No.&nbsp;121, <I>Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of, </I>on January&nbsp;1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amounts of the assets exceed the fair value of the assets (see Notes 4). Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Segment Reporting </B>- The Financial Accounting Standards Board issued
Statement No.&nbsp;131, <I>Disclosures about Segments of an Enterprise and Related
Information </I>(&#147;SFAS No.&nbsp;131&#148;), in June 1997. SFAS No.&nbsp;131 establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
It replaces the &#147;industry segment&#148; concept of SFAS No.&nbsp;14, <I>Financial Reporting
for Segments of a Business Enterprise, </I>with a &#147;management approach&#148; concept as
to basis for identifying reportable segments. SFAS 131 is effective for
financial statements for fiscal years beginning after December&nbsp;15, 1997. The
Company adopted SFAS 131 in December 1997. MDT is considered a discontinued
operation as of September 1998. As of December&nbsp;31, 2002, the Company has only
one operating segment, DPI, the Company&#146;s Audio Signal
Processing business. Approximately 67% of total revenues in 2002 were
to companies located in Asia.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Income Taxes </B>- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Recent Accounting
Pronouncements </B>- The FASB recently issued the following statements:
FASB&nbsp;146 - Accounting for Costs Associated with Exit or Disposal
Activities, FASB&nbsp;147 - Acquisitions of Certain Financial
Institutions, FASB&nbsp;148 - Accounting for Stock-Based
Compensation. These FASB statements did not, or are not expected to,
have a material impact on the Company's financial position and
results of operations.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Use of Estimates </B>- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Fair Value of Financial Instruments </B>- The fair and carrying values of cash
equivalents, accounts receivable, accounts payable, short-term debt to a
related party and accrued liabilities and those potentially subject to
valuation risk at December&nbsp;31, 2002 and 2001 approximated fair value due to
their short maturity or nature.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The fair values of notes payable to a related party at December&nbsp;31, 2002
and 2001 are materially consistent with the related carrying values based on
current rates offered to the Company for instruments with similar maturities.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Discontinued Operation </B>- In September 1998, the Board of Directors
approved a plan to refocus corporate activities on the Company&#146;s core audio
business, Desper Products, Inc. In conjunction to this strategic refocusing,
the Company permanently suspended operations of MDT and placed the business and
its related patent portfolio up for sale. The Company is accounting for the
on-going operating and termination expenses of MDT as a discontinued operation
(see Note 11).
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(3)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Property and Equipment</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and equipment, as of December&nbsp;31, 2002 and 2001, consists of the
following, net of a reserve for impairment loss in 1998 in accordance with
application of SFAS 121:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
    <TD width="74%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Office Computers, Software, Equipment and Furniture</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">307,973</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">304,127</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Test Equipment</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">73,300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">73,300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Tooling Equipment</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">45,539</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">45,539</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Trade Show Booth and Demonstration Equipment</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">171,301</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">100,155</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">24
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
    <TD width="74%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Automobiles</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">7,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">7,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Leasehold Improvements</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">22,122</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Property and Equipment</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">605,113</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">552,243</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Less Accumulated Depreciation and Amortization</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">534,271</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">501,657</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Property and Equipment, Net</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">70,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">50,586</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(4)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Intangible Assets</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Intangible assets, as of December&nbsp;31, 2002 and 2001 consist of the
following:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
    <TD width="74%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Capitalized Patent, Trademarks and Technology Costs</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">486,549</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">465,650</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Less Accumulated Amortization</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">260,690</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">209,924</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intangible Assets, Net</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">225,859</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">255,726</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>


<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Estimated
amortization is as follows:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="50%">
<TR valign="bottom">
    <TD width="87%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">50,765</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">2004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">43,794</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">2005</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">25,733</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">2006</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">16,702</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">2007</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">16,702</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">Thereafter</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">72,163</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>


<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">225,859</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(5)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Notes Payable to Related Parties</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company was indebted to the Desper Family Trust, a related party, in
the amount of $112,500 at December&nbsp;31, 2002. This amount bears interest at a
fixed rate of 10% annually and is due on demand.
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(6)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Shareholders&#146; Equity</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>During the year ended December&nbsp;31, 2002, no shares were issued or
converted.</I>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>During the year ended December&nbsp;31, 2001, shares were issued or converted
as follows:</I>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2001, the Company converted 15,000 shares of Series&nbsp;B Convertible
Preferred Shares into 313,968 shares of common stock as per the terms of the
1999 Transactions. In addition, warrants to purchase 5,000 shares of common
stock were exercised in 2001, increasing shareholders&#146; equity by $1,000.
</FONT>

<P><FONT size="2"><B>Capitalization</B></FONT>

<P><FONT size="2"><B>Series&nbsp;A Preferred Stock:</B> On
December&nbsp;26, 2002 the Company filed a Certificate of Elimination
with the Delaware Secretary of State stating that no shares of the
Corporations Series&nbsp;A Preferred Stock are outstanding and that no
shares of the Series&nbsp;A Preferred Stock will be issued.
</FONT>

<P><FONT size="2"><B>Series&nbsp;B Preferred Stock:</B> On
December&nbsp;26, 2002 the Company filed a Certificate of Elimination
with the Delaware Secretary of State stating that no shares of the
Corporations Series&nbsp;B Preferred Stock are outstanding and that no
shares of the Series&nbsp;B Preferred Stock will be issued.
</FONT>

<P><FONT size="2"><B>Series&nbsp;B-1 Redeemable Convertible Preferred Stock:</B> On
November&nbsp;6, 2002 the Board of Directors Designated a
Series&nbsp;B-1 Preferred Stock. The series has a par value of $0.01 and a stated value of $10.00 per share US
and is designated as a liquidation preference. The stock will rank
prior to the Company's common stock. No dividends will be paid on the
Series&nbsp;B-1 Preferred Stock. Conversion rights exist on or after January&nbsp;1,
2003 to convert the Series&nbsp;B-1 Preferred Stock to common at a certain formula.
At December&nbsp;29, 2005 certain mandatory conversion requirements
exist subject to a certain formula. The Series&nbsp;B-1 Preferred Stock has no voting
power. Certain restrictions on trading exist based on date sensitive
events. In December&nbsp;2002, 87,967&nbsp;shares of Series&nbsp;B-1 Preferred Stock
were issued in exchange for the Series&nbsp;B Preferred Stock and
14,795&nbsp;shares were issued in
lieu of the adjusted accrued dividends on the Series&nbsp;B Preferred
Stock.
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(7)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Escrowed Performance Shares</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December 1996, the Company accepted the terms outlined by the British
Columbia Securities Commissions (&#147;BCSC&#148;) for the release of the Company&#146;s
5,776,700 escrowed &#147;Performance Shares&#148; from Canadian Escrow into a new escrow
arrangement with the Company. The overall modification was approved by the
Company&#146;s shareholders in August 1996. Under the revised arrangement, the
performance shares were released automatically as follows: 20% on June&nbsp;22,
2000; 30% on June&nbsp;22, 2001; and 30% on June&nbsp;22, 2002. Under the revised
escrow arrangement, the performance shares vested,
provided the individual had not voluntarily terminated his/her relationship
with the Company prior to applicable vesting dates.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on the revised escrow arrangement, which primarily converted the
escrow shares release from performance criteria to a time-based criteria, the
Company recorded as compensation expense the excess of the fair market value of
the 5,776,700 performance shares on the date the Company accepted the terms of
the new escrow arrangement over the purchase price of such escrow shares.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the performance shares are included in the issued and outstanding
shares for the years ended December&nbsp;31, 2002, 2001 and 2000. However, the
shares were not reflected in the calculation of loss per common share until
earned by and released to the holders on December&nbsp;30, 1996, the date on which
the Company and the BCSC accepted and entered into the terms of the current
escrowed agreement as discussed above. As of December&nbsp;31, 2002, all performance
shares under the escrow arrangement have been released.
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(8)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Stock Options</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 1995, the Company adopted a stock option plan (the &#147;Plan&#148;) pursuant to
which the Company&#146;s Board of Directors may grant stock options to directors,
officers and employees. The Plan which was approved by the
stockholders authorizes grants of options to purchase
authorized but unissued common stock up to 10% of total common shares
outstanding at each calendar quarter, 4,740,694 as of December&nbsp;31, 2002. Stock
options are
</FONT>

<P align="center"><FONT size="2">25
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P><FONT size="2">granted with an exercise price equal to the stock&#146;s fair market
value at the date of grant. Stock options have five-year terms and vest and
become fully exercisable up to three years from the date of grant.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2002, there were 2,069,194 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock
options granted during 2002, 2001 and 2000 was $0.11, $0.29 and $0.19, and,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: 2002: expected
dividend yield 0%, risk-free interest rate of 6%, expected volatility
of 427% and expected life of 5 years; 2001 expected dividend yield
0%, risk-free interest rate of 9.0%, expected volatility of 332% and an
expected life of 5&nbsp;years; 2000- expected dividend yield 0%, risk-free interest
rate of 9.0%, expected volatility of 654% and an expected life of
5&nbsp;years.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company applies APB Opinion No.&nbsp;25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for the fair value of its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No.&nbsp;123, the Company&#146;s net income (loss)&nbsp;would have
been increased to the pro forma amounts indicated below:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
    <TD width="43%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2000</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">NET INCOME (LOSS):</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">As Reported</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">18,292</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(240,107</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">382,019</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Pro Forma</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(136,498</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(344,853</FONT></TD>
    <TD><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">292,169</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">BASIC AND DILUTED LOSS:</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">As Reported</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(0.01</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Pro Forma</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(0.01</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">(0.01</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pro forma net income (loss)&nbsp;reflects only options granted since December&nbsp;31,
1994. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No.&nbsp;123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the options&#146;
vesting period and compensation cost for options granted prior to January&nbsp;1,
1995 is not considered.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock option activity during the periods indicated is as follows:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Weighted-Average</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Exercise Price</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options outstanding at December&nbsp;31, 1999</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,859,467</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1.271</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options granted</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">400,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.19</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options exercised</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(648,001</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.69</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options forfeited</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(399,167</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1.92</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options outstanding at December&nbsp;31, 2000</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,212,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1.13</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options granted</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">410,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.29</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options exercised</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(0</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options forfeited</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(750,000</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.83</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options outstanding at December&nbsp;31, 2001</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,872,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.45</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options granted</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">1,300,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options exercised</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(0</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options forfeited</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(500,799</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2.29</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Options
outstanding at December&nbsp;31, 2002</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,671,500</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31,
2002, the number of options exercisable was 2,668,332 and
the weighted-average exercise price of those options was $0.24.
</FONT>

<P align="center"><FONT size="2">26
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(9)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Warrants</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Warrant activity for the periods indicated below is as follows:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
    <TD width="69%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Warrants</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Warrant Price</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants outstanding at December&nbsp;31, 1999</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,730,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.67</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants issued</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants exercised</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(210,000</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.12</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants expired</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants outstanding at December&nbsp;31, 2000</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,520,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.72</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants issued</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants exercised</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(5,000</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.20</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants expired</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(415,000</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">1.16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants outstanding at December&nbsp;31, 2001</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,100,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.65</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants issued</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants exercised</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants expired</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(2,100,000</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.65</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants outstanding at December&nbsp;31, 2002</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the warrants granted in 1999 were issued in connection with private
placements. At December&nbsp;31, 2002, all such warrants had expired,
without exercise.
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(10)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Income Taxes</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company files a consolidated return for U.S. income tax purposes.
Income tax expense for the years ended December&nbsp;31, 2002, 2001 and 2000
consisted of the following:
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
    <TD width="47%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>2000</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">State franchise tax</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,864</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">800</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Federal taxes</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(0</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">(0</FONT></TD>
    <TD nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">9,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">2,864</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">10,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain revenues received from customers in foreign countries are subject
to withholding taxes that are deducted from outgoing funds at the time of
payment. These taxes range from approximately 10% to 16.5% and are recorded as
net foreign revenue.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income tax expense for the years ended December&nbsp;31, 2002, 2001 and 2000
differed from the amounts computed by applying the U.S. federal income tax rate
of 34&nbsp;percent to loss before income taxes primarily due to the generation of
additional net operating loss carryforwards for which no tax benefit has been
provided.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December&nbsp;31, 2001 is composed primarily
of the net loss carryforwards. The net change in the total valuation allowance
for the year ended December&nbsp;31, 2001 was insignificant. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future taxable
income and tax planning strategies in making this assessment. Based upon the
level of historical taxable losses, management believes it is more likely than
not the Company will not realize the benefits of these deductible differences
and has established a valuation allowance to fully reserve the deferred tax
assets at December&nbsp;31, 2002. Additionally, the ultimate realizability of net
operating losses may be limited by change of control provisions under Section
382 of the Internal Revenue Code.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2002, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $26,000,000 which are available to
offset future Federal taxable income, if any, through 2013. Approximately
$21,700,000 of these net operating loss carryforwards are subject to an annual
limitation of approximately $1,000,000.
</FONT>

<P align="center"><FONT size="2">27
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(11)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Discontinued Operation</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;25, 1998, the Board of Directors determined that it would be
unable to raise the necessary capital required to properly commercialize the
MDT technology. Therefore, the Company ceased funding the operations of MDT and
is actively seeking to sell the assets and technology. All employees of MDT
have been terminated and the Company has vacated the MDT facilities.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on this action, the Company is treating MDT as a discontinued
operation. Accordingly, the balance sheet and statement of operations of MDT
are not consolidated in the continuing operations of the Company, but rather
are disclosed as Net Liabilities of Discontinued Operation and Loss From
Discontinued Operation, respectively. At December&nbsp;31, 2002, after four years of
inactivity and inability to sell the assets, the remaining balance of $71,045
was eliminated.
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(12)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Commitments and Contingencies</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the downsizing of the Company in 1998, a number of
employees were terminated and have filed, on various dates, employment and
compensation related claims with the California State labor authorities. All
but two of these claims have been settled. Two former officers and employees
of MDT filed labor and employment termination related claims before the Labor
Commissioner in 2000 seeking approximately $400,000 each which was allegedly
due under each of their respective employment agreements, which claims, if
resolved in favor of the claimants, could be material to the financial
statements of the Company. The Labor Commissioner postponed those
proceedings while other litigation proceeded in the Superior Court, Orange County seeking declaratory
relief to bar the labor claims, as well as return of intellectual property and
unspecified damages for breaches of the former officers&#146; and employees&#146;
employment agreements. These employees, however, filed for personal
bankruptcy and as a result, the state court proceeding was postponed and then dismissed
primarily because of the bankruptcies. The claims became inactive. While
bankruptcy for one employee has been dismissed the claims have not been
reactivated. We
also anticipate that, from time to time, we may be named as a party to other
legal proceedings that may arise in the ordinary course of our business.
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Operating Lease Commitments</I>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is obligated under several non-cancelable operating leases.
Future minimum rental payments for all operating leases of approximately
$77,000 through November 2002. Rent expense amounted to approximately $78,000,
$ 78,000 and $115,000 for the years ended December&nbsp;31, 2002, 2001 and 2000,
respectively.
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2"><B>(13)</B></FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2"><B>Profit Sharing Plan</B></FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has a 401(k) profit sharing plan covering substantially all
employees, subject to certain participation and vesting requirements. The
Company may elect to make discretionary contributions to the Plan, but has
never done so over the life of the Plan. The amount charged to administrative
expense for the Plan in 2002, 2001 and 2000 was approximately $2,000 per annum.
</FONT>

<P align="center"><FONT size="2">28
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<!-- link2 "Item&nbsp;9.&nbsp;&nbsp;Change in and Disagreements with Accountants on Accounting and Financial Disclosure" -->
<DIV align="left"><A NAME="008"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;9.&nbsp;&nbsp;</B><B><I>Change in and Disagreements with Accountants on Accounting and Financial Disclosure</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</FONT>

<!-- link1 "PART III" -->
<DIV align="left"><A NAME="009"></A></DIV>
<P align="center"><FONT size="2"><B>PART III</B></FONT>

<!-- link2 "Item&nbsp;10.&nbsp;&nbsp;Directors and Executive Officers of the Registrant" -->
<DIV align="left"><A NAME="010"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;10.&nbsp;&nbsp;</B><B><I>Directors and Executive Officers of the Registrant</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information required for this item incorporated by reference to the
Definitive Proxy to be filed on or before April&nbsp;30, 2003.
</FONT>

<!-- link2 "Item&nbsp;11.&nbsp;&nbsp;Executive Compensation" -->
<DIV align="left"><A NAME="011"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;11.&nbsp;&nbsp;</B><B><I>Executive Compensation</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information required for this item incorporated by reference to the
Definitive Proxy to be filed on or before April&nbsp;30, 2003.
</FONT>

<!-- link2 "Item&nbsp;12.&nbsp;&nbsp;Security Ownership of Certain Beneficial Owners and Management" -->
<DIV align="left"><A NAME="012"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;12.&nbsp;&nbsp;</B><B><I>Security Ownership of Certain Beneficial Owners and Management</I></B></FONT>

<P align="center"><FONT size="2"><B>Equity Compensation Plan Information</B></FONT>

<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="5%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number of securities</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number of securities</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>remaining available for</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>to be issued</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Weighted-average</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>future issuance under</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>upon exercise of</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>exercise price of</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>equity compensation plans</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>outstanding options,</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>outstanding options,</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>(excluding securities</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center" colspan="2"><FONT size="1"><B>Plan category</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>warrants and rights</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>warrants and rights</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>reflected in column (a))</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="2"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>(a)</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>(b)</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>(c)</B></FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Equity compensation
plans approved by
security holders</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">2,671,500</FONT></TD>
    <TD nowrap><FONT size="2"><SUP>1</SUP></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">$</FONT></TD>
    <TD align="right"><FONT size="2">0.24</FONT></TD>
    <TD nowrap><FONT size="2"><SUP>1</SUP></FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD nowrap><FONT size="2"><SUP>2</SUP></FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Equity compensation
plans not approved
by security holders</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right"><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
<P>
<HR size="1" width="18%" align="left" noshade>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
      <TD width="1%" align="left" nowrap><FONT size="2"><SUP>1</SUP></FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">Represents options to acquire the Company&#146;s Common Stock under the Company&#146;s 1995 Stock
Option Plan and 1996 Incentive Plan approved by the Company&#146;s
stockholders in 1995 and 1996, respectively. The 1995 Plan authorizes
grants of options to purchase authorized but unissued common stock in an amount of up to 10% of total
common shares outstanding at each calendar quarter or, 4,740,694 as of December&nbsp;31, 2002.
Stock options are granted with an exercise price equal to the stock&#146;s fair market value at
the date of grant. Stock options have five-year terms and vest and become fully
exercisable as determined by the committee on date of grant. The 1996
Plan supplements the 1995 Plan by allowing for stock appreciation,
incentive shares and similar accruals aggregating not more than the
equivalent of 500,000 shares and the regrant of any Performance Shares
that become available for regrant. See Note&nbsp;2.</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR valign="top">
      <TD width="1%" align="left" nowrap><FONT size="2"><SUP>2</SUP></FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">In December 1996, the Company accepted the terms outlined by the British Columbia
Securities Commissions for the release of the Company&#146;s 5,776,700 escrowed
&#147;Performance Shares&#148; from Canadian Escrow into a new escrow arrangement with the
Company. The overall modification was approved by the Company&#146;s stockholders in
August 1996. Under the revised arrangements, the final release date was June&nbsp;22, 2002. Since all
the Performance Shares were included in the issued and outstanding shares as of 1996
and thereafter, the Performance Shares have no dilutive effect on the Company&#146;s equity.</FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The remaining
information is required for this item is incorporated by reference to the
Definitive Proxy to be filed on or before April&nbsp;30, 2003.
</FONT>

<!-- link2 "Item&nbsp;13.&nbsp;&nbsp;Certain Relationships and Related Transactions" -->
<DIV align="left"><A NAME="013"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;13.&nbsp;&nbsp;</B><B><I>Certain Relationships and Related Transactions</I></B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information required for this item incorporated by reference to the
Definitive Proxy to be filed on or before April&nbsp;30, 2003.
</FONT>

<!-- link2 "Item&nbsp;14.&nbsp;&nbsp;Controls and Procedures" -->
<DIV align="left"><A NAME="014"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;14.&nbsp;&nbsp;</B><B><I>Controls and Procedures</I></B></FONT>

<P align="left"><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Within
90&nbsp;days prior to the filing of this report, the Company carried
out an evaluation, under the supervision and with the participation
of the Company&#146;s management, including the Company&#146;s Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the
Company&#146;s disclosure controls and procedures. Consistent with
the Company&#146;s policies adopted to accommodate a single person holding both designations, the
evaluation was undertaken in consultation with the Company&#146;s audit committee and accounting
personnel. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company&#146;s disclosure controls and procedures
are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and
Exchange Commission&#146;s rules and forms.</FONT>

<P align="left"><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There
were no significant changes in the Company&#146;s internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.</FONT>

<!-- link1 "PART IV" -->
<DIV align="left"><A NAME="015"></A></DIV>
<P align="center"><FONT size="2"><B>PART IV</B></FONT>

<!-- link2 "Item&nbsp;15.&nbsp;&nbsp;Exhibits, Financial Statement Schedules and Reports on Form&nbsp;8-K" -->
<DIV align="left"><A NAME="016"></A></DIV>
<P align="left"><FONT size="2"><B>Item&nbsp;15.&nbsp;&nbsp;</B><B><I>Exhibits, Financial Statement Schedules and Reports on Form&nbsp;8-K</I></B></FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="90%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Exhibit</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Description</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade width=55></TD>
</TR>
<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">2.1*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Desper-Spatializer Reorganization Agreement dated January&nbsp;29, 1992. (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">2.2*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Arrangement Agreement dated as of March&nbsp;4, 1994 among Spatializer-Yukon, DPI and Spatializer-Delaware
(Incorporated by reference to the Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No
33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">3.1*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Certificate of Incorporation of Spatializer-Delaware as filed February&nbsp;28, 1994. (Incorporated by
reference to the Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective
August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">3.2*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Amended and Restated Bylaws of Spatializer-Delaware. (Incorporated by reference to the Company&#146;s
Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">3.3*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Certificate of Designation of Series&nbsp;B 10% Redeemable Convertible Preferred Stock of the Company as
filed December&nbsp;27, 1999</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">3.4*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Certificate of Amendment of Certificate of Incorporation of the Company as filed on February&nbsp;25, 2000</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="left"><FONT size="2">3.5</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Certificate of Designation of Series&nbsp;B-1
Redeemable Convertible Preferred Stock as filed December&nbsp;20, 2002</FONT></TD>
</TR>
<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="left"><FONT size="2">3.6</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Certificate of Elimination of Series&nbsp;A
Preferred Stock as filed December&nbsp;26, 2002</FONT></TD>
</TR>
<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="left"><FONT size="2">3.7</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Certificate of Elimination of Series&nbsp;B
Preferred Stock as filed December&nbsp; 26,2002</FONT></TD>
</TR>
<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.1*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Form of Subscription Agreement for August 1994 Private Placement. (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.2*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Form of Subscription Agreement for November 1994 Private Placement. (Incorporated by reference to the
Company&#146;s Registration Statement on Form S-1.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.3*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.) Form of Spatializer-Yukon Incentive
Stock Option Agreement. (Incorporated by reference to the Company&#146;s Registration Statement on Form&nbsp;S-1,
Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.4*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Spatializer-Delaware Incentive Stock Option Plan (1995 Plan). (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.5*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Performance Share Escrow Agreements dated June&nbsp;22, 1992 among Montreal Trust Company of Canada,
Spatializer-Yukon and certain shareholders with respect to escrow of 2,181,048 common shares of
Spatializer-Yukon. (Incorporated by reference to the Company&#146;s Registration Statement on Form&nbsp;S-1,
Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">29
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="90%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Exhibit</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Description</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade width=55></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.6*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Spatializer-Delaware 1996 Incentive Plan. (Incorporated by reference to the Company&#146;s Proxy Statement
dated June&nbsp;25, 1996 and previously filed with the Commission.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.7*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Form of Subscription Agreement for 1995 Private Placements. (Incorporated by reference to the Company&#146;s
Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.8*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Form of Subscription Agreement and Warrant Agreement for March&nbsp;7, 1997 Private Placement. (Incorporated
by reference to the Company&#146;s Annual Report on Form&nbsp;10-K for the year ended December&nbsp;31, 1997.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.9*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Modification Agreement for Escrowed Performance Shares. (Incorporated by reference to the Company&#146;s
Definitive Proxy Statement dated June&nbsp;28, 1996 and previously filed with the Commission.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.10*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Subscription Agreement for April 1998 Private Placement. (Incorporated by reference to the Company&#146;s
Registration Statement on Form&nbsp;S-3, Registrations No.&nbsp;333-52863, filed May&nbsp;15, 1998.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.11*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Common Stock Purchase Agreement dated as of December&nbsp;29, 1999 among the Company, CPR (USA)&nbsp;Inc.,
LibertyView Funds, L.P., LibertyView Fund, LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.12*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Stock Purchase Warrant, dated as of December&nbsp;29, 1999 issued by the Company to CPR (USA)&nbsp;Inc.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.13*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Stock Purchase Warrant, dated as of December&nbsp;29, 1999 issued by the Company to LibertyView Funds, L.P.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.14*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Stock Purchase Warrant, dated as of December&nbsp;29, 1999 issued by the Company to LibertyView Fund, LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.15*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Registration Rights Agreement dated as of December&nbsp;29, 1999 among the Company and CPR (USA)&nbsp;Inc.,
LibertyView Funds, L.P. and LibertyView Fund, LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.16*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Secured Non-Negotiable Convertible Promissory Note dated as of December&nbsp;29, 1999 issued by the Company
to CPR (USA)&nbsp;Inc.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.17*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Secured Non-Negotiable Convertible Promissory Note dated as of December&nbsp;29, 1999 issued by the Company
to LibertyView Funds, L.P.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.18*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Secured Non-Negotiable Convertible Promissory Note dated as of December&nbsp;29, 1999 issued by the Company
to LibertyView Fund LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.19*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Registration Rights Agreement dated as of December&nbsp;29, 1999 among the Company and CPR (USA)&nbsp;Inc.,
LibertyView Funds, L.P. and LibertyView Fund, LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.20*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Agreement Regarding Cancellation of Warrants, dated as of December&nbsp;29, 1999 among CPR (USA), Inc.,
LibertyView Funds, L.P. and LibertyView Fund, LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.21*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Common Stock Subscription Agreement dated as of December&nbsp;29, 1999 between the Company and Lufeng
Investments (as assignee of Arab Commerce Bank)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.22*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Stock Purchase Warrant, dated as of December&nbsp;29, 1999 issued by the Company to Lufeng Investments (as
assignee of Arab Commerce Bank)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.23*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Registration Rights Agreement dated as of December&nbsp;29, 1999 between the Company and Lufeng Investments
(as assignee of Arab Commerce Bank)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.24*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Common Stock Subscription Agreement dated as of December&nbsp;29, 1999 between the Company and Bank Insinger
de Beaufort</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.25*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Stock Purchase Warrant, dated as of December&nbsp;29, 1999 issued by the Company to Bank Insinger de Beaufort</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.26*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Registration Rights Agreement dated as of December&nbsp;29, 1999 between the Company and Bank Insinger de
Beaufort</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.27*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Common Stock Subscription Agreement dated as of December&nbsp;29, 1999 between the Company and Romofin, A.G</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.28*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Stock Purchase Warrant, dated as of December&nbsp;29, 1999 issued by the Company to Romofin, A.G</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.29*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Registration Rights Agreement dated as of December&nbsp;29, 1999 between the Company and Romofin, A.G</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.30*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">10% Convertible Preferred Stock Subscription Agreement dated as of December&nbsp;29, 1999 between the Company
and Clarion Finanz, A.G. Carlo Civelli, Henry R. Mandell, James D. Pace, Jerold H. Rubinstein, Gilbert
N. Segel, Aton Select Fund Ltd. and Romofin A.G</FONT></TD>
</TR>
<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">4.31</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Form of Exchange Agreement effective
December&nbsp;26, 2002 entered into by holders of Series&nbsp;B
Preferred Stock in connection with exchange of same for Series&nbsp;B-1
Preferred Stock</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">10.1*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">License Agreement dated June&nbsp;29, 1994 between DPI and MEC. (Incorporated by reference to the Company&#146;s
Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">30
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="90%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Exhibit</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center" colspan="3"><FONT size="1"><B>Number</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Description</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD colspan="3"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade width=55></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">10.2*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">License Agreement dated November&nbsp;11, 1994 between DPI and ESS. (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">10.3*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">License Agreement dated June&nbsp;10, 1994 between Joel Cohen and DPI. (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">10.4*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Agreement Regarding Indebtedness dated as of December&nbsp;29, 1999 among the Company and CPR (USA)&nbsp;Inc.,
LibertyView Funds, L.P. and LibertyView Fund, LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">10.5*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Security Agreement dated as of December&nbsp;29, 1999 among the Company and CPR (USA)&nbsp;Inc., LibertyView
Funds, L.P. and LibertyView Fund, LLC</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">10.6*</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Finder&#146;s Fee Agreement dated as of December&nbsp;27, 1999 between the Company and Bristol Capital, L.L.C</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">21.1&nbsp;&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Schedule of Subsidiaries of the Company</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top" align="right"><FONT size="2">&nbsp;</FONT></TD>
    <TD valign="top" align="right"><FONT size="2">99.1&nbsp;&nbsp;</FONT></TD>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">Certification of Chief Executive Officer and
Chief Financial Officer</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P>
<HR size="1" width="18%" align="left" noshade>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
      <TD width="1%" align="left" nowrap><FONT size="2">*</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">Previously filed.</FONT></TD>
</TR>
</TABLE>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Financial Statements </B>&#151; See pages 17 and following.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Reports on 8-K </B>&#151; None
</FONT>

<P align="center"><FONT size="2">31
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "SIGNATURES" -->
<DIV align="left"><A NAME="017"></A></DIV>
<P align="center"><FONT size="2"><B>SIGNATURES</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of Section&nbsp;13 or 15(d) 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.
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="45%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="50%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><FONT size="2">Dated: March&nbsp;26, 2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
SPATIALIZER AUDIO LABORATORIES, INC.<BR>
(Registrant)</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
/s/&nbsp;&nbsp;&nbsp;Henry R. Mandell<BR>
Henry R. Mandell<BR>
<I>Chief Executive Officer &#038; Chief Financial Officer</I></FONT></TD>
</TR>
</TABLE>
</CENTER>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="16%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="26%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center"><FONT size="1"><B>Signature</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Title</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Date</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center"><HR size="1" noshade width=60></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade width=30></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade width=30></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><FONT size="2">/s/&nbsp;&nbsp;&nbsp;Carlo Civelli<BR>
<hr noshade size="1">
Carlo Civelli</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
Director
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">March&nbsp;26, 2003</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;
<hr noshade size="1">
Stephen W. Desper</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
Director
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

<TD align="center" valign="top"><FONT size="2">March&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;, 2003</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">/s/&nbsp;&nbsp;&nbsp;James D. Pace
<hr noshade size="1">
James D. Pace</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
Director
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">March&nbsp;26, 2003</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">/s/&nbsp;&nbsp;Gilbert N. Segel
<hr noshade size="1">
Gilbert N. Segel</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
Director
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">March&nbsp;26, 2003</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
    <TD valign="top"><FONT size="2">/s/&nbsp;&nbsp;Henry R. Mandell
<hr noshade size="1">
Henry R. Mandell</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
Director
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">March&nbsp;26, 2003</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">32</FONT>

</BODY>
</HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.5
<SEQUENCE>3
<FILENAME>v88363exv3w5.txt
<DESCRIPTION>EXHIBIT 3.5
<TEXT>
<PAGE>

                                                                     Exhibit 3.5


                           CERTIFICATE OF DESIGNATION
                                       OF
                SERIES B-1 REDEEMABLE CONVERTIBLE PREFERRED STOCK
                                       OF
                      SPATIALIZER AUDIO LABORATORIES, INC.

      Pursuant to Section 151 of the General Corporation Law ("GCL") of the
State of Delaware, and the Bylaws of SPATIALIZER AUDIO LABORATORIES, INC., a
Delaware corporation (the "Company"), we the undersigned, being President and
Assistant Secretary, respectively, DO HEREBY CERTIFY, that the following
resolution was duly adopted by the Board of Directors on November 6, 2002:

      RESOLVED, that pursuant to the authority conferred upon the Board of
Directors by the Company's Certificate of Incorporation and Bylaws, the Board of
Directors hereby provides for the issuance of a series of Preferred Stock of the
Company consisting of 118,351 authorized shares which shall have the voting
powers, designations, preferences and relative participating, optional or other
rights, if any, and the qualifications, limitations, or restrictions, set forth
in such Certificate of Incorporation, and in addition thereto, the following:

      Section 1. Designation and Amount. The series of Preferred Stock hereby
created shall be designated as "Series B-1 Preferred Stock", shall have a par
value of $0.01 per share and the number of shares constituting the Series B-1
Preferred Stock shall be 118,351. The Series B-1 Preferred Stock shall have a
stated value of US$10.00 per share.

      Section 2. Rank. The Series B-1 Preferred Stock shall rank: (i) prior to
all of the Company's Common Stock, par value $0.01 per share ("Common Stock"),
(ii) prior to any class or series of capital stock of the Company hereafter
created (unless such future class specifically, by its terms, ranks on parity
with the Series B-1 Preferred Stock), and (iii) junior to any class or series of
capital stock of the Company created before the date hereof, in each case as to
distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such distributions being referred
to collectively as "Distributions").

      Section 3. Dividends. No dividends shall be paid on the Series B-1
Preferred Stock.

      Section 4. Sinking Funding. No provisions shall be made for any sinking
fund.

      Section 5. Liquidation Preference.

            (a) In the event of any liquidation, dissolution or winding up of
the Company, either voluntary or involuntary, the holders of Series B-1
Preferred Stock shall be entitled to receive an amount per share equal to the
sum of US$10.00 for each outstanding share of Series B-1 Preferred Stock (the
"Liquidation Preference"). If upon the occurrence of such event, the assets and
funds available to be distributed among the holders of the Series B-1 Preferred
Stock shall be insufficient to permit the payment to such holders of the full
preferential amounts due to such holders, then the entire assets and funds of
the Company legally available for distribution shall be distributed among the
holders of the Series B-1 Preferred Stock on a pro rata basis.

                                      -1-
<PAGE>


            (b) Notwithstanding anything set forth above, holders of Series B-1
Preferred Stock shall not be entitled to receive more than the Liquidation
Preference in the event of any corporate reorganizations or any other
transaction (or series of related transactions) that results in the transfer of
more than fifty percent (50%) of the outstanding voting power of the Company,
and such transactions shall not constitute a liquidation, dissolution, or
winding up of the Company if the successor assumes that obligations of the
Company with respect to the Series B-1 Preferred Stock. A sale, conveyance, or
other disposition of all or substantially all of the Company's assets, shall
constitute a liquidation, dissolution or winding up within the meaning of this
paragraph and shall entitle the holders of the Series B-1 Preferred Stock to the
Liquidation Preference, to the extent available above. The purchase or
redemption by the Company of stock of any class, in any number permitted by law,
for the purpose of this paragraph, shall not be regarded as a liquidation,
dissolution or winding up of the Company.

      Section 6. Conversion. The record holders of this Series B-1 Preferred
Stock shall have conversion rights as follows (the "Conversion Rights").

            (a) Right to Convert.

                  (1) On or after January 1, 2003, the holders shall have the
right, subject to Section 6(a)(2) below, to convert, in whole or in part, shares
of Series B-1 Preferred Stock into shares of Common Stock based on the
conversion price per share defined below (the "Conversion Price"). The number of
shares of Common Stock to be issued to the holder upon conversion shall be
determined by (i) multiplying the number of shares of Series B-1 Preferred Stock
to be converted by US$10.00, and (ii) dividing this product by the Conversion
Price, provided, however, that the Company shall not issue to any holder a
fraction of a share of Common Stock and shall instead round the number of shares
of Common Stock issued up to the next whole share of Common Stock.

                  (2) Upon an election by a holder to convert shares of Series
B-1 Preferred Stock into shares of Common Stock, the Company shall have the
right to pay cash to such holder in lieu of issuing shares of Common Stock. If
the Company elects to pay cash rather than issuing shares of Common Stock, the
Company shall pay to the holder US$10.00 for each share of Series B-1 Preferred
Stock that such holder had elected to convert to shares of Common Stock. The
holder shall surrender the shares of Series B-1 Preferred Stock to the Company
for cancellation.

                  (3) The "Conversion Price" shall be determined on the
Conversion Date, and shall equal Ninety percent (90%) of the average of the
closing bid prices of Common Stock for the ten (10) consecutive trading days
ending on the trading day immediately preceding the Conversion Date (as defined
below), provided, however, that the Conversion Price shall under no
circumstances: (i) be lower than Fifty-Six Cents ($0.56) (the "Floor Price"); or
(ii) be higher than 200% of the Floor Price (the "Ceiling Price"). The "closing
bid price" shall mean the last bid price for Common Stock on the OTC Bulletin
Board, as reported by any authoritative source acceptable to the Company or on
the successor market for the Company's Common Stock.

                  (4) In the event of any stock split, reverse stock split,
stock dividend, reclassification or similar event affecting the Common Stock
(each an "Adjustment

                                      -2-
<PAGE>

Transaction"), then both the Floor Price and the Ceiling Price shall be adjusted
by multiplying them by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such Adjustment
Transaction, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such Adjustment Transaction.

            (b) Mechanics of Conversion. Conversion of the Series B-1 Preferred
Stock to Common Stock may be exercised by holder telecopying an executed and
completed notice of conversion ("Notice of Conversion") to the Company, and
delivering the original Notice of Conversion and the certificate representing
the shares of Series B-1 Preferred Stock to the Company by hand or by overnight
courier within three (3) business days of exercise. Each date on which a Notice
of Conversion is telecopied to and received by the Company in accordance with
the provisions hereof shall be deemed a "Conversion Date". The Company will
transmit the certificates representing the Common Stock issuable upon conversion
of all or any part of the shares of Series B-1 Preferred Stock (together with
any certificates for replacement shares of Series B-1 Preferred Stock not
previously converted but included in the original certificate presented for
conversion) to the holder via overnight courier within three (3) business days
after the Company has received the original Notice of Conversion and certificate
for the shares of Series B-1 Preferred Stock being so converted. The Notice of
Conversion and certificate representing the portion of the shares of Series B-1
Preferred Stock converted shall be delivered as follows:

            To the Company:     Spatializer Audio Laboratories, Inc.
                                900 Lafayette Street, Suite 710
                                Santa Clara, CA 95050
                                Attention: Henry Mandell
                                Telephone: (408) 296-0600
                                Facsimile: (408) 296-0650

or to such other person at such other place as the Company shall designate to
the holder in writing.

            (c) Lost or Stolen Certificates. Upon receipt by the Company of
evidence of the loss, theft, destruction or mutilation of any certificates
representing shares of Series B-1 Preferred Stock, and (in the case of loss,
theft or destruction) of indemnity or security reasonably satisfactory to the
Company, and upon surrender and cancellation of the certificate(s), if
mutilated, the Company shall execute and deliver new certificate(s) of like
tenor and date. However, the Company shall not be obligated to re-issue such
lost or stolen certificates if holder contemporaneously requests the Company to
convert such Series B Preferred Stock into Common Stock.

            (d) Mandatory Conversion. To the extent not previously converted,
any Series B-1 Preferred Stock then outstanding shall be subject to mandatory
conversion on December 29, 2005, at which time all shares of Series B-1
Preferred Stock will automatically be converted upon the terms set forth in
Section 6(a) at the Conversion Price in effect at such time. Mandatory
conversion shall not occur in the event of the occurrence of one or both of the
following at the time of such mandatory conversion: (x) the Company is unable,
or admits in

                                      -3-
<PAGE>

writing its inability, to pay its debts, or is not paying its debts generally as
they come due, or has made any assignment for the benefit of creditors; or (y)
the Company has commenced, or there has been commenced against the Company, any
case, proceeding, or other action seeking to have an order for relief entered
with respect to the Company, or to adjudicate the Company as a bankrupt or
insolvent.

            (e) Reservation of Stock Issuable upon Conversion. The Company has
reserved and will keep available out of its authorized but unissued shares of
Common Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all then outstanding shares of
Series B-1 Preferred Stock at the Floor Price.

            (f) Conversion Adjustments.

                  (1) Adjustment Due to Merger, Consolidation, Etc. If, prior to
the conversion of all Series B-1 Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of another class or
classes of stock or securities of the Company or another entity, or other
property, then each holder of Series B-1 Preferred Stock shall, upon being given
at least ten (10) business days advance written notice of such transaction,
thereafter have the right to acquire and receive, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such shares of stock and/or
securities or other property as would have been issuable or payable with respect
to or in exchange for the number of shares of Common Stock purchasable and
receivable upon the conversion of Series B-1 Preferred Stock held by such holder
immediately prior to the merger, consolidation, exchange of shares,
recapitalization or reorganization. Appropriate provisions shall be made with
respect to the rights and interests of the holders of the Series B-1 Preferred
Stock to the end that the provisions hereof shall thereafter be applicable, as
nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the conversion thereof. The Company shall not effect
any transaction described in this subsection unless (1) each holder of Series
B-1 Preferred Stock has been given at least ten (10) business days advance
written notice of such transaction, and (2) the resulting successor or acquiring
entity (if not the Company) assumes by written instrument the obligation to
deliver to the holders of the Series B-1 Preferred Stock such shares of stock
and/or securities or other property as the holders of the Series B-1 Preferred
Stock would be entitled to receive pursuant to this Section 6(f).

                  (2) No Fractional Shares. If any adjustment under this section
would create a fractional share, or a right to acquire a fractional share, of
any security, such fractional share shall be disregarded and the number of
shares of such security issuable upon conversion shall be the next higher number
of shares.

      Section 7. Voting Rights. The holders of the Series B-1 Preferred Stock
shall have no voting power whatsoever, except with respect to any amendment to
the Company's Certificate of Incorporation which would have an adverse effect on
the Series B-1 Preferred Stock or as otherwise provided by the Delaware
Corporation Laws.


                                      -4-
<PAGE>


      Section 8. Status of Converted Stock. In the event any shares of Series
B-1 Preferred Stock shall be converted pursuant to Section 6 hereof, shall be
exchanged by the holders for other securities of the Company or if the Company
has elected to pay cash to such holder pursuant to Section 6(a)(2) in lieu of
issuing shares of Common Stock, the shares of Series B-1 Preferred Stock so
converted (or for which cash was paid in lieu of conversion) shall be cancelled,
shall return to the status of authorized but unissued Preferred Stock of no
designated series, and shall not be issuable by the Company as Series B-1
Preferred Stock.

      Section 9. Preference Rights. Nothing contained herein shall be construed
to prevent the Board of Directors of the Company from issuing one or more series
of Preferred Stock with dividend and/or liquidation preferences junior to the
dividend and liquidation preferences of the Series B-1 Preferred Stock.

      Section 10. Restrictions on Trading. Each holder of Series B-1 Preferred
Stock shall agree that, during the ten (10) trading days immediately preceding
the Conversion Date, it shall not, whether directly or indirectly: (i) buy or
sell, or make or accept any offer to buy or sell, any shares of capital stock of
the Company; or (ii) buy or sell, or make or accept any offer to buy or sell,
any derivative security based on or relating to any capital stock of the Company
(including without limitation options to buy or sell shares of capital stock of
the Company). Each holder of Series B-1 Preferred Stock shall also agree not to
engage in any short sales of any shares of capital stock of the Company for so
long as any of its shares of Series B-1 Preferred Stock remain issued and
outstanding. No holder of Series B-1 Preferred Stock shall be entitled to
convert its Series B-1 Preferred Stock into Common Stock until ten (10)
consecutive trading days have elapsed during which such holder has not engaged
in any of the transactions prohibited by this Section 10.


                  [Remainder of Page Intentionally Left Blank]


                                      -5-
<PAGE>



      IN WITNESS THEREOF, the Company has caused the undersigned to sign this
Certificate of Designation this 12th day of December, 2002.

                                           SPATIALIZER AUDIO LABORATORIES, INC.


                                           By: /s/ HENRY R. MANDELL
                                               ---------------------------------
                                               Henry R. Mandell,
                                               Chief Executive Officer


Attest:


By: /s/ MARGARET G. GRAF
   ----------------------------------
   Assistant Secretary


                                      -6-


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.6
<SEQUENCE>4
<FILENAME>v88363exv3w6.txt
<DESCRIPTION>EXHIBIT 3.6
<TEXT>
<PAGE>
                                                                     Exhibit 3.6


                           CERTIFICATE OF ELIMINATION

                                       OF

                            SERIES A PREFERRED STOCK

                                       OF

                       SPATIALIZER AUDIO LABORATIES, INC.

            Spatializer Audio Laboraties, Inc., a corporation organized and
existing under the Delaware General Corporation Law (the "Corporation") pursuant
to Section 151(g) of the Delaware General Corporation Law, does hereby certify
that the following resolutions regarding the Corporation's Series A Preferred
Stock were duly adopted by the Corporation's Board of Directors:

                  RESOLVED, that no shares of the Corporation's Series A
            Preferred Stock are outstanding and that no shares of the Series A
            Preferred Stock will be issued subject to the certificate of
            designations previously filed with respect to the Series A Preferred
            Stock; and

                  FURTHER RESOLVED, that the officers of the Corporation are
            directed to file with the Secretary of State of the State of
            Delaware a certificate pursuant to Section 151(g) of the Delaware
            General Corporation Law setting forth these resolutions in order to
            eliminate from the Corporation's certificate of incorporation all
            matters set forth in the certificate of designations with respect to
            the Series A Preferred Stock.

            IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Elimination to be signed by its duly authorized officer this 23rd day December,
2002.

                                          SPATIALIZER AUDIO LABORATIES, INC.


                                          By: /s/ MARGARET G. GRAF
                                             -----------------------------------
                                             Margaret G. Graf
                                             Assistant Secretary

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.7
<SEQUENCE>5
<FILENAME>v88363exv3w7.txt
<DESCRIPTION>EXHIBIT 3.7
<TEXT>
<PAGE>

                                                                     Exhibit 3.7

                           CERTIFICATE OF ELIMINATION

                                       OF

                            SERIES B PREFERRED STOCK

                                       OF

                       SPATIALIZER AUDIO LABORATIES, INC.

            Spatializer Audio Laboraties, Inc., a corporation organized and
existing under the Delaware General Corporation Law (the "Corporation") pursuant
to Section 151(g) of the Delaware General Corporation Law, does hereby certify
that the following resolutions regarding the Corporation's Series B Preferred
Stock were duly adopted by the Corporation's Board of Directors:

                  RESOLVED, that no shares of the Corporation's Series B
            Preferred Stock are outstanding and that no shares of the Series B
            Preferred Stock will be issued subject to the certificate of
            designations previously filed with respect to the Series B Preferred
            Stock; and

                  FURTHER RESOLVED, that the officers of the Corporation are
            directed to file with the Secretary of State of the State of
            Delaware a certificate pursuant to Section 151(g) of the Delaware
            General Corporation Law setting forth these resolutions in order to
            eliminate from the Corporation's certificate of incorporation all
            matters set forth in the certificate of designations with respect to
            the Series B Preferred Stock.

            IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Elimination to be signed by its duly authorized officer this 23rd day December,
2002.

                                             SPATIALIZER AUDIO LABORATIES, INC.


                                             By: /s/ MARGARET G. GRAF
                                                --------------------------------
                                                Margaret G. Graf
                                                Assistant Secretary

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.31
<SEQUENCE>6
<FILENAME>v88363exv4w31.txt
<DESCRIPTION>EXHIBIT 4.31
<TEXT>
<PAGE>
                                                                    Exhibit 4.31



                           Form of Exchange Agreement

               10% CONVERTIBLE SERIES B PREFERRED STOCK AGREEMENT

      THIS 10% CONVERTIBLE SERIES B PREFERRED STOCK AGREEMENT (the "Agreement")
is entered into as of December 16, 2002, by and among Spatializer Audio
Laboratories, Inc., a Delaware corporation (the "Company") and the holders of
the Company's 10% Convertible Series B Preferred Stock listed on Schedule A
hereto (each individually a "Holder" and collectively, the "Holders").

                                    RECITALS

      A. Pursuant to the terms of that certain 10% Convertible Series B
Preferred Stock Subscription Agreement, dated December 29, 1999, by and among
the Company and the Holders, the Holders acquired an aggregate of 102,967 shares
of 10% Series B Convertible Preferred Stock of the Company (the "Series B
Preferred"), none of which shares have been converted and which shares of Series
B Preferred are the only outstanding shares of preferred stock of the Company.

      B. The Company and the Holders desire to effect a partial recapitalization
in which the Holders will exchange all of their respective shares of Series B
Preferred, for a new series of shares, being the Series B-1 Convertible
Preferred Stock of the Company (the "Series B-1 Preferred") on the terms and
conditions set forth below (the "Stock Exchange").

      C. The Series B Preferred provide for the accrual and payment of dividends
at the rate of 10% per annum until the Series B Preferred has been converted, in
which event all dividends are payable in Common Stock or in cash, at the option
of the Company, and the Holders and the Company wish, in connection with the
Stock Exchange, to agree to modify the dividends which are due and payable from
the date of issuance of the Series B Preferred through December 29, 2002 and to
provide for the payment of such dividends (the "Dividends Due") and for no
further accrual or payment of dividends and, in connection therewith, to have
issued to them at this time additional shares of the Series B-1 Preferred to
reflect the Dividends Due; all as set forth below.

      D. The Series B Preferred provides for conversion, at the option of the
Holder, of the Series B Preferred into the Common Stock of the Company and for
an automatic conversion, if not sooner converted, of all of the outstanding
Series B Preferred into the Common Stock of the Company on December 29, 2002 and
the Company and the Holders now wish, pursuant to the Stock Exchange, to extend
the date for automatic conversion to December 29, 2005.

<PAGE>


                                    AGREEMENT

      1. Exchange.

            (a) Terms of Exchange. The Company hereby agrees to issue to the
Holders and the Holders agree to accept, a new series of preferred shares,
denominated as Series B-1 Preferred, to be issued pursuant to a Certificate of
Designation to be filed with the Secretary of State of Delaware, substantially
in the form attached as Exhibit 1. The Series B-1 Preferred are to be issued on
the basis of one share of Series B-1 Preferred for each share of Series B
Preferred now held, except that, in addition thereto, there shall be issued to
the Holders, additional shares of Series B-1 Preferred representing the
Dividends Due (the "Dividend Shares") with the number of Dividend Shares to be
issued to be calculated using a dividend of 6.6% for the year 2000, 5.9% for the
year 2001 and 2.4% for the year 2002, respectively, in lieu of, and in full
discharge of, all obligations with respect to Dividends Due and any further
dividends as set forth in the Certificate of Designation for the Series B
Preferred, a copy of which is attached as Exhibit 2. In addition, the Holders
agree that no dividends shall accrue or be payable with respect to the Series
B-1 Preferred. As set forth in the Certificate of Designation for the Series B-1
Preferred, the Series B-1 Preferred (i) shall be convertible at the option of
the Holder at any time after issuance at a Floor Price of $0.56 and at a Ceiling
Price of $1.12, such amounts being identical to the Floor Price and Ceiling
Price applicable to the Series B Preferred, and (ii) shall be automatically
converted, if not sooner converted, on December 29, 2005.

            (b) Exchange of Shares. Therefore, concurrently with the execution
of this Agreement and subject to the terms and conditions set forth herein, each
Holder does hereby exchange, transfer and deliver to the Company that number of
shares of Series B Preferred set forth opposite his or its name on Schedule A
hereto (the "Stock Exchange").

            (c) Issuance of the Series B-1 Preferred Stock. In exchange for each
Holder's respective shares of Series B Preferred and all Dividend Shares
issuable thereon, the Company does hereby issue and deliver to each Holder, in
exchange and in full payment for each share of Series B Preferred and all
accrued and unpaid dividends due through December 29, 2002, the aggregate number
of shares of Series B-1 Preferred, par value $0.01 per share, of the Company set
forth opposite each Holder's name on Schedule A hereto. The Series B-1 Preferred
shall have a stated value of US$10.00 per share.

            (d) Delivery of the Series B Preferred. The Company does hereby
acknowledge receipt of the Series B Preferred stock certificates registered in
the name of each of the Holders, accompanied by assignments separate from
certificates duly executed by each respective Holder, and agrees that all stock
certificates shall be

                                      -2-
<PAGE>

marked cancelled and the class of Series B Preferred shall be extinguished by
the Company.

            (e) Delivery of the Series B-1 Preferred. Each Holder hereby
acknowledges receipt of a stock certificate registered in his, or its, name
representing that number of shares of Series B-1 Preferred set forth opposite
his or its name on Schedule A hereto.

      2. Closing. The closing of the Stock Exchange shall be held at the offices
of Crosby, Heafey, Roach & May, Professional Corporation, 1901 Avenue of the
Stars, Suite 700, Los Angeles, California, 90067 at 10:00 a.m. on December 20,
2002 (the "Closing").

      3. Representations and Warranties of the Company. The Company hereby
represents and warrants to each of the Holders as follows:

            (a) Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.

            (b) Corporate Power. The Company has, or will have, at the time of
the Closing, all requisite corporate power to enter into this Agreement, to
issue the shares of the Series B-1 Preferred to each Holder, and to carry out
and perform its obligations under the terms of this Agreement, and has, or will
have, taken all actions necessary for the authorization, execution and delivery
of this Agreement and the issuance of the shares of Series B-1 Preferred. This
Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights and by the availability of equitable remedies.

            (c) Valid Issuance of Shares. The shares of Series B-1 Preferred,
when issued in compliance with the provisions of this Agreement, will be validly
issued, fully paid and nonassessable, and will be free of any liens or
encumbrances imposed by the Company; provided, however, that the shares of
Series B-1 Preferred will be subject to restrictions on transfer under the state
and federal securities laws as set forth herein, and as may be required by
future changes in such laws.

      4. Representations and Warranties of the Holders. Each Holder represents
and warrants, severally but not jointly, to the Company as follows:

            (a) Capacity. Such Holder has full legal capacity, power and
authority to execute, deliver, and perform his or its obligations under this
Agreement.


                                      -3-
<PAGE>


            (b) Ownership of Stock; Vesting Title. Each Holder beneficially owns
only such number of Series B Preferred as indicated opposite such Holder's name
on Schedule A attached hereto, with full right and authority to deliver such
shares hereunder, and upon delivery of such shares and one or more stock powers
with respect to such shares of Series B Preferred hereunder, the Company will
receive good, valid and marketable title thereto, free and clear of all liens or
encumbrances, and not subject to any agreements or understandings among any
persons with respect to the voting or transfer of such shares.

            (c) Accredited Investor. Each Holder is an "accredited investor" as
defined under the rules promulgated under the Securities Act of 1993, as
amended.

            (d) Ability to Protect Own Interest. Each Holder has a preexisting
personal or business relationship with the Company or one or more of its
directors of officers or controlling persons, or, by reason of such Holder's
business or financial experience, the business or financial experience of such
Holder's professional advisors (who are not affiliated with or compensated by
the Company or any of their affiliates) or the business or financial experience
of such Holder's representative, each Holder has the capacity to protect its own
interest in connection with the Stock Exchange.

            (e) Access to Information. Each Holder (or, if applicable, such
Holder's representative) has had an opportunity to discuss the Company's
business, management and financial affairs with its management and to ask
questions of officers of the Company, which questions were answered to its
satisfaction. Each Holder understands that such discussions with management, as
well as any written information issued by the Company, were intended to describe
certain aspects of the Company's business and prospects but were not a thorough
or exhaustive description. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 3 hereof or the right
of the Holders to rely thereon.

            (f) No Reliance. In deciding to enter into and consummate the
transactions contemplated hereby, each Holder has not relied, as to tax,
securities and other legal matters, on the advice that such Holder has received
from the Company or any of its attorneys or representatives, but only on the
advice of such Holder's own advisors and experts.

            (g) Investment Intent. The shares of Series B-1 Preferred to be
issued to each Holder will be acquired for such Holder's own account, for
investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"). Each Holder furthermore has no
current commitment or obligation, contingent or otherwise, to anyone to dispose
of the shares of Series B-1 Preferred and has no current plan or intent to
dispose of the shares of Series B-1 Preferred.


                                      -4-
<PAGE>


            (h) Exempt from Registration. Each Holder understands and
acknowledges that the exchange and delivery of the shares of Series B-1
Preferred pursuant to the terms of this Agreement will not be registered under
the Securities Act on the grounds that the Stock Exchange is exempt from
registration pursuant to section 3(a)(9) of the Securities Act, as an exchange
by the Company solely with its own securities holders, and are exempt from
qualification pursuant to Section 260.103(a)(1) of the California Corporate
Securities Law of 1968, as amended (the "Law"), and that the Company's reliance
upon such exemptions is predicated, in part, upon the Holder's representations
set forth in this Agreement. Each Holder acknowledges and understands that the
Company has no intention of registering the shares of Series B-1 Preferred and
that they therefore must be held indefinitely unless they are (i) converted to
Common Stock pursuant to the terms thereof and are then subsequently sold
pursuant to an effective registration statement or exemption from such
registration or (ii) the shares of Series B-1 Preferred are subsequently
registered under the Securities Act and qualified under the Law or an exemption
from such registration and such qualification is available.

            (i) Indefinite Holding Period. Each Holder understands and
acknowledges that he or it may be required to hold the shares of Series B-1
Preferred for an indeterminate period.

            (j) Disposition of Shares and Options. In no event will each Holder
dispose of any of his or its shares of Series B-1 Preferred (other than in
conjunction with an effective registration statement for the same under the
Securities Act) unless and until (i) such Holder shall have notified the Company
of the proposed disposition and shall have furnished the Company with a
detailed, true and accurate statement of the circumstances surrounding the
proposed disposition, and (ii) if requested by the Company, such Holder shall
have furnished the Company with an opinion of counsel satisfactory in form and
substance to the Company to the effect that [EITHER] (a) such disposition will
not require registration under the Securities Act and (b) appropriate action has
been taken to make the disposition qualify with the Law.

            (k) No Violation. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby will not result in the
breach of any term of, or constitute a default under, any contract, agreement,
commitment, indenture, mortgage, note or other instrument or obligation to which
each Holder, or any of such Holder's shares of Series B-1 Preferred, may be
bound.

            (l) Binding Obligation. This Agreement has been duly executed and
delivered by each Holder and constitutes a legal, valid and binding obligation
of such Holder, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency and other laws affecting the enforcement of
creditors' rights and by the availability of equitable remedies.


                                      -5-
<PAGE>


            (m) Legends. Each document representing the shares Series B-1
Preferred shall be endorsed with substantially the following legend:

            THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
            REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
            SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE
            UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION
            OR AN EXEMPTION THEREFROM UNDER THE ACT WHICH, EXCEPT IN THE CASE OF
            AN EXEMPTION PURSUANT TO RULE 144 UNDER THE ACT, IS CONFIRMED IN A
            LEGAL OPINION SATISFACTORY TO THE COMPANY.

      5. Conditions to the Company's Obligation to Close. The Company's
obligation to issue shares of Series B-1 Preferred at the Closing is subject to
the fulfillment to the Company's satisfaction on or prior to the Closing of the
following conditions, any of which may be waived by the Company in its sole
discretion:

            (a) Representations and Warranties Correct. The representations and
warranties made by the Holders in Section 4 hereof shall be true and correct
when made and shall be true and correct on and as of the Closing with the same
force and effect as if they had been made on and as of said date.

            (b) Tender. Each Holder shall have tendered all of his or its
outstanding shares of Series B Preferred with fully executed stock powers.

            (c) Consents and Waivers. The Company shall have obtained any and
all consents, permits and waivers necessary or appropriate for consummation of
the transactions contemplated by this Agreement.

      6. Miscellaneous

            (a) Governing Law. The Agreement shall be governed in all respects
by the laws of the State of California.

            (b) Survival. The representations, warranties, covenants and
agreements made herein shall survive the Closing of the transactions
contemplated hereby.

            (c) Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.


                                      -6-
<PAGE>


            (d) Further Acts. The parties hereto shall perform all further acts
and execute and deliver all documents that may be reasonably necessary to carry
out their obligations hereunder and the purposes of this Agreement.

            (e) Changes and Termination. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by a statement in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.

            (f) Entire Agreement. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.

            (g) Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
mailed by registered or certified mail, postage prepaid, return receipt
requested, or sent via internationally recognized overnight courier, addressed:

            If to a Holder:       To such Holder's address set forth by its or
                                  his name on Schedule A attached hereto, or at
                                  such other address as such Holder shall have
                                  furnished to the Company in writing

            If to the Company:    Spatializer Audio Laboratories, Inc.
                                  900 Lafayette Street, Suite 710
                                  Santa Clara, California  95050
                                  Attn:  Chief Executive Officer

Notices that are mailed shall be deemed given one (1) day after deposit in the
United States mail.

            (h) Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.

            (i) Expenses. The Company and the Holder shall bear his or its own
expenses and legal fees in connection with this Agreement and the transactions
contemplated thereby.

            (j) Titles and Subtitles. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.


                                      -7-
<PAGE>


            (k) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
constitute one instrument.

            (l) Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to the Company shall impair any such right, power or
remedy of the Company, nor shall it be construed to be a waiver of any breach or
default under this Agreement, or any acquiescence therein, or any waiver of or
acquiescence in any similar breach or default thereafter occurring; nor shall
any delay or omission to exercise any right, power or remedy accruing to the
Company or any waiver by the Company of any single breach or default by any
other party be deemed a waiver by the Company of any other right, power or
remedy or breach or default theretofore or thereafter occurring. All remedies,
either under this Agreement, or by law otherwise afforded to the Company shall
be cumulative and not alternative.

      IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

SPATIALIZER AUDIO LABORATORIES, INC.,

a Delaware corporation

By:   /s/ HENRY R. MANDELL
   -----------------------------------
      Henry R. Mandell,
      Chief Executive Officer


                                      -8-
<PAGE>


HOLDERS:

CLARION FINANZ, A.G.,
a Swiss corporation

By: /s/
   -----------------------------------

Name:
     ---------------------------------

Title:
      --------------------------------


/s/
- --------------------------------------
CARLO CIVELLI, an individual


/s/
- --------------------------------------
HENRY R. MANDELL, an individual


/s/
- --------------------------------------
JAMES D. PACE, an individual


/s/
- --------------------------------------
JEROLD H. RUBINSTEIN, an individual


/s/
- --------------------------------------
GILBERT N. SEGEL, an individual

ATON SELECT FUND LTD.,
a Swiss corporation

By: /s/
   -----------------------------------

Name:
     ---------------------------------

Title:
      --------------------------------


                                      -9-
<PAGE>


ROMOFIN A.G.,
a Swiss corporation

By: /s/
   -----------------------------------

Name:
     ---------------------------------

Title:
      --------------------------------

                                      -10-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>7
<FILENAME>v88363exv21w1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE>
                                                                    EXHIBIT 21.1


                            Schedule of Subsidiaries

Name                                    Ownership
- ----                                    ---------

Desper Products, Inc.                      100%

Multden Technologies, Inc.                 100%

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>8
<FILENAME>v88363exv99w1.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
<PAGE>

                                CERTIFICATION OF

               CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

I, Henry Mandell, certify that:

      1. In my capacity as Chief Executive Officer and Chief Financial Officer,
I have reviewed this annual report on Form 10-K of Spatializer Audio
Laboratories, Inc. (the "Company").

      2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

      4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:

            (a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

            (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

            (c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

      5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the registrant's board of
directors:

            (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls: and

            (b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and


                                      -1-


<PAGE>

      6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

      7. A signed original of this written statement required by Section 906 of
the Sarbannes-Oxley of 2002 has been provided to the Company to be retained by
the Company and furnished to the Securities and Exchange Commission or its staff
on request.

Date: March 25, 2003

                                           By: /s/ HENRY R. MANDELL
                                               ---------------------------------
                                               Henry R. Mandell
                                               Chairman, Chief Executive Officer
                                               and Chief Financial Officer


                                      -2-

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
