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<SEC-DOCUMENT>0000950129-04-008938.txt : 20041112
<SEC-HEADER>0000950129-04-008938.hdr.sgml : 20041111
<ACCEPTANCE-DATETIME>20041112150310
ACCESSION NUMBER:		0000950129-04-008938
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		8
CONFORMED PERIOD OF REPORT:	20040930
FILED AS OF DATE:		20041112
DATE AS OF CHANGE:		20041112

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-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-26460
		FILM NUMBER:		041138639

	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-Q
<SEQUENCE>1
<FILENAME>v03127e10vq.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML>
<HEAD>
<TITLE>Spatializer Audio Laboratories, Inc. - 9/30/2004</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<HR size="4" noshade color="#000000" style="margin-top: -5px">
<HR size="1" noshade color="#000000" style="margin-top: -10px">





<P align="center" style="font-size: 14pt"><B>UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION</B>

<DIV align="center" style="font-size: 12pt"><B>Washington, D.C. 20549</B>
</DIV>


<P align="center" style="font-size: 10pt"><HR size="1" noshade width="20%" align="center">


<DIV align="center" style="font-size: 18pt"><B>FORM 10-Q</B>
</DIV>

<DIV align="center" style="font-size: 10pt"><HR size="1" noshade width="20%" align="center">
</DIV>


<P align="left" style="font-size: 10pt"><B>(Mark One)</B>


<DIV align="center">
<TABLE style="font-size: 12pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><FONT face="Wingdings">&#252;</FONT>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Quarterly report pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" style="font-size: 10pt">&nbsp;</TD>
</TR>


<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="font-size: 10pt">For the period ended: <B>September&nbsp;30, 2004</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" style="font-size: 10pt">&nbsp;</TD>
</TR>


<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" style="font-size: 10pt"><B>OR</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" style="font-size: 10pt">&nbsp;</TD>
</TR>


<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><FONT face="Wingdings">&#111;</FONT>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="font-size: 12pt">Transition report pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">Commission File Number: <B>000-26460</B>


<P align="center" style="font-size: 24pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.</B>


<div align="center" style="font-size: 10pt">(Exact name of registrant as specified in its charter)
</div>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="75%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="47%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><B>Delaware</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>95-4484725</B></TD>
</TR>

<TR valign="bottom">
    <TD align="center" valign="top">(State or other jurisdiction of
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">(IRS Employer</TD>
</TR>

<TR valign="bottom">
    <TD align="center" valign="top">incorporation or organization)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Identification No.)</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><B>2625 Townsgate Road, Suite&nbsp;330<BR>
Westlake Village, California 91361</B>



<P align="center" style="font-size: 10pt">(Address of principal executive offices)



<P align="center" style="font-size: 10pt"><B>1754 Technology Drive, Suite&nbsp;125<BR>
San Jose, California 95110</B>



<P align="center" style="font-size: 10pt">(Address of principal corporate offices)



<P align="center" style="font-size: 10pt"><B>Telephone Number: (408)&nbsp;453-4180</B>



<P align="center" style="font-size: 10pt">(Registrant&#146;s telephone number, including area code)


<P align="left" style="font-size: 10pt">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:



<P align="center" style="font-size: 10pt"><B>Yes <FONT face="Wingdings">&#252;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <FONT face="Wingdings">&#111;</FONT></B>


<P align="left" style="font-size: 10pt">Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule&nbsp;12b-2 of the Exchange Act):



<P align="center" style="font-size: 10pt"><B>Yes <FONT face="Wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <FONT face="Wingdings">&#252;</FONT></B>


<P align="left" style="font-size: 10pt">As of October&nbsp;28, 2004, there were 46,975,365 shares of the Registrant&#146;s Common
Stock outstanding.



<HR size="1" noshade color="#000000" style="margin-top: -2px">
<HR size="4" noshade color="#000000" style="margin-top: -10px">










<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">










<!-- 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>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="76%"></TD>
</TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#000"> CONSOLIDATED BALANCE SHEETS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#001"> CONSOLIDATED STATEMENTS OF OPERATIONS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#002"> CONSOLIDATED STATEMENT OF CASH FLOWS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#003"> CONSOLIDATED STATEMENT OF SHAREHOLDERS&#146; EQUITY</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#004"> Notes to Consolidated Financial Statements</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#005">Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#006">Item 3. Quantitative and Qualitative Disclosures About Market Risk</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#007">Item 4. Controls and Procedures</A></TD></TR>
<TR><TD colspan="9"><A HREF="#008">PART II. OTHER INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#009">ITEM 1. LEGAL PROCEEDINGS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#010">ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#011">ITEM 3. DEFAULTS UPON SENIOR SECURITIES</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#012">ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#013">ITEM 5. OTHER INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#014">ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</A></TD></TR>
<TR><TD colspan="9"><A HREF="#015">SIGNATURES</A></TD></TR>
<TR><TD colspan="9"><A HREF="v03127exv10w5.htm">Exhibit 10.5</A></TD></TR>
<TR><TD colspan="9"><A HREF="v03127exv31w1.htm">Exhibit 31.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="v03127exv32w1.htm">Exhibit 32.1</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>









<P align="center" style="font-size: 10pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>


<!-- link3 " CONSOLIDATED BALANCE SHEETS" -->
<DIV align="left"><A NAME="000"></A></DIV>

<P align="center" style="font-size: 10pt"><B>CONSOLIDATED BALANCE SHEETS</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="68%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2004</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2003</B><HR size="1" noshade></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" colspan="3"><B>(unaudited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD align="center"><DIV style="margin-left:10px; text-indent:-10px"><B>ASSETS</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Current Assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">920,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">589,797</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accounts Receivable, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">208,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">345,411</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Prepaid Expenses and Deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,074</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,430</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Total Current Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,223,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">970,638</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Property and Equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,022</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Intangible Assets, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">167,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">192,485</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Total Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,424,668</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,205,145</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:10px; text-indent:-10px"><B>LIABILITIES AND SHAREHOLDERS&#146; EQUITY</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Current Liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Notes Payable to Related Party, Short Term</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,500</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Note Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,745</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accounts Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,466</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Wages and Benefits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,898</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,973</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Professional Fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Commissions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,548</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,856</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,196</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,197</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Deferred Income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">547,953</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Total
Current Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">765,061</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">177,992</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Notes Payable to Related Party, Long Term</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,831</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,746</TD>
    <TD>&nbsp;</TD>
</TR>

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

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Series&nbsp;B-1, Redeemable Convertible Preferred shares, $.01 par
value, 1,000,000 shares authorized, 102,762
shares issued and outstanding at September&nbsp;30, 2004
and December&nbsp;31, 2003.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,028</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,028</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Shareholders&#146; Equity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Common shares, $.01 par value, 65,000,000 shares
authorized, 46,975,365 shares
issued and outstanding at September&nbsp;30, 2004 and
December&nbsp;31, 2003.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">470,159</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Additional Paid-In Capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,429,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,428,615</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accumulated Deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(46,271,026</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(45,943,395</TD>
    <TD nowrap>)</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Total Shareholders&#146; Equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">627,748</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">955,379</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,424,668</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,205,145</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="center" style="font-size: 10pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>


<!-- link3 " CONSOLIDATED STATEMENTS OF OPERATIONS" -->
<DIV align="left"><A NAME="001"></A></DIV>

<P align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF OPERATIONS<BR>
(unaudited)</B>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="42%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>For the Three Month Period Ended</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>For the Nine Month
Period Ended</B><HR size="1" noshade></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>September 30,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2004</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2003</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2004</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2003</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Revenues :</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">License Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Royalty Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">205,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">341,339</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">610,863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">924,619</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Product Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">205,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">341,339</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">610,863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">924,619</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Cost of Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,114</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">61,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93,586</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Gross Profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,210</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">306,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">549,611</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">831,033</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Operating Expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">General and Administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,268</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">193,293</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">528,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">585,830</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Research and Development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93,842</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">122,145</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">295,630</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">333,289</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Sales and Marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93,488</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,962</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">295,180</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">260,594</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">408,926</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">870,773</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,214,299</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Operating (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(81,384</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(102,734</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(321,162</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(383,266</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Interest and Other Income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,908</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Interest and Other Expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,936</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,812</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8,702</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(10,634</TD>
    <TD nowrap>)</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,192</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,368</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,069</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,726</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">(Loss) Before Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(82,576</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(104,102</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(327,231</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(387,992</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,400</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(400</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,420</TD>
    <TD nowrap>)</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Net (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(80,576</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(106,502</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(327,631</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(393,412</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Basic and Diluted(Loss) Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Weighted Average Shares
Outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="center" style="font-size: 10pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>


<!-- link3 " CONSOLIDATED STATEMENT OF CASH FLOWS" -->
<DIV align="left"><A NAME="002"></A></DIV>

<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENT OF CASH FLOWS<BR>
(unaudited)</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="75%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Nine Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>September 30,</B><HR size="1" noshade></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2004</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2003</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Cash Flows from Operating Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Net (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(327,631</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(393,412</TD>
    <TD nowrap>)</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Adjustments to reconcile net (loss)&nbsp;to net cash
provided by (used in) operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Depreciation and Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,816</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,980</TD>
    <TD>&nbsp;</TD>
</TR>

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

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accounts Receivable and Employee Advances</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">137,382</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">172,079</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Prepaid Expenses and Deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(59,644</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(14,854</TD>
    <TD nowrap>)</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Note Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,745</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accounts Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,245</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,711</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Wages and Benefits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,925</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Professional Fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Commissions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,692</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Accrued Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,999</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(28,528</TD>
    <TD nowrap>)</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Deferred Income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">547,953</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Net Cash Provided By (Used In) Operating Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">389,992</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(197,024</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Cash Flows from Investing Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Purchase/Disp of Property and Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,247</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,680</TD>
    <TD nowrap>)</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Increase in Capitalized Patent and Technology Costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(16,580</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,030</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Net Cash Provided By (Used in) Investing Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(19,827</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,710</TD>
    <TD nowrap>)</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Cash flows from Financing Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Repayment of Notes Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(39,915</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Net Cash Provided by Financing Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(39,915</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Increase (Decrease) in Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">330,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(201,734</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Cash and Cash Equivalents, Beginning of Period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">589,797</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">858,725</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Cash and Cash Equivalents, End of Period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">920,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">656,991</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Supplemental Disclosure of Cash Flow Information:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Cash paid during the period for:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">10,149</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">10,632</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:20px; text-indent:-10px">Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,420</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:20px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="center" style="font-size: 10pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>


<!-- link3 " CONSOLIDATED STATEMENT OF SHAREHOLDERS&#146; EQUITY" -->
<DIV align="left"><A NAME="003"></A></DIV>

<div align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENT OF SHAREHOLDERS&#146; EQUITY<BR>
(unaudited)</B>
</div>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="90%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&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="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Common Shares</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Total</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Additional</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Shareholders&#146;</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>shares</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Par value</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>paid-in-capital</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Deficit</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Equity</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Balance, December&nbsp;31, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,015,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">470,159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">46,428,615</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(45,943,395</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">955,379</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Issuance of Preferred Shares, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Options Exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Warrants Exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Options Issued for Services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Conversion of Preferred Shares, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Net (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(123,796</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(123,796</TD>
    <TD nowrap>)</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Balance, March&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,015,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">470,159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">46,428,615</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(46,067,191</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">831,583</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Net (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(123,259</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(123,259</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Cancellation of Unissued Performance Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-40,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Balance, June&nbsp;30, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,429,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(46,190,450</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">708,324</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Net (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(80,576</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(80,576</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Balance, September&nbsp;30, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,429,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(46,271,026</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">627,748</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="center" style="font-size: 10pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>


<!-- link3 " Notes to Consolidated Financial Statements" -->
<DIV align="left"><A NAME="004"></A></DIV>

<P align="center" style="font-size: 10pt">Notes to Consolidated Financial Statements



<P align="left" style="font-size: 10pt"><B>(1)&nbsp;Nature of Business</B>



<P align="left" style="font-size: 10pt">&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&#146;s sales,
research and subsidiary administration are conducted out of facilities in San
Jose, California.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The foregoing interim financial information is unaudited and has been
prepared from the books and records of the Company. The financial information
reflects all adjustments necessary for a fair presentation of the financial
condition, results of operations and cash flows of the Company in conformity
with generally accepted accounting principles. All such adjustments were of a
normal recurring nature for interim financial reporting. Operating results for
the three and nine months ended September&nbsp;30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December&nbsp;31,
2004. Accordingly, your attention is directed to footnote disclosures found in
the December&nbsp;31, 2003 Annual Report and particularly to Note 1, which includes
a summary of significant accounting policies.


<P align="left" style="font-size: 10pt"><B>(2)&nbsp;Significant Accounting Policies</B>



<P align="left" style="font-size: 10pt">&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. All significant intercompany balances and
transactions have been eliminated in consolidation. Corporate administration
expenses are not allocated to subsidiaries.


<P align="left" style="font-size: 10pt">&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.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Deferred Revenue &#151; </B>The Company receives License Fee advances from certain
customers in accordance with contract terms. The Company does not require
advances from all customers. Advances are negotiated on a per contract basis.
Cash received in advance of revenue earned from a contract is recorded as
deferred revenue until the related contract revenue is earned under the
Company&#146;s revenue recognition policy.

<P align="left" style="font-size: 10pt">&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 September&nbsp;30, 2004
substantially all cash and cash equivalents were on deposit at two financial
institutions.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2004, four major customers, not presented in order of
importance, each accounted for 10% or more of our total accounts receivable:
Matsushita, Toshiba, InterVideo


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">



<P align="left" style="font-size: 10pt">and Sharp, each of whom accounted for greater than 10% of our total 2004
accounts receivable. One OEM accounted for 38%, another accounted for 17%,
another accounted for 16% and one accounted for 15% of our total accounts
receivable at September&nbsp;30, 2004.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company does not apply interest charges to past due accounts
receivable.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Customers Outside of the U.S. &#151; </B>Sales to foreign customers were 88% and
100% of total sales in the year to date periods ended September&nbsp;30, 2004 and
2003, respectively. Approximately 54% and 42% of sales were generated in Japan
and Korea, respectively.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Major Customers &#151; </B>During the quarter ended September&nbsp;30, 2004, four
customers accounted for 42%, 19%, 13% and 12%, respectively, of the Company&#146;s
net sales.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&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&nbsp;years to 5
years under the straight line method.


<P align="left" style="font-size: 10pt">&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. The weighted
average useful life of patents was approximately 12&nbsp;years.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Earnings Per Share &#151; </B>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. The following table presents contingently issuable
shares, options and warrants to purchase shares of common stock that were
outstanding during the three month periods ended September&nbsp;30, 2004 and 2003
which were not included in the computation of diluted loss per share because
the impact would have been antidilutive or less than $0.01 per share:


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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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>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="31%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2004</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2003</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,135,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,771,500</TD>
    <TD>&nbsp;</TD>
</TR>

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

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,135,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,771,500</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">During the three months ended September&nbsp;30, 2004, no options to purchase shares
of the Company&#146;s common stock were granted.



<P align="left" style="font-size: 10pt">&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;1, <I>Accounting for the Impairment of
Long-Lived Assets </I>on January&nbsp;1,
2002. 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.


<P align="left" style="font-size: 10pt">&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&nbsp;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&nbsp;1997. MDT is considered a discontinued
operation as of September&nbsp;1998. As of September&nbsp;30, 2004, the Company has only
one operating segment, DPI, the Company&#146;s Audio Signal Processing business.


<P align="left" style="font-size: 10pt">&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.


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Recent Accounting Pronouncements </B>- The FASB recently issued the following
statements: FASB 146 &#151; Accounting for Costs Associated with Exit or Disposal
Activities, FASB 147 &#151; Acquisitions of Certain Financial Institutions, FASB 148
- - Accounting for Stock-Based Compensation, FASB 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity and
FASB Interpretation 46 &#147;Consolidation of Variable Interest Entities, an
interpretation of ARB No.&nbsp;51&#148;. These FASB statements did not, or are not
expected to, have a material impact on the Company&#146;s financial position and
results of operations.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&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, 2003 and September&nbsp;30, 2004 approximated fair
value due to their short maturity or nature.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The fair values of notes payable to a related party at December&nbsp;31, 2003
and September&nbsp;30, 2004 are materially consistent with the related carrying
values based on current rates offered to the Company for instruments with
similar maturities.


<P align="left" style="font-size: 10pt"><B>(3)&nbsp;Property and Equipment</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and equipment, as of December&nbsp;31, 2003 and September&nbsp;30, 2004,
consists of the following, net of a reserve for impairment loss in 1998 in
accordance with application of SFAS 121:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<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 style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>September 30, 2004</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>December 31, 2003</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Office Computers, Software, Equipment and Furniture</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">331,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">309,744</TD>
    <TD>&nbsp;</TD>
</TR>

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

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

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Trade Show Booth and Demonstration Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,548</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">171,301</TD>
    <TD>&nbsp;</TD>
</TR>

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

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Total Property and Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">632,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">606,884</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Less Accumulated Depreciation and Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">598,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">564,862</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Property and Equipment, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">33,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">42,022</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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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>

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="left" style="font-size: 10pt"><B>(4)&nbsp;Intangible Assets</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Intangible assets, as of December&nbsp;31, 2003 and September&nbsp;30, 2004 consist
of the following:

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="88%">
<!-- Begin Table Head -->
<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 style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>September 30, 2004</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>December 31, 2003</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Capitalized Patent, Trademarks and Technology Costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">522,068</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">505,487</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Less Accumulated Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">354,418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">313,002</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="1" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Intangible Assets, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">167,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">192,485</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Estimated amortization is as follows:

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="59%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="17%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="18%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">29,563</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">25,733</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">16,702</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">16,702</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">78,950</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><HR size="4" noshade>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">167,650</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>




<P align="center" style="font-size: 10pt">
</DIV>




<P align="left" style="font-size: 10pt"><B>(5)&nbsp;Notes Payable to Related Parties</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company was indebted to the Desper Family Trust, a related party, in
the amount of $68,331 at September&nbsp;30, 2004. The Desper Family
Trusts&#146; principle beneficiary is the mother of a former Director of the Company. In the fourth quarter of 2003, in
response to the calling of the Note by the holder, we negotiated and completed
the conversion of the original $112,500 related party 10% demand note to a
three- year 10% term note. This amount bears interest at a fixed rate of 10%
annually, is paid in monthly installments of $5,191 that commenced on December
1, 2003 and continues for twenty-four months until the entire balance of
principal and interest is paid in full.


<P align="left" style="font-size: 10pt"><B>(6) Note Payable</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company was indebted to the Premium Finance, Inc., an unrelated
insurance premium finance company, in the amount of $36,745 at September&nbsp;30,
2004. This note finances the Company&#146;s annual Directors&#146; and Officers&#146;
Liability Insurance. This amount bears interest at a fixed rate of 8%
annually, is paid in monthly installments of $5,191 that commenced on June&nbsp;1,
2004 and continues for nine months until the entire balance of principal and
interest is paid in full.


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</DIV>

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<P align="left" style="font-size: 10pt"><B>(7)&nbsp;Shareholders&#146; Equity</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>During the quarter ended September&nbsp;30, 2004, no shares were issued,
cancelled or converted.</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>During the year ended December&nbsp;31, 2003, shares were issued or converted
as follows:</I>

<P align="left" style="font-size: 10pt">An employee exercised options to purchase 166,666 shares of common stock in
2003, increasing shareholders&#146; equity by $10,000.


<P align="left" style="font-size: 10pt"><B>Capitalization</B>


<P align="left" style="font-size: 10pt"><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 Company&#146;s Series&nbsp;A Preferred Stock are outstanding and that no shares of
the Series&nbsp;A Preferred Stock will be issued.


<P align="left" style="font-size: 10pt"><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 Company&#146;s Series&nbsp;B Preferred Stock are outstanding and that no shares of
the Series&nbsp;B Preferred Stock will be issued.


<P align="left" style="font-size: 10pt"><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 which is designated
as a liquidation preference. The stock ranks prior to the Company&#146;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 shares of Series&nbsp;B-1
Preferred Stock were issued in exchange for the Series&nbsp;B Preferred Stock and
14,795 shares were issued in lieu of the adjusted accrued dividends on the
Series&nbsp;B Preferred Stock.


<P align="left" style="font-size: 10pt"><B>(8)&nbsp;Escrowed Performance Shares</B>


<P align="left" style="font-size: 10pt">In December&nbsp;1996, the Company accepted the terms outlined by the British
Columbia Securities Commission (&#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 stockholders in August&nbsp;1996. Under the revised arrangement, the
performance shares were released automatically as follows: 20% prior to June
22, 2000, 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.


<P align="left" style="font-size: 10pt">Based on the revised escrow arrangement, which primarily converted the escrow
shares





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<P align="left" style="font-size: 10pt">release from performance criteria to a time-based criterion, 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.


<P align="left" style="font-size: 10pt">All of the performance shares are included in the issued and outstanding shares
for the years ended December&nbsp;31, 2003, 2002 and 2001. 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. In December&nbsp;2003 and June&nbsp;2004, 557,740
and 40,500 shares, respectively, of former employees or participants, who lost
entitlement to such shares under the terms of the escrow arrangement, were
cancelled.



<P align="left" style="font-size: 10pt"><B>(9)&nbsp;Stock Options</B>



<P align="left" style="font-size: 10pt">&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,
4,697,537 as of September&nbsp;30, 2004. 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 up to three
years from the date of grant.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2004, there were 1,562,537 additional shares available
for grant under the Plan.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were 200,000 options granted in the quarter ended September&nbsp;30, 2004
to board members for board compensation and 100,000 shares granted to board
members in 1999 expired.


<P align="left" style="font-size: 10pt">&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:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="55%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="67%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="13%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2004</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">NET INCOME (LOSS):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:10px; text-indent:-10px">As Reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(327,631</TD>
    <TD nowrap>)</TD>
</TR>

<TR valign="bottom" style="background: #eeeeee">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Pro Forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(327,631</TD>
    <TD nowrap>)</TD>
</TR>

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

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

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

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2004, the number of options exercisable was 3,135,000 and
the weighted-average exercise price of those options was $0.178.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no warrants outstanding at December&nbsp;31, 2003 and September&nbsp;30,
2004.


<P align="left" style="font-size: 10pt"><B>(10)&nbsp;Commitments and Contingencies</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also anticipate that, from time to time, we may be named as a party to
legal proceedings that may arise in the ordinary course of our business.


<P align="left" style="font-size: 10pt"><I>Operating Lease Commitments</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is obligated under several non-cancelable operating leases.
Future minimum rental payments at September&nbsp;30, 2004 for all operating leases
were approximately $5,400 through December&nbsp;2004. Rent expense amounted to
approximately $5,400 and $21,000 for the quarters ended September&nbsp;30, 2004 and
2003, respectively.


<P align="left" style="font-size: 10pt"><B>(11)&nbsp;Profit Sharing Plan</B>



<P align="left" style="font-size: 10pt">&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.


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<!-- link2 "Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations" -->
<DIV align="left"><A NAME="005"></A></DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;2. Management&#146;s Discussion and Analysis of Financial Condition and Results
of Operations</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This information should be read in conjunction with Management&#146;s
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company&#146;s Annual Report on Form 10-K for the year ended
December&nbsp;31, 2003, the audited consolidated financial statements and the notes
thereto included in the Form 10-K and the unaudited interim consolidated
financial statements and notes thereto included in this report.


<P align="left" style="font-size: 10pt"><B>Approach to MD&#038;A</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The purpose of MD&#038;A is to provide our shareholders and other interested
parties with information necessary to gain an understanding of our financial
condition, changes in financial condition and results of operations. As such,
we seek to satisfy three principal objectives:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to provide a narrative explanation of a Company&#146;s financial
statements that enables investors to see the company through the eyes of
management;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to enhance the overall financial disclosure and provide the
context within which financial information should be analyzed; and</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to provide information about the quality of, and potential
variability of, a company&#146;s earnings and cash flow, so that investors
can ascertain the likelihood that past performance is indicative of
future performance.</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe the best way to achieve this is to give the reader:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>An understanding of our operating environment</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>An outline of critical accounting policies</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>A review of the key components of the financial statements and our
cash position and capital resources</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Disclosure on our internal controls and procedures</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt"><B>Operating Environment</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We operate in a very competitive business environment. This environment
impacts us in the following ways, further discussed in greater detail under
<I>Risk Factors</I>:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Our Operating Results Fluctuate and If We Are Unable to Achieve or
Sustain Profitability in the Future or Obtain Future Financing Our
Business Operations May Fail.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Because The Market In Which We Operate Is Highly Competitive, We
Face Significant Pricing Pressure and Competition.</TD>
</TR>



</TABLE>

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<P><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We Rely on the Schedules and Cooperation of Chip Makers or Other
Third Parties to Deliver Our Technology in Consumer Products. These
Third parties Have Their Own Priorities and Alliances that May Delay or
Thwart our Sales Efforts to Potential Customers.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>If New Product Development Is Delayed, We Will Experience Delays In
Revenues And Competitive Products May Reach The Market Before Our
Products.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>If We Are Unable To Attract And Retain Our Key Personnel, We May
Not Be Able To Successfully Operate Our Business.</TD>
</TR>

</TABLE>

<P align="left" style="font-size: 10pt">The fluid, competitive and dynamic nature of the market continues a degree of
uncertainty to our operations. The operations of our business, and those of our
competitors, may also be impacted by the continued trend in the 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, we must develop and
license our 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. We have responded
by offering additional products targeted to each price/quality segment of the
market and continue to aggressively pursue new opportunities in emerging
product categories such as cellular phones and notebook computers that
complements 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 us, and our rational commercial
competitors, to enhance their operating results.


<P align="left" style="font-size: 10pt">The personal computer (PC)&nbsp;and consumer electronics markets are under intense
pressure, primarily from retailers, to reduce selling prices, with resultant
pressure to reduce costs. Cost reductions are driven by lower cost sourcing,
often in China, design simplification and reduction in features. While we
present a value proposition that stresses the cost reducing capabilities of our
audio solutions through improved performance from lower cost components as well
as product differentiation that Spatializer technology can deliver, all such
features are closely scrutinized by potential customers&#146; product marketing and
engineering. This makes it more challenging to secure new design wins,
particularly in product categories that have become commoditized, such as
became the case with DVD players. It also may result in the elimination of
features, including ours, if cost is of paramount importance. When this occurs,
we receive very short notice and revenues from such an account will typically
begin a steep decline in the subsequent quarter, resulting in period-to-period
fluctuation. Our response has been to strengthen our value proposition, more
aggressively price and feature enrich our products and enter new segments, such
as cell phones, with different competitive pressure.


<P align="left" style="font-size: 10pt">Manufacturer&#146;s design-in cycles for our technology range from four to twelve
months, from

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<P align="left" style="font-size: 10pt">the decision to adopt our technology to actual cash flow to us. These schedules
are also prone to delays at the manufacturer level and in some cases,
manufacturer&#146;s new products may be cancelled due to market testing or resource
allocation. Since these events are beyond our control, it is difficult to
absolutely project when new deals will begin generating revenues or if signed
deals will generate financial results. For this reason, we do not typically
announce new deals until the target product is being introduced.


<P align="left" style="font-size: 10pt">Spatializer does not develop or market semiconductors. That is why we carry no
inventory or have order backlogs that typically are good indicators of near
term performance. Rather, we develop audio algorithms that are embedded on
third party processors or semiconductors used by our customers. While our
algorithms are implemented on a wide array of processors, often times a
customer uses a processor where there is no such implementation, or where a
competing solution has been implemented. In this case, our customers request
that our algorithm be implemented. While these requests are typically honored,
processor manufacturers must schedule such implementation as their resources or
corporate strategies allow. Therefore, the supply-chain is often quite long and
complicated, which potentially can result in delays or deadlines that may not
always coincide with our customer&#146;s requirements and which are beyond the
control of our company.


<P align="left" style="font-size: 10pt">Therefore, when reviewing the operating results or drawing conclusions with
regard to future performance, these competitive forces and uncertainties must
be taken into consideration. Without absolute long-term visibility, it is
difficult to draw such conclusions in absolute terms. Further, the dynamic
nature of the business environment creates the potential for both positive and

negative fluctuations in near and long term operating performance. While
management strives to mitigate these risks, as outlined in <I>Risk Factors, </I>it is
not possible to be fully immune from such dynamics.



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<P align="left" style="font-size: 10pt"><B>Critical Accounting Policies</B>



<P align="left" style="font-size: 10pt">&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 based on historical experience and various
other factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions. In consultation with our Board of Directors and Audit Committee, we
have identified three accounting policies that we believe are critical to an
understanding of our financial statements. These are important accounting
policies that require management&#146;s most difficult, subjective judgments.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&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.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Audit Committee</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This committee is directed to review the scope, cost and results of the
independent audit of our books and records, the results of the annual audit
with management and the internal auditors and the adequacy of our accounting,
financial, and operating controls; to recommend annually to the Board of
Directors the selection of the independent auditors; to approve proposals made
by our independent auditors for consulting work; and to report to the Board of
Directors, when so requested, on any accounting of financial matters.


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<P align="left" style="font-size: 10pt">Additionally, following the completion of the audit, the committee meets with
the independent accountants to review with the independent accountants any
problems or difficulties the accountants may have encountered in connection
with the audit, the adequacy of the internal accounting controls, the financial
and accounting personnel and any management letter provided by the independent
accountants and the Company&#146;s response to that letter. The committee also
discusses with the independent accountants any matters that are required to be
discussed under applicable rules, including without limitation those matters
required to be discussed by Statement on Auditing Standards No.&nbsp;61 relating to
the conduct of the audit.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Compensation and Stock Committee</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Compensation and Stock Option Committee (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 our senior officers and employees. 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 our 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.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Special Committee</I>

<P align="left" style="font-size: 10pt">In November of 2002, the Board of Directors created a Special Committee to
review certain strategic opportunities as they arise and to obtain additional
information regarding such opportunities for consideration and evaluation by
the Board of Directors.



<P align="left" style="font-size: 10pt"><B>Results of Operations</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This report contains forward-looking statements, within the meaning of the
Private Securities Reform Act of 1995, which are subject to a variety of risks
and uncertainties. Our actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements.


<P align="left" style="font-size: 10pt"><B>Revenues</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues for the three months ended September&nbsp;30, 2004 were $205,000,
compared to revenues of $341,000 in the comparable period last year, a decrease
of 40%. Revenues in the three months ended September&nbsp;30, 2004 were lower due to
a DVD OEM account with one manufacturer in 2003 for which there was no
comparable account in the current period. Revenues in the nine months ended
September&nbsp;30, 2004 were $611,000, compared to revenues of $925,000 in the
comparable period last year, a decrease of 34%.The decline in revenue resulted
from the expiration of a licensing agreement with a major computer account in
January&nbsp;2003 ($125,000 reduction) and the inability to replace a prior year DVD
OEM account in the current nine month period This was partially offset by an
increase in revenues from cell phone accounts.


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<P align="left" style="font-size: 10pt"><B>Gross Profit</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit for the three months ended September&nbsp;30, 2004 was $179,000
(87% of revenue) compared to gross profit of $306,000 (90% of revenue) in the
comparable period last year, a decrease of 42%. Gross profit for the nine
months ended September&nbsp;30, 2004 were $550,000 (90% of revenue) compared to
$831,000 (90% of revenue) in the comparable period last year. Gross profit in
the three and nine-month periods decreased primarily due to the decrease in
revenue. Gross margin decline in the current three month period resulted from
a portion of royalty paid and expensed on deferred revenue.


<P align="left" style="font-size: 10pt"><B>Operating Expenses</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses in the three months ended September&nbsp;30, 2004 were
$261,000 (127% of revenue) compared to operating expenses of $409,000 (120% of
revenue) in the comparable period last year, a decrease of 36%. Operating
expenses in the nine months ended September&nbsp;30, 2004 were $871,000 (143% of
revenue) compared to $1,214,000 (131% of revenue) in the comparable nine-month
period last year. The decrease in operating expenses for the three and nine
months ended September&nbsp;30, 2004 resulted primarily from reductions in occupancy
and headcount effected in the fourth quarter of 2003.


<P align="left" style="font-size: 10pt"><I>General and Administrative</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative expenses in the three months ended September
30, 2004 were $155,000 (76% of revenue) compared to general and
administrative expenses of $193,000 (57% of revenue) in the comparable period
last year, a decrease of 20%. General and administrative expenses in the
nine-months ended September&nbsp;30, 2004 were $528,000 (86% of revenue) compared
to $586,000 (63% of revenue) in the comparable nine-month period last year.
The decrease in general and administrative expense for the three and nine
month periods resulted primarily from reductions in occupancy and support
services, partially offset by higher legal and accounting expenses arising
from new regulatory public company requirements and higher executive overseas
travel by the chief executive to secure additional contracts with
manufacturers and to maintain existing relationships with our customers.


<P align="left" style="font-size: 10pt"><I>Research and Development</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and Development expenses in the three months ended September
30, 2004 were $94,000 (46% of revenue) compared to research and development
expenses of $122,000 (36% of revenue) in the comparable period last year, a
decrease of 23%. Research and Development expenses for the nine months ended
September&nbsp;30, 2004 were $296,000 (48% of revenue) compared to $333,000 (36%
of revenue) in the comparable nine-month period last year. The decrease in
three and nine-month research and development expenses resulted from lower
cost Silicon Valley facilities, and greater use of lower cost off-shore
applications engineering, rather than domestic contracting compared with the
prior period.


<P align="left" style="font-size: 10pt"><I>Sales and Marketing</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and Marketing expenses in the three months ended September&nbsp;30,
2004 were $11,000 (5% of revenue) compared to sales and marketing expenses of
$93,000 (27% of


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<P align="left" style="font-size: 10pt">revenue) in the comparable period last year, a decrease of 88%. Sales
and Marketing expenses for the nine months ended September&nbsp;30, 2004 were
$47,000 (8% of revenue) compared to $295,000 (32% of revenue) in the
comparable nine-month period last year. The decrease in sales and marketing
expense in the three and nine-month periods resulted primarily from the
elimination of a senior sales executive position ($50,000/$150,000),
transition of Japan sales to a commission only structure ($20,000/$60,000 and
lower cost Silicon Valley facilities ($12,000/$40,000).


<P align="left" style="font-size: 10pt"><B>Net (Loss)</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss in the three months ended September&nbsp;30, 2004 was ($81,000), ($0.00)
basic per share, compared with net loss of ($107,000), ($0.00) basic per share in
the comparable period last year. Net loss in the nine months ended September
30, 2004 was ($328,000), ($0.01) basic per share, compared with net loss of
($393,000), ($0.01) basic per share in the comparable period last year. The net
loss resulted from decreased revenues, partially offset by lower operating
expenses.


<P align="left" style="font-size: 10pt"><B>Liquidity and Capital Resources</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2004, we had $920,000 in cash and cash equivalents as
compared to $590,000 at December&nbsp;31, 2003. The increase in cash and cash
equivalents results from a royalty advance received in the third quarter,
partially offset by the net loss. We had working capital of $458,000 at
September&nbsp;30, 2004 as compared with working capital of $792,000 at December&nbsp;31,
2003.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the fourth quarter of 2003, we negotiated and completed the conversion
of a $112,500 related party 10% demand note to a three-year 10% term note.
Principal and interest of $5,191 is paid monthly, which we pay on a current
basis. Installments due in more than twelve months are classified as Notes
Payable to Related Parties<B>-</B>long-term.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We continue to maintain an accrual for unasserted claims or settlement
costs of approximately $28,000. We do not expect any final liability to be in
excess of this balance.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We currently believe our future cash flow will come primarily from the
audio signal processing licensing, original equipment manufacturers&#146; (OEM)
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 we believe should generate additional
cash flow without imposing any substantial costs on us. We announced two new
licensing arrangements in the cellular phone market and expect this category to
expand in 2004. We are also targeting other markets where the cost pressure is
not as acute and which might be more receptive to licensing our products.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We anticipated that there would be a wind down of our licensing program in
2003 with a large computer account and reductions in licensing to DVD accounts
that are under extreme pressure to reduce costs. We anticipate that there may
continue to be dislocations of individual licensing programs due to continuing
pressure to reduce costs, particularly in the DVD player segment.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that growth from other licensing arrangements, which include
new markets such as cellular phones, and other arrangements that are pending
but not announced or in negotiation, will substantially offset any revenue
shortfalls from market dynamics or


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<P align="left" style="font-size: 10pt">transitioning platforms. Further, we anticipate that our cost reduction
initiative implemented in the fourth quarter of 2003 will lower the revenues
needed to reach the break-even point.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the extent we maintain or exceed our projected revenues and are not
required to fund significant contingencies, we expect to continue to retain our
current cash reserves and therefore, maintain our liquidity position at a
consistent level both on at least a short-term basis. However, to the extent
that we do not achieve current projected operating levels, fail to close deals
in process timely or are required to fund contingencies, we will be required to
use our cash reserves and this will negatively impact our longer term
liquidity. We believe our current cash reserves and cash generated from our
existing operations and customer base are at a minimal level for us to meet our
operating obligations and the anticipated additional research and development
for our audio technology business for the short term. This constrained working
capital currently limits our ability to capitalize fully on market
opportunities and to compete as rigorously as we would like. Indeed, a
continued deterioration in our cash position will, absent new financing or
licensing arrangements, impair our ability to operate as a going concern. If
we do not achieve current projected operating levels, our current cash reserves
may be depleted within &nbsp;&nbsp;&nbsp;months. In such case, we may have to rely on the
sale of equity, debt or convertible debt financings in the future, which may
have a dilutive effect on our existing shareholders. Further, we cannot assure
you that debt or equity financing will be available as required and if not
available, we would have to further scale down operations or even cease
operations.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We will continue to consider and evaluate capital investment or business
arrangements with financial or strategic participants or investors as such
opportunities become available to us on terms that enhance shareholder value
and support our business strategy.


<P align="left" style="font-size: 10pt"><B>Net Operating Loss Carry Forwards</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2003, we had net operating loss carry forwards for Federal
income tax purposes of approximately $27,000,000 which are available to offset
future Federal taxable income, if any, through 2023. Approximately $17,000,000
of these net operating loss carry forwards are subject to an annual limitation
of approximately $1,000,000.


<P align="left" style="font-size: 10pt"><B>Risk Factors</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain information in this report includes forward-looking statements.
Forward-looking statements include statements regarding our expectations,
beliefs, intentions, plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements that are other than
statements of historical fact. When used in this report the words &#147;shall,&#148;
&#147;should,&#148; &#147;forecast,&#148; &#147;all of,&#148; &#147;projected,&#148; &#147;believes,&#148; &#147;anticipates,&#148;
&#147;expects,&#148; and similar expressions are intended to identify these
forward-looking statements. In addition, we may from time to time make oral
forward-looking statements. We wish to caution readers that a number of
important factors could cause actual results to differ materially from those in
the forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed above in
&#147;Management&#146;s Discussion and Analysis of Financial Condition and Results of
Operations,&#148; elsewhere in this report or from time to time described in our
other filings with the Securities and Exchange Commission.


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<P align="left" style="font-size: 10pt"><I>Our Operating Results Fluctuate and If We Are Unable to Achieve or Sustain
Profitability in the Future or Obtain Future Financing Our Business Operations
May Fail</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We continue to experience operating losses. While our objective and full
effort is on managing a profitable business, due to the market conditions and
factors outlined above and below and their impact on fluctuations in operating
expenses and revenues, we cannot provide assurance that we will be able to
generate a positive profit position in any given future period. We cannot
guarantee that we will increase sales of our products and technologies, or that
we will successfully develop and market any additional products. We may not be
able to re-establish or sustain future profitability. We may have to rely on
the sale of equity, debt or convertible debt financings in the future, which
may have a dilutive effect on our existing shareholders. Further, we cannot
assure you that debt or equity financing will be available as required and if
not available, we would have to further scale down operations or even cease
operations.

<P align="left" style="font-size: 10pt"><I>Because The Market In Which We Operate Is Highly Competitive, We Face
Significant Pricing Pressure and Competition.</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We operate in a technology environment which is competitive and rapidly
changing. 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. Our
future success is dependent on establishing and maintaining the technological
superiority of our products over those of competitors, our ability to
successfully identify and bring other compatible technologies and products to
market and a recognition by the market of product value. We compete with a
number of entities that produce various stereo audio enhancement processes,
technologies and products in both traditional two-speaker environments such as
consumer electronics and multimedia computing, and in multi-channel,
multi-speaker applications such as Home Theater. In the field of 3-D or
&#147;virtual audio&#148;, our principal competitors are SRS Labs, Inc., QSound Labs,
Inc. and Dolby Laboratories or technologies and products developed by other
companies, including entities that have business relationships with us. Many
of our competitors have greater financial, technical, sales and marketing
resources, better name recognition and a larger customer base than ours. In
addition, some of our large competitors may offer customers a broader product
line, which may provide a more comprehensive solution than our current
offerings.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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. We have responded by offering additional products targeted to each
price and quality segment of the market and continue to aggressively pursue new
opportunities in emerging product categories and complements to our existing
core business. We believe 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 us, and our rational commercial competitors, to enhance their
operating results. There is no assurance that our present or contemplated
future products will achieve or maintain sufficient commercial acceptance, or
if they do, that functionally equivalent products will not be developed by
current or future competitors who had access to significantly greater resources
or which are willing to &#147;give away&#148; their products.


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<P align="left" style="font-size: 10pt"><I>We Rely on the Schedules and Cooperation of Chip Makers or Other Third Parties
to Deliver Our Technology in Consumer Products. These Third Parties Have Their
Own Priorities and Alliances that May Delay or Thwart our Sales Efforts to
Potential Customers.</I>


<P align="left" style="font-size: 10pt">Spatializer does not develop or market semiconductors. That is why we carry no
inventory or have order backlogs that typically are good indicators of near
term performance. Rather, we develop audio algorithms that are embedded on
third party processors or semiconductors used by our customers. While our
algorithms are implemented on a wide array of processors, often times a
customer uses a processor where there is no such implementation, or where a
competing solution has been implemented. In this case, our customers request
that our algorithm be implemented. While these requests are typically honored,
processor manufacturers must schedule such implementation as their resources or
corporate strategies allow. Therefore, the supply-chain is often quite long and
complicated, which potentially can result in delays or deadlines that may not
always coincide with our customer&#146;s requirements and which are beyond the
control of our company<B>.</B>


<P align="left" style="font-size: 10pt"><I>If New Product Development Is Delayed, We Will Experience Delays In Revenues
And Competitive Products May Reach The Market Before Our Products.</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since our inception, we have experienced delays in bringing new products
to market and commercial application as a result of delays inherent in
technology development, financial resource limits and industry responses and
maturity. These delays have resulted in delays in the timing of revenues and
product introduction. In the future, delays in new product development or
technology introduction on behalf of us, our original equipment manufacturers
of consumer electronics and multimedia computer products (OEMs), integrated
circuit (IC)&nbsp;foundries or our software producers and marketers could result in
further delays in revenues and could allow competitors to reach the market with
products before us. In view of the emerging nature of the technology involved,
and the rapidly changing character of the entire media, internet and computer
markets, our expansion into other technology areas, such as cellular
telephones, and the uncertainties concerning the ability of our current
products and new products to achieve meaningful commercial acceptance in the
new technology areas, there can be no assurance of when or if we will achieve
or sustain profitability.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Manufacturer&#146;s design-in cycles for our technology range from four to
twelve months, from the decision to adopt our technology to actual cash flow to
us. These schedules are also prone to delays at the manufacturer level and in
some cases, manufacturer&#146;s new products may be cancelled due to market testing
or resource allocation. Since these events are beyond our control, it is
difficult to absolutely project when new deals will begin generating revenues
or if signed deals will generate financial results. For this reason, we do not
typically announce new deals until the target product is being introduced.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We expect that we will continue to be dependent upon a limited number of
OEMs for a significant portion of our net sales in future periods, although no
OEM is presently obligated either to purchase a specified amount of products or
to provide us with binding forecasts of product purchases for any period. Our
four largest customers as of September&nbsp;30, 2004 accounted for 42%, 19%, 13%
and 12% of our net sales in the third quarter. The loss of any one of our major
customers or licensees would significantly reduce our revenues and harm our
ability to achieve or sustain acceptable levels of operating results. The loss,
or signing of


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<P align="left" style="font-size: 10pt">a similarly sized account or accounts would have a material short term
impact on our operations and there is no assurance that we will not lose all or
some of the revenues from one or more of these accounts. While we are working
to broaden the sources of our royalty streams, there can be no assurance that
we will be successful in retaining or attracting such key accounts and
broadening such revenue stream sources.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our products are typically one of many related products used by consumer
electronic users. Demand for our products is therefore subject to many risks
beyond our control, including, among others:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>competition faced by our OEM customers in their particular end
markets;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the technical, sales and marketing and management capabilities of
our OEM customers; and</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the pressure faced by our OEM customers to reduce cost</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There can be no assurance that we will not lose sales in the future as a
result of the pressure to reduce costs faced by our customers. The reduction of
orders from our significant OEM customers, or the discontinuance of our
products by our end users may subject us to potential adverse revenue
fluctuations.

<P align="left" style="font-size: 10pt"><I>If We Are Unable To Attract And Retain Our Key Personnel, We May Not Be Able To
Successfully Operate Our Business.</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future success primarily depends on the abilities and efforts of a
small number of individuals, with particular management obligations and
technical expertise. Loss of the services of any of these persons could
adversely affect our business prospects. There is no assurance that we will be
able to retain this group or successfully recruit other personnel, as needed.
We compete with other enterprises with stronger financial resources and larger
staffs that may offer employment opportunities to our staff which are more
desirable than those which we are able to offer. Failure to maintain skilled
personnel with the software and engineering skills critical to our business
could have an adverse impact upon our business, the results of our operations
and our prospects. Currently, we have an employment agreement with Henry R.
Mandell with a term expiring in November&nbsp;2005.

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<P align="left" style="font-size: 10pt"><B>Item&nbsp;3. </B><B><I>Quantitative and Qualitative Disclosures About Market Risk</I></B>



<P align="left" style="font-size: 10pt">&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
September&nbsp;30, 2004. 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.

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<P align="left" style="font-size: 10pt"><B>Item&nbsp;4. </B><B><I>Controls and Procedures</I></B>





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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company carried out an evaluation of the effectiveness of the
Company&#146;s disclosure controls and procedures, as defined in Rules&nbsp;13a-15(e) and
15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer had concluded that the
Company&#146;s disclosure controls and procedures as of September&nbsp;30, 2004 were
effective to ensure that information required to be disclosed by the Company in
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 Securities and Exchange Commission&#146;s rules and forms. There were no changes
in the Company&#146;s internal control over financial reporting that occurred during
the quarter ended September&nbsp;30, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company&#146;s internal control over
financial reporting.


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<P align="center" style="font-size: 10pt">PART II. OTHER INFORMATION


<!-- link2 "ITEM 1. LEGAL PROCEEDINGS" -->
<DIV align="left"><A NAME="009"></A></DIV>

<P align="left" style="font-size: 10pt"><B>ITEM 1. LEGAL PROCEEDINGS</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From time to time we may be involved in various disputes and litigation
matters arising in the normal course of business. As of November&nbsp;8, 2004, we
are not involved in any legal proceedings that are expected to have a material
adverse effect on our consolidated financial position, results of operations or
cash flows. However, litigation is subject to inherent uncertainties. Were an
unfavorable ruling to occur, there exists the possibility of a material adverse
impact on our results of operations of the period in which the ruling occurs.
Our estimate of the potential impact on our financial position or overall
results of operations for new legal proceedings could change in the future.

<!-- link2 "ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS" -->
<DIV align="left"><A NAME="010"></A></DIV>

<P align="left" style="font-size: 10pt"><B>ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS</B>



<P align="left" style="font-size: 10pt">None


<!-- link2 "ITEM 3. DEFAULTS UPON SENIOR SECURITIES" -->
<DIV align="left"><A NAME="011"></A></DIV>

<P align="left" style="font-size: 10pt"><B>ITEM 3. DEFAULTS UPON SENIOR SECURITIES</B>



<P align="left" style="font-size: 10pt">None


<!-- link2 "ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS" -->
<DIV align="left"><A NAME="012"></A></DIV>

<P align="left" style="font-size: 10pt"><B>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B>



<P align="left" style="font-size: 10pt">None


<!-- link2 "ITEM 5. OTHER INFORMATION" -->
<DIV align="left"><A NAME="013"></A></DIV>

<P align="left" style="font-size: 10pt"><B>ITEM 5. OTHER INFORMATION</B>



<P align="left" style="font-size: 10pt">None


<!-- link2 "ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K" -->
<DIV align="left"><A NAME="014"></A></DIV>

<P align="left" style="font-size: 10pt"><B>ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</B>



<P align="left" style="font-size: 10pt"><B>(a)&nbsp;Exhibits</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
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</TR>

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<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">10.5
</DIV></TD>

    <TD align="left" valign="top">License Agreement between Spatializer Audio Laboratories, Inc.,
Desper Products, Inc. and Samsung Electronics, effective August&nbsp;22,
2004.*</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>

    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">31.1
</DIV></TD>

    <TD align="left" valign="top">Certificate of Chief Executive Officer and Chief Financial Officer
pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>

    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">32.1
</DIV></TD>

    <TD align="left" valign="top">Certificate of Chief Executive Officer and Chief Financial Officer
pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002.**</TD>
</TR>

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</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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    <TD width="87%">&nbsp;</TD>
</TR>

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<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">*
</DIV></TD>

    <TD align="left" valign="top">Confidential treatment requested. Confidential portions of this exhibit
have been redacted and filed separately with the Securities and Exchange
Commission.</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>

    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">**
</DIV></TD>

    <TD align="left" valign="top">Certification will not be deemed &#147;filed&#148; for purposes of Section&nbsp;18 of
the Securities Exchange Act of 1934.</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="left" style="font-size: 10pt"><B>(b)&nbsp;Reports on Form&nbsp;8-K:</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On August&nbsp;10, 2004, we filed a Current Report on Form 8-K regarding a
press release issued with earnings information for the quarter ended June&nbsp;30,
2004. The information furnished in the report shall not be deemed to be filed
for purposes of Section&nbsp;18 of the Securities Exchange Act of 1934.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On August&nbsp;26, 2004, we filed a Current Report on Form 8-K regarding a
press release issued with information on the License Agreement between
Spatializer Audio Laboratories, Inc., Desper Products, Inc. and Samsung
Electronics. The information furnished in the report shall not be deemed to be
filed for purposes of Section&nbsp;18 of the Securities Exchange Act of 1934.


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
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<DIV align="left"><A NAME="015"></A></DIV>
<P align="left" style="font-size: 10pt"><B>SIGNATURES</B>


<P align="left" style="font-size: 10pt">Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


<P align="left" style="font-size: 10pt">Dated: November&nbsp;10, 2004


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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    <TD width="40%">&nbsp;</TD>
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    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="50%">&nbsp;</TD>
</TR>
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<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>SPATIALIZER AUDIO LABORATORIES, INC.</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>(Registrant)</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Henry R. Mandell</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><HR size="1" noshade width="60%" align="left"></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>Henry R. Mandell</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><I>Chairman of the Board, Chief Executive Officer</I></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><I>Chief Financial Officer and Secretary</I></TD>
</TR>

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</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>2
<FILENAME>v03127exv10w5.htm
<DESCRIPTION>EXHIBIT 10.5
<TEXT>
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<P align="right" style="font-size: 10pt"><B>EXHIBIT 10.5</B>


<P align="left" style="font-size: 10pt"><B>CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT
HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.</B>



<P align="center" style="font-size: 10pt">DEVELOPMENT AND DISTRIBUTION AGREEMENT



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Development and Distribution Agreement (&#147;Agreement&#148;) is entered into
as of August&nbsp;16, 2004 (the &#147;Effective Date&#148;) by and between Spatializer Audio
Laboratories, Inc. (&#147;Spatializer&#148;) and its wholly-owned subsidiary, Desper
Products, Inc.(&#147;Desper&#148;) , corporations organized and existing under the laws
of the State of Delaware and the State of California, respectively, and having
a principal place of business at 1754 Technology Drive, Suite&nbsp;125, San Jose,
California 95110, United States of America (collectively referred to as
&#147;Licensor&#148;), and Samsung Electronics Co., Ltd., acting through its System LSI
Division , a corporation organized and existing under the laws of Republic of
Korea, and having a principal place of business at San #24 Nongseo-Ri,
Giheung-Eup, Yongin-City, Gyeonggi-Do, Korea 449-711(&#147;Licensee&#148;).


<P align="center" style="font-size: 10pt">BACKGROUND



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;Desper, a subsidiary of Spatializer, has developed certain proprietary
audio signal processing software products for providing enhanced audio
reproduction from stereo loudspeakers and/or headphones.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;The term &#147;Licensor&#148; includes Spatializer and Desper, which will
undertake the rights and obligations as set forth herein, and conduct and
perform as a party under this Agreement.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C Licensee is engaged in, among other things, the business of
manufacturing and distributing certain integrated circuit devices that are
capable of providing audio signal processing capabilities.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D Licensee desires to receive from Licensor, and Licensor desires to
grant to Licensee, a non-exclusive license to develop Compatible Software
Products (as defined below) for use with Distributor Products (as defined
below) and to distribute such Compatible Software Products and Distributor
Products, subject to the terms and conditions of this Agreement.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the parties agree as follows:


<P align="center" style="font-size: 10pt">Section&nbsp;1<BR>
DEFINITIONS



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For purposes of this Agreement the following terms shall have the meanings
set forth below:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.1 &#147;Authorized DSP IC(s)&#148; means digital signal processing or other
programmable digital processor integrated circuit devices manufactured by
Licensee which: (i)&nbsp;are capable of performing the digital signal processing
functions necessary to properly perform the Core Functionality (as defined
below) of a Licensed Product (as defined below); and (ii)&nbsp;have on-board or are
bundled with sufficient on-board read-only memory to contain the corresponding
Compatible Software Product(s).


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.2 &#147;Compatible Software Product(s)&#148; means the executable code version of
a software product developed by Licensee using Licensed Product(s) that
implements the Core Functionality corresponding to such Licensed Product and is
designed for and is capable of being properly executed by, and is compatible
with, the respective Authorized DSP IC.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.3 &#147;Core Functionality&#148; means the digital audio signal processing
functionality embodied in each of the Licensed Products and Modifications
thereto, as described in Exhibit&nbsp;A attached hereto.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.4 &#147;Current Release&#148; means the then-current, unmodified release of a
Licensed Product provided by Licensor to Licensee hereunder.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.5 &#147;Deliverables&#148; means those tangible items specified in Exhibit&nbsp;A
attached hereto, and includes the Documentation (as defined below).


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.6 &#147;Distributor Product(s)&#148; means an Authorized DSP IC bundled with a
copy of a Compatible Software Product loaded into the on-board read-only memory
of such Authorized DSP IC.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.7 &#147;Documentation&#148; means the written reference materials designated by
Licensor for use by development partners and distributors of the Licensed
Products that Licensor furnishes to Licensee hereunder in conjunction with the
Licensed Products, as may be amended by Licensor from time to time.
Documentation includes the Licensed Products&#146; filter coefficients, block
diagrams, test bench and Matlab scripts.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.8 &#147;Evaluation Boards&#148; means evaluation board level products which
Licensee provides to potential third party customers enabling such potential
third party customers to evaluate the Authorized DSP ICs and the Compatible
Software Products prior to making a purchase decision regarding the Authorized
DSP ICs.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.9 &#147;Fees&#148; or &#147;Distribution Fees&#148; means all license, distribution,
royalty, and other fees payable to Licensor hereunder, as specified in Section
4 and Exhibit&nbsp;A attached hereto.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.10 &#147;Licensed Product(s)&#148; means the current machine readable, executable
code versions and floating point source code versions of Licensor&#146;s proprietary
audio signal processing software products listed on Exhibit&nbsp;A attached hereto
and made a part hereof, including any improvements, updates, modifications, and
derivatives thereof furnished to Licensee by Licensor during the term of this
Agreement. It is understood that the provision of any such improvements,
updates, modifications, and derivatives shall be at Licensor&#146;s sole discretion
and may be subject to additional fees and/or additional terms and conditions.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.11 &#147;Modifications&#148; means any and all enhancements, improvements, updates
and revisions of the Licensed Products, Deliverables and Core Functionality.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.12 &#147;Quarter&#148; means a period of three (3)&nbsp;consecutive calendar months,
commencing January&nbsp;1, April&nbsp;1, July 1 or October 1.


<P align="center" style="font-size: 10pt">2
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="center" style="font-size: 10pt">Section&nbsp;2<BR>
LICENSE GRANTS



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.1 Development License. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee, a non-exclusive,
non-transferable, worldwide right and license to use and reproduce the Licensed
Products, including the Deliverables, and Modifications thereto, solely for the
purpose of developing and having developed a Compatible Software Product(s)
corresponding to each Licensed Product listed on Exhibit&nbsp;A hereto. Licensee
shall not distribute any Distributor Product to a third party customer without
first providing a copy of the applicable Compatible Software Product to
Licensor for its acceptance in accordance with Section&nbsp;3.3 of this Agreement,
which acceptance shall not be unreasonably withheld or delayed by Licensor,
provided that Licensee shall not be obligated to provide the Compatible
Software Product in case of Licensee&#146;s demonstrations to its customers,
internal and external, under the terms and conditions set forth in Section&nbsp;2.3.
Such acceptance shall not be delayed more than seven (7)&nbsp;days after the receipt
of the applicable Compatible Software Product. Licensor shall not disclose to
any third party the applicable Compatible Software Product provided by
Licensee, and shall use such Compatible Software solely for the acceptance
purpose as provided in this Section. Upon request by Licensee, Licensor shall
immediately return to Licensee such Compatible Software. Nothing in this
Agreement shall be construed as granting any right or license by Licensee.
Licensee shall not grant sublicenses to the rights set forth in this Section
2.1 and shall not in any event disclose or distribute the Core Functionality or
Deliverables or any portion thereof to third parties unless as provided herein
or agreed in writing by Licensor. Licensee shall not be authorized to prepare
derivative works or create Modifications of the Licensed Products, the Core
Functionality or the Deliverables.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.2 Distribution License. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee a non-exclusive,
non-transferable, worldwide right and license to make, have made, distribute,
ship, consume or otherwise transfer the Compatible Software Products developed
by Licensee, and the related Distributor Products, (i) * * * (collectively
&#147;Internal Consumption&#148;) and (ii) * * * (&#147;External Consumption&#148;). THIS AGREEMENT
AUTHORIZES INTERNAL CONSUMPTION AND EXTERNAL CONSUMPTION WITH RESPECT TO
DISTRIBUTOR PRODUCTS USED ONLY FOR * * *. INTERNAL CONSUMPTION OR EXTERNAL
CONSUMPTION OF DISTRIBUTOR PRODUCTS FOR USE IN * * * AND OTHER ELECTRONIC
DEVICES IS NOT AUTHORIZED. STANDALONE DISTRIBUTION OF DOCUMENTATION IS
STRICTLY PROHIBITED AND IS GROUNDS FOR IMMEDIATE TERMINATION OF THIS AGREEMENT.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.3 Demonstration License. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee a non-exclusive,
non-transferable, worldwide rights and license to demonstrate pre-production
versions of the Compatible Software Product on Evaluation Boards or otherwise,
provided Licensee shall make best efforts to protect the Core Functionality
during such demonstrations as it would to protect its own intellectual property
or proprietary information.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.4 Customer Support and Warranties. Licensee shall be solely responsible
for, and Licensor shall have no obligation to honor, any representations or
warranties that Licensee provides with respect to the Compatible Software
Products and Distributor Products except for



<P>
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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top">
    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">3
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">





<P align="left" style="font-size: 10pt">any warranties and representations provided by Licensor under this Agreement.
Licensee shall be solely responsible for providing support and maintenance to
its customers.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.5 Restrictions and Ownership of Licensed Products. Licensee shall not
(except as expressly provided in this Agreement) copy, decompile, disassemble
or reverse engineer the Licensed Products and Deliverables. Licensee acquires
no title, right or interest in the Licensed Products, Deliverables and Core
Functionality other than the non-exclusive license rights expressly granted
herein. Licensee shall not exercise its rights under this Agreement in any
manner, or take any other action, which adversely affects Licensor&#146;s ownership
and rights in and to the Licensed Products, Deliverables and Core
Functionality. ALL RIGHTS NOT EXPRESSLY GRANTED HEREUNDER ARE RESERVED TO
LICENSOR.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.6 Ownership of Modifications. Licensor shall exclusively develop and
own any Modifications during the term of this Agreement. Licensee shall not
develop, and acquires no title, right or interest in Modifications other than
the non-exclusive license rights expressly granted herein. Licensee shall
promptly notify Licensor of, and fully disclose to Licensor, any and all
proposed Modifications suggested by Licensee, and Licensor may, in its
discretion, develop such Modifications (at no cost to Licensee), and is
exclusively entitled to seek patents and patent applications disclosing,
claiming or otherwise relating to any such Modifications. Licensee hereby
assigns to Licensor all right, title and interest in all such proposed
Modifications throughout the world. Licensee further agrees to execute all
documents reasonably requested by Licensor to perfect Licensor&#146;s interest in
such proposed Modifications throughout the world.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.7 Future Product Versions. In the event that Licensor develops and
makes generally available to any other licensees a new version of a Licensed
Product during the term of this Agreement, Licensor shall add or substitute the
new version under this Agreement as an additional version of the Licensed
Product or in substitution of another version of the Licensed Product, upon
thirty (30)&nbsp;days notice to and express written consent by Licensee.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.8 Ownership of Compatible Software Products. Licensee shall exclusively
develop and own the Compatible Software Products and any revisions thereto
(excluding Licensor&#146;s pre-existing intellectual property contained therein).
Licensor shall not develop, and acquires no title, right or interest in
Compatible Software Products and any revisions thereto (except Licensor&#146;s
pre-existing intellectual property contained therein).


<P align="center" style="font-size: 10pt">Section&nbsp;3<BR>
OBLIGATIONS OF LICENSOR



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.1 Delivery. Subject to the terms and conditions of this Agreement,
Licensor shall deliver one copy of the Current Release of each Licensed Product
listed on Exhibit&nbsp;A hereto, along with the corresponding Deliverables, to
Licensee within fifteen (15)&nbsp;days after the Effective Date.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.2 Technical Assistance. During the first year of this Agreement, upon
reasonable notice and subject to reasonable availability, Licensor will provide
Licensee, free of charge, with up to twenty (20)&nbsp;hours of technical assistance
during normal business hours to assist Licensee in developing the Compatible
Software Products. If Licensee requires more than twenty (20)&nbsp;hours of
technical assistance, then each hour in excess of the twenty (20)&nbsp;hours, shall
be billed at


<P align="center" style="font-size: 10pt">4
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">Licensor&#146;s then-current hourly rate. The current hourly rate is * * *, subject
to change at any time by Licensor. Such assistance shall be provided by
telephone consultation unless otherwise mutually agreed. In the event of any
travel by Licensor personnel requested by Licensee, Licensee shall reimburse
Licensor for all pre-approved reasonable costs for travel, food and lodging for
such Licensor personnel for such travel. Within a reasonable period of time
after the Effective Date, Licensor shall dispatch one (1)&nbsp;of its employees for
the provision of on-site assistance at Licensee&#146;s facilities, provided that
such support shall not be included in the twenty (20)&nbsp;hours mentioned above.
Licensor&#146;s travel expenses (economy class air fares, food, and lodging)
incurred in performing such assistance shall be paid by Licensee thirty (30)
days after the receipt of proper receipts.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.3 Verification Procedures. The parties will cooperate to ensure that
the Distributor Products comply with the following standard of quality of
Licensor (&#147;Standard of Quality&#148;). For Dolby&#174; certification if necessary, the
parties will cooperate to ensure such certification. For all Distributor
Products, whether or not Dolby&#174; certification is sought, the Standard of
Quality consists of compliance with the Deliverables and Licensor&#146;s audio
quality assurance review. Licensee shall provide a minimum of two (2)&nbsp;samples
of Distributor Products per each major model of the Distributor Products to
Licensor as soon as reasonably practical in advance of initial commercial
release of such Distributor Products. Licensee shall notify Licensor that such
samples are being provided for verification testing under this Section&nbsp;3.3.
Licensor will then report to Licensee any non-compliance with the Standard of
Quality and Licensee shall correct such non-compliances prior to initial
commercial release. In the event that Licensor does not notify Licensee of any
non-compliance within ten (10)&nbsp;business days after receipt of the samples, the
Distributor Product will be deemed to have passed verification testing for
purposes of initial commercial release. In the event that any non-compliance
are discovered after a Distributor Product has passed verification testing,
Licensee shall have a reasonable period of time to bring the Distributor
Product into conformity, taking into account Licensee&#146;s normal design cycle and
manufacturing lead times. In the event that modification of a Distributor
Product would materially interfere with Licensee&#146;s ongoing business, the
parties may mutually agree upon special branding and other terms and conditions
to allow Licensee to continue distributing the respective Distributor Products.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.4 Marketing Assistance. Licensor will confer with Licensee from time to
time during the term of this Agreement regarding the promotion, sales and
marketing of Authorized DSP ICs to Licensee customers. During the first year
of this Agreement, upon reasonable notice and subject to reasonable
availability, Licensor will provide Licensee, free of charge, with up to twenty
(20)&nbsp;hours of assistance during regular business hours for mutually agreed
marketing and promotional activities for the Authorized DSP ICs. During the
first (1st) year of this Agreement, at the reasonable request of Licensee,
Licensor will provide its then current applicable standard marketing literature
for the Licensed Products to potential Licensee customers and will participate
in joint sales calls to actual and potential Licensee customers as mutually
agreed.


<P align="center" style="font-size: 10pt">Section&nbsp;4<BR>
COMPENSATION TO LICENSOR



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.1 Distribution Fees. In consideration of the rights, licenses, and
assistance provided to Licensee hereunder, Licensee shall pay to Licensor
per-unit license fees in the amount



<P>
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<TR valign="top">
    <TD width="1%" nowrap align="right"><B>***</B></TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">5
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">





<P align="left" style="font-size: 10pt">indicated on Exhibit&nbsp;A hereto for the specified Compatible Software Products
consumed, distributed, sold or otherwise transferred by or on behalf or under
authority of Licensee as part of a Distributor Product under Section&nbsp;2.2 above
during the term of this Agreement. Notwithstanding the foregoing, Distribution
Fees payable by Licensee during the term of this Agreement shall be less than
the license fees payable by the most favored licensee of the Licensed Products
pursuant to a license agreement with Licensor in effect at the same time and
having substantially similar terms and conditions as this Agreement.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.2 Fee Reports. Within thirty (30)&nbsp;days of the last day of each Quarter,
Licensee shall provide Licensor with a written report in reasonable detail
which sets forth all Distributor Products and Authorized DSP ICs distributed
internally or externally during such Quarter, and the aggregate amount of, and
basis for, per unit Distribution Fees due to Licensor for such Quarter, if any.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.3 Payment. Any per unit Distribution Fees that may be due as set forth
in Exhibit&nbsp;A, shall be due and paid net thirty (30)&nbsp;days after receipt of the
applicable original invoice, which invoice shall be submitted following
Licensee&#146;s notification that Licensee shall exercise its option set forth in
Exhibit&nbsp;A or Licensor&#146;s receipt of the applicable Quarter&#146;s fee report,
whichever is applicable according to Exhibit&nbsp;A. Any per-unit Distribution Fees
that may be due shall be calculated based on the cumulative total number of
units, both Internally Consumed, and shipped for External Consumption, less any
copies returned with a Distributor Product for refund. All Distribution Fee
payments shall be calculated and made in United States Dollars by wire transfer
to:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="70%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="11%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="31%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Desper Products, Inc.</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>Citibank</B>, attention Steven Port</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">One Sansome Street</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">San Francisco, CA 94104</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Account #: * * *</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Routing #: * * *</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">with notification to:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Henry Mandell</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chief Executive Officer</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Desper Products, Inc.</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">1754 Technology Drive, Suite&nbsp;125</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">San Jose, CA 95110</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Fax: (408)&nbsp;437-5787</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="left" style="font-size: 10pt">unless otherwise specified in writing by Licensor.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.4 Taxes. Amounts payable to Licensor under this Agreement are payable
in full to Licensor without reduction for taxes (excluding any withholding tax
on Licensor&#146;s income) or customs duties. In the event that Licensee is required
to deduct any income tax from any payment payable or due hereunder to Licensor
by the Korean Tax Authority, Licensee agrees to deduct such withholding tax
from the payment; use reasonable efforts to ensure that the deduction or
withholding does not exceed the minimum amount legally required; pay to the
Korean Tax Authority within the period for payment permitted by law the full
amount of the deduction; provide Licensor with an official receipt issued by
the Korean Tax Authority within a reasonable



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    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">6
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">





<P align="left" style="font-size: 10pt">time after such official receipt having been issued so that Licensor may claim
the credit in order to avoid double taxation in the US.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.5 Late Payment. Any payments due under this Agreement which are not
paid when due shall bear interest to the maximum extent permitted by applicable
law, or three percent (3%) per annum, calculated on the number of days such
payment is delinquent, whichever is less.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.6 Maintenance and Inspection of Records. Licensee agrees to make and to
maintain until the expiration of two (2)&nbsp;years after the year to which such
records pertain, sufficient books, records and accounts regarding its sales,
distribution and other activities in order to calculate and confirm its payment
obligations hereunder. Licensor will have the right, at its own expense and not
more than once in any twelve (12)&nbsp;months, to have an independent certified
public accountant, or other reasonably acceptable professional, inspect, upon
reasonable notice and during regular business hours, Licensee&#146;s relevant
accounting records to verify the accuracy of Fees paid by Licensee under the
terms of this Agreement within the twelve (12)&nbsp;months immediately prior to the
audit. If any such examination discloses a shortfall in the Fees due to
Licensor hereunder, Licensee shall reimburse Licensor for the full amount of
such shortfall and if the amount of the underpayment for any period is more
than eight percent (8 %) Licensee shall pay Licensor&#146;s costs of performing the
audit with respect to such period.


<P align="center" style="font-size: 10pt">Section&nbsp;5<BR>
MARKETING, TRADEMARKS AND PROPRIETARY NOTICES



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.1 Licensor Trademarks. Licensee acknowledges that the symbols, logos,
trademarks and service marks adopted by Licensor or its suppliers to identify
the Licensed Products, as set forth in Exhibit&nbsp;B as may be amended from time to
time (&#147;Licensor Trademarks&#148;), belong to Licensor and that Licensee shall have
no rights in such Licensor Trademarks except as expressly set forth herein. All
Distributor Products used or shipped by Licensee incorporating the Compatible
Software Products and all documentation, associated brochures, packaging and
advertising may display the Licensor Trademarks, and if Licensee utilizes the
Licensor Trademarks, it shall do so according to the guidelines set forth in
Exhibit&nbsp;B hereto, and as Exhibit&nbsp;B may be amended from time to time, as
required by laws or regulations. Alternatively, Licensee may private label the
Distributor Products with new symbols, logos, trademarks and service marks
adopted by Licensee to identify the Distributor Products (&#147;Party Trademarks&#148;).
Party Trademarks shall include a reference to Licensor as follows &#147;&#091;<I>Party
Trademark&#093; Spatializer &#091;with Spatializer&#146;s
&#147;Circle/Square logo&#148;&#093; &#153;</I>&#148; and all
new logos, symbols, trademarks and service marks contained in the Party
Trademarks (other than the Licensor Trademarks included therein) shall be
co-owned by the parties. All such Party Trademarks are subject to the
provisions of Section&nbsp;5.2 of this Agreement. Any good will arising out of the
use of Licensor&#146;s Trademarks hereunder shall inure to the benefit of Licensor.
At no time during or after the term of this Agreement will Licensee challenge
or assist others to challenge Licensor&#146;s Trademarks or the registration thereof
or attempt to register any trademarks, marks or trade names confusingly similar
to Licensor&#146;s Trademarks.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.2 Approval of Representations. All depictions of Licensor&#146;s Trademarks,
including Party Trademarks that Licensee intends to use, shall be submitted to
Licensor for approval of design, color, or other details or, in the case of
Licensor Trademarks, will be exact copies of those used by Licensor for the
Licensed Products. In the event Licensor does not approve of such depiction,
Licensee shall cease using such depiction as soon as is practical upon
reasonable notice, provided that Licensor shall not unreasonably withhold or
delay its approval.


<P align="center" style="font-size: 10pt">7
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">Any Licensor Trademarks used in conjunction with another trademark on or in
relation to the Distributor Products will be presented legibly and with
reasonable prominence.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.3 Registered User Agreements. Licensor and Licensee may enter into
registered user agreements with respect to Licensor Trademarks to the extent
applicable under trademark law requirements in any jurisdiction in which
Licensee distributes Distributor Products. Licensor and Licensee shall be
jointly responsible for proper filing of the registered user agreement with
government authorities within such jurisdiction and shall pay all costs or fees
associated with such filing.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.5 Press Release. At a mutually agreed time, Licensor and Licensee shall
use best efforts to issue a press release announcing the relationship
contemplated by this Agreement, provided that the contents of such press
release shall be approved by both parties prior to announcement.
Notwithstanding the foregoing, Licensor shall be entitled to submit a
disclosure to Securities and Exchange Commission (&#147;SEC&#148;) on its own if
specifically required within a certain period by applicable law, provided that
such disclosure shall include only information that is specifically required to
be disclosed by such applicable law and shall exclude anything, express or
implicit, that may be interpreted to indicate Licensee.


<P align="center" style="font-size: 10pt">Section&nbsp;6<BR>
CONFIDENTIALITY



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.1 Obligations. The parties acknowledge and agree that the information
provided by one party (the &#147;Disclosing Party&#148;) to the other party (the
&#147;Receiving Party&#148;) directly or indirectly (which other information is marked as
&#147;proprietary&#148; or &#147;confidential&#148;, or, if disclosed orally, is summarized in
writing and similarly marked and delivered to the Receiving Party within thirty
(30)&nbsp;days of initial disclosure) hereunder constitutes the confidential and
proprietary information of the Disclosing Party for a period of three (3)&nbsp;years
after disclosure, or for so long as this Agreement remains in effect, whichever
is longer, provided that the Deliverables shall remain confidential and
proprietary for a period of five (5)&nbsp;years after disclosure. Licensor&#146;s
confidential information shall be deemed to include without limitation the
Deliverables, Core Functionality, Licensed Products, and Modifications.
Licensee&#146;s confidential information shall be deemed to include without
limitation any software, samples, and any other technical information related
to the Distributor Products and Compatible Software Products. The Receiving
Party shall retain in strict confidence and not disclose to any third party or
use any and all such information (except as expressly authorized by this
Agreement) without the Disclosing Party&#146;s express written consent except as
reasonably necessary to exercise the rights granted under this Agreement.
Without limiting the foregoing, each party shall use at least the same
procedures and degree of care which it uses to protect its own confidential
information of like importance, and in no event less than reasonable care.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.2 Exceptions. The Receiving Party shall be relieved of this obligation
of confidentiality to the extent any such information:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;was in the public domain at the time it was disclosed or has become in
the public domain through no fault of the Receiving Party;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;was independently developed by the Receiving Party without any use of
the Disclosing Party&#146;s confidential information and by employees or other
agents of the Receiving Party who have not had access to any of the Disclosing
Party&#146;s confidential information, as demonstrated by the Receiving Party&#146;s
records;


<P align="center" style="font-size: 10pt">8
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;was known to or developed by the Receiving Party prior to receipt of
such information from the Disclosing Party; or


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;becomes known to the Receiving Party, without restriction, from a
source other than the Disclosing Party without breach of this Agreement and
otherwise not in violation of the Disclosing Party&#146;s rights.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;is disclosed pursuant to a valid order of a court or government body
provided that the Receiving Party shall promptly notify the Disclosing Party
upon recognition of such order.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.3 Protections. Licensee shall not under any circumstances distribute,
reproduce, perform, publicly display or disclose the Deliverables in any manner
except as provided herein, and shall use the same procedures to protect the
Deliverables from unauthorized use and disclosure as it uses to protect its own
most sensitive confidential and proprietary information from unauthorized use
and disclosure. Licensor shall not under any circumstances distribute,
reproduce, perform, publicly display or disclose the Distributor Products and
Compatible Software Products in any manner, and shall use the same procedures
to protect the Distributor Products and Compatible Software Products from
unauthorized use and disclosure as it uses to protect its own most sensitive
confidential and proprietary information from unauthorized use and disclosure.


<P align="center" style="font-size: 10pt">Section&nbsp;7<BR>
TERM AND TERMINATION



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.1 Term. This Agreement shall be effective as of the Effective Date and
shall continue for a term of * * *, provided that the initial year for the
purpose of this Agreement shall include the First Year as defined in Exhibit&nbsp;A.
Thereafter, this Agreement shall automatically renew for successive one (1)
year terms at Licensee&#146;s sole discretion, provided that Licensee shall notify
Licensor of such discretion at least sixty (60)&nbsp;days prior to the end of the
initial * * * term or any successive one (1)&nbsp;year renewal.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.2 Termination for Breach. In the event of a material breach by either
party, the non-breaching party shall be entitled to give the breaching party
written notice of such breach. Failure to make timely payment shall constitute
a material breach of this Agreement by Licensee which shall have thirty (30 )
days to cure after receipt of written notice from Licensor. With respect to all
other material breaches, the breaching party shall have sixty (60 ) days to
cure such breach after receipt of written notice from the non-breaching party.
Thereafter, the non-breaching party shall be entitled, in addition to any other
rights it may have under this Agreement or otherwise under law, to terminate
this Agreement by giving notice thereof to the other party which shall take
effect immediately.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.3 Effect of Termination or Expiration. Upon termination of this
Agreement by Licensor for Licensee&#146;s material breach of failing to make timely
payment hereunder, the rights and licenses granted under this Agreement shall
immediately terminate except as expressly set



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    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">9
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">





<P align="left" style="font-size: 10pt">forth in Section&nbsp;7.4 below. Notwithstanding anything to the contrary in this
Agreement, Licensee may continue to distribute the Distributor Products for a
period of one (1)&nbsp;year (&#147;sell-off period&#148;) after termination by Licensor if
there is no material breach for failure to pay, upon payment of
* * * per unit under Section&nbsp;4. Upon such termination, Licensee shall
immediately destroy or return to Licensor all tangible items in its possession
or control which are proprietary to Licensor, including all copies of the
Deliverables, Core Functionality, Licensed Products, and Modifications.
Notwithstanding the foregoing, upon expiration of this Agreement or termination
by Licensee for Licensor&#146;s material breach hereunder, Licensee shall retain the
right to continue to distribute the Distributor Products upon payment of * * *
per unit, provided that such right shall be restricted to the Distributor
Products which Licensee developed during the Term.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.4 Survival. The provisions of Sections&nbsp;1, 2.4, 2.5, 2.6, 2.8, 4 (only
so long as Licensee continues to distribute Distributor Products subject to
section 7.3) , 7.3, 7.4, 8.2, 9, 10 and 11 shall survive the termination or
expiration of this Agreement for any reason. The provisions of Section&nbsp;6 shall
survive the termination or expiration of this Agreement for the remainder of
the period specified therein.


<P align="center" style="font-size: 10pt">Section&nbsp;8<BR>
LIMITED WARRANTY AND DISCLAIMER



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.1 Product Warranty. Licensor warrants to Licensee that the Current
Release of each Licensed Product as provided by Licensor to Licensee hereunder
will conform in all material respects with Licensor&#146;s Documentation for such
Licensed Product from the Effective Date until the ninetieth (90th) day
following the completion of Licensor&#146;s verification under Section&nbsp;3.3 of this
Agreement of such Licensed Product to Licensee hereunder (the &#147;Warranty
Period&#148;). Licensor does not warrant the Licensed Products will meet all of
Licensee&#146;s or Licensee&#146;s customer&#146;s requirements nor that the use of the
Licensed Products will be uninterrupted or error free. Notwithstanding the
foregoing, throughout the term of this Agreement, and after expiration of the
applicable Warranty Period, Licensor shall correct errors, bugs and other
defects in the Licensed Products that do not permit the Compatible Software
Products to conform to the Documentation, and to issue Modifications to correct
errors, bugs and other defects in the Licensed Products to Licensee at no
additional expense to Licensee. Licensee shall provide Licensor with
commercially reasonable assistance in such corrections of errors, bugs and
other defects.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.2 Disclaimer. EXCEPT FOR THE ABOVE EXPRESS LIMITED WARRANTY, THE
LICENSED PRODUCTS ARE PROVIDED &#147;AS IS&#148; AND WITHOUT WARRANTY OF ANY KIND WHETHER
EXPRESS, IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF THIS AGREEMENT OR
COMMUNICATION WITH LICENSEE, AND LICENSOR SPECIFICALLY DISCLAIMS ANY IMPLIED
WARRANTY OF MERCHANTABILTY, NONINFRINGEMENT OR FITNESS FOR A PARTICULAR
PURPOSE.



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    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">10
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">






<P align="center" style="font-size: 10pt">Section&nbsp;9<BR>
INDEMNIFICATION



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.1 Intellectual Property Indemnification by Licensor. Licensor agrees to
defend, indemnify and hold Licensee harmless against any liability and any
related costs and expenses arising out of any infringement of a copyright,
patent, trademark, trade secret right, or any other intellectual property
rights of any third party by Licensee&#146;s use of the Licensed Products as
intended by this Agreement. Notwithstanding the foregoing, Licensor assumes no
liability for infringement claims solely arising from (i)&nbsp;the use of a
Compatible Software Product alone or in combination with other products not
provided by Licensor, if such infringement would have been avoided by the use
of the corresponding Licensed Product alone, (ii)&nbsp;the modification of a
Compatible Software Product, if such infringement would have been avoided but
for such modification, or (iii)&nbsp;any willful infringement by Licensee having
prior knowledge of such infringement. Licensor shall pay all attorney&#146;s fees,
damages and costs awarded against Licensee, including any settlement amount
agreed to be paid and related expenses in such action that are attributable to
such claim. In the event that a Licensed Product or Deliverables infringes, or
if Licensor believes is likely to infringe, any intellectual property or
proprietary right of a third party, Licensor shall, at its sole expense, (x)
procure for Licensee the right to continue using the Licensed Product or
Deliverables; (y)&nbsp;replace or modify the Licensed Product, Deliverables or part
thereof in such a way that it is non-infringing but functionally equivalent; or
if (x)&nbsp;and (y)&nbsp;are not commercially reasonable (z)&nbsp;terminate this Agreement
with respect to such Licensed Product or Deliverables and refund any and all
prepaid license fees paid by Licensee to Licensor.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.2 Procedures. Licensor&#146;s obligation to indemnify Licensee under this
Section&nbsp;9 shall be subject to Licensee : (i)&nbsp;promptly notifying it of the claim
or action giving rise to the indemnity; (ii)&nbsp;providing it with control and
authority over the defense of such action or claim; and (iii)&nbsp;providing it with
proper and full information and reasonable assistance to defend and/or settle
any such claim or action. .


<P align="center" style="font-size: 10pt">Section&nbsp;10<BR>
LIMITATION OF LIABILITY



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THE TOTAL LIABILITY OF LICENSOR AND ITS DISTRIBUTORS ARISING OUT OF OR
RELATED TO THIS AGREEMENT (EXCLUDING SECTION 9) SHALL NOT EXCEED THE TOTAL
AMOUNT PAID BY LICENSEE TO LICENSOR HEREUNDER AND THE LIABILITY OF LICENSOR AND
ITS DISTRIBUTORS RELATING TO SPECIFIC PRODUCT(S) PROVIDED HEREUNDER (EXCLUDING
SECTION 9) SHALL NOT EXCEED THE AMOUNT PAID BY LICENSEE TO LICENSOR FOR SUCH
PRODUCT(S). EXCEPT FOR LIABILITY ARISING UNDER SECTIONS 6 AND 9 OF THIS
AGREEMENT, IN NO EVENT SHALL LICENSOR, ITS DISTRIBUTORS OR LICENSEE HAVE ANY
LIABILITY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES,
HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER FOR BREACH OF CONTRACT,
TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, ARISING OUT OF OR RELATED TO THIS
AGREEMENT, INCLUDING BUT NOT LIMITED TO LOSS OF ANTICIPATED PROFITS, EVEN IF
SUCH PARTY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THESE
LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY.


<P align="center" style="font-size: 10pt">11
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="center" style="font-size: 10pt">Section&nbsp;11<BR>
GENERAL PROVISIONS



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.1 Assignment. Either Party may not assign this Agreement or any rights
or obligations hereunder, by operation of law or otherwise, without the prior
written approval of the other party and any such attempted assignment shall be
void; provided, however, that either party may assign this Agreement to a
successor to all or substantially all of its business or assets to which this
Agreement relates if the assignee agrees in writing to comply with all terms
and conditions of this Agreement. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto, their
successors and permitted assigns.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.2 Notices. All notices between the parties shall be in writing and
shall be deemed to have been given if personally delivered or sent by certified
or registered mail (return receipt), or by internationally recognized overnight
courier, or by telecopy to the addresses set forth as follows, or such other
contact and/or address as is provided by notice as set forth herein.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="70%">
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<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="19%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="62%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">If to Licensor to:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Desper Products, Inc.</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">1754 Technology Drive, Suite&nbsp;125</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">San Jose, CA 95110</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attention: Henry Mandell</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Fax: (408)&nbsp;437-5787</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">If to Licensee to:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Samsung Electronics CO., LTD.</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">San #24, Nongseo-Ri, Giheung-Eup, Yongin-City,</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Gyeonggi-Do, Korea 449-711</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attention: * * *</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Fax: * * *</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">Notices shall be deemed effective upon receipt or, if delivery is not effected
by reason of some fault of the addressee, when tendered.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.3 Export Regulations. Licensee understands that Licensor is subject to
regulation by agencies of the U.S. government, including, but not limited to,
the U.S. Department of Commerce, which prohibit export or diversion of certain
technical products to certain countries. Licensee warrants that it will comply
in all respects with the Export Administration Regulations and all other export
and re-export restrictions applicable to the technology and documentation
licensed hereunder.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.4 Governing Law and Dispute Resolution


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;Any dispute or claim arising out of or in relation to this Agreement,
or the interpretation, making, performance, breach or termination thereof,
shall be finally and exclusively settled by binding arbitration in San Jose,
California, USA, if initiated by Licensee, and in Yongin-City, Gyeonggi-Do,
Korea, if initiated by Licensor, or such other location as the parties may
agree, in either case under the Rules of Arbitration of the International
Chamber of Commerce by three (3)&nbsp;arbitrators appointed in accordance with the
said Rules. The arbitral proceedings and all pleadings and written evidence
shall be in the English language. Any written



<P>
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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top">
    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">12
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">





<P align="left" style="font-size: 10pt">evidence originally in a language other than English shall be submitted in
English translation accompanied by the original or a true copy thereof.
Judgment on the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;This Agreement shall not be governed by the 1980 United Nations
Convention on Contracts for the International Sale of Goods; rather, this
Agreement shall be governed by and construed under the laws of the State of New
York without reference to conflict of laws principles. The arbitrators shall
apply New York law to the merits of any dispute or claim, without reference to
that state&#146;s conflict of laws principles.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.5 Relationship of the Parties. Nothing in this Agreement shall
constitute, nor shall any party represent that there is any relationship of
employee and employee, principal and agent or partnership between the parties
as a result of this Agreement.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.6 Severability. Any term or provision of this Agreement held to be
illegal or unenforceable shall, if possible, be interpreted so as to be
construed as valid, but in any event the validity or enforceability of the
remainder hereof shall not be affected.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.7 Waiver. The waiver of, or failure to enforce, any breach or default
hereunder shall not constitute the waiver of any other or subsequent breach or
default.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.8 Headings The paragraph headings appearing in this Agreement are
inserted only as a matter of convenience and in no way define, limit, construe
or describe the scope or extent of such paragraph, or in any way affect such
agreements.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.9 Entire Agreement. This Agreement, along with the Exhibits attached
hereto which are incorporated herein by reference, sets forth the entire
agreement between the parties and supersedes, merges, and renders void any and
all prior proposals, agreements, and representations between them, whether
written or oral, to the extent they relate in any way to the subject matter
hereof. This Agreement specifically supersedes and terminates that agreement
captioned DESPER PRODUCTS, INC. DEVELOPMENT AND DISTRIBUTION AGREEMENT between
the parties dated May&nbsp;22, 2002, as amended. This Agreement may be changed only
by mutual agreement of the parties in writing.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.10 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which will be considered an original, but all of
which together will constitute one and the same instrument.


<P align="center" style="font-size: 10pt">13
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
duly authorized representatives on the dates set forth below to be effective as
of the Effective Date set forth above.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
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<TR valign="bottom">
    <TD width="45%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="52%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">SAMSUNG ELECTRONICS CO., LTD.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">DESPER PRODUCTS, INC.</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">* * *</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><HR align="left" size="1" noshade width="65%">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><HR align="left" size="1" noshade width="45%"></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">(Signature)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(Signature)</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">* * *</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><HR align="left" size="1" noshade width="65%">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><HR align="left" size="1" noshade width="45%"></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">(Printed Name)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(Printed Name)</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><HR align="left" size="1" noshade width="65%">
(Title)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><HR align="left" size="1" noshade width="45%">
(Title)</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><HR align="left" size="1" noshade width="65%">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><HR align="left" size="1" noshade width="45%"></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Date:
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Date:</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer Audio Laboratories, Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><HR align="left" size="1" noshade width="65%"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">(Signature)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><HR align="left" size="1" noshade width="65%"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">(Printed Name)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><HR align="left" size="1" noshade width="65%"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">(Title)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Date:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:32px; text-indent:-0px"><HR align="left" size="1" noshade width="62%">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

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</TABLE>
</DIV>




<P>
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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top">
    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">14
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<DIV style="font-family: 'Times New Roman',Times,serif">






<P align="center" style="font-size: 10pt">EXHIBIT A



<P align="center" style="font-size: 10pt">LICENSED PRODUCTS



<P align="left" style="font-size: 10pt"><B>1. Licensed Product</B>



<P align="left" style="font-size: 10pt">Spatializer VBX<SUP>TM</SUP>



<P align="left" style="font-size: 10pt">Spatializer N-2-2<SUP>TM</SUP> Ultra



<P align="left" style="font-size: 10pt">Spatializer VirtuaLFE<SUP>TM</SUP>



<P align="left" style="font-size: 10pt">Spatializer&#174; 3-D Stereo audio technology



<P align="left" style="font-size: 10pt">Spatializer Natural Headphone<SUP>TM</SUP>



<P align="left" style="font-size: 10pt">Spatializer Vi.B.E. <SUP>TM</SUP>



<P align="left" style="font-size: 10pt">Spatializer PCE<SUP>TM</SUP>



<P align="left" style="font-size: 10pt">(separately or all four
together in <BR>

a package known as Spatializer UltraMobile HD<SUP>TM</SUP>)



<P align="left" style="font-size: 10pt"><B>2. Specification of Core Functionality</B>


<P align="left" style="font-size: 10pt">Note: The core functionalities may be identified via a &#147;fingerprinting&#148; method
that involves using an Audio Precision System which measures the frequency and
phase response of an audio system. In all cases, the filter coefficients and
delays are dependant on sampling rate and may differ somewhat depending on the
specific application of the algorithm. <B>The specification of core
functionalities is confidential and proprietary to Licensor.</B>



<P align="left" style="font-size: 10pt">Virtual Surround VBX and 3-D Stereo audio<BR>
The VBX and 3-D Stereo * * *.


<P align="left" style="font-size: 10pt">N-2-2 ULTRA<BR>
N-2-2 ULTRA * * *.


<P align="left" style="font-size: 10pt">VirtuaLFE<BR>
The VirtuaLFE * * *.



<P>
<HR size="1" width="18%" align="left" noshade>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top">
    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">15
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">






<P align="left" style="font-size: 10pt">Natural Headphone<BR>
* * *


<P align="left" style="font-size: 10pt">Vi.B.E.<BR>
The Vi.B.E. * * * .


<P align="left" style="font-size: 10pt">PCE<BR>
In the PCE * * *.


<P align="left" style="font-size: 10pt"><B>3. Deliverables</B>


<P align="left" style="font-size: 10pt">Sample source code including, without limitation, working C-level source code
for each of the Licensed Products.


<P align="left" style="font-size: 10pt">Documentation, which contains (1)&nbsp;the filter coefficients, block diagrams,
Matlab scripts and test bench, (2)&nbsp;explanation of source code for each of the
Licensed Products including, but not limited to, the definition of input and
output and detailed explanation of each effect, and (3)&nbsp;verification
procedures.



<P align="left" style="font-size: 10pt"><B>4. Distribution Fees</B>



<P align="left" style="font-size: 10pt"><B>Upon execution of this Agreement</B>


<P align="left" style="font-size: 10pt">Within thirty (30)&nbsp;days upon the receipt of original invoice after the
execution of this Agreement, Licensee shall pay the total amounts of * * *
Distribution Fees, which shall be applied to all Distributor Products (i.e.
Internally Consumed and/or externally shipped, both inclusive, cumulatively the
* * *). For the avoidance of doubts, Licensee shall have no obligation to pay
any additional fees or charges, other than such prepaid per-unit Distribution
Fees set forth herein.



<P align="left" style="font-size: 10pt"><B>First Year after Licensee Distributes the * * * Units</B>


<P align="left" style="font-size: 10pt">When the numbers of cumulative Distributor Products distributed by Licensee * *
*. Licensee shall have the right to exercise such option up to three (3)&nbsp;times
within the first year after Licensee distributes the * * * mentioned in the
above paragraph (&#147;First Year&#148;). * * * Distribution Fees shall be applied to
each unit of Distributor Products exceeding * * * for the First Year. In the
event that the total number of Licensed Products distributed in the First Year
fails to reach * * *, the First Year shall be extended for up to * * *, at
which time, the First Year will end and the next year will begin on the next
proximate calendar quarter. For the avoidance of doubts, in the event that
Licensee fails to distribute the full amount of Distributor Products covered by
the option(s)




<P>
<HR size="1" width="18%" align="left" noshade>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top">
    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">16
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">






<P align="left" style="font-size: 10pt">that Licensee exercised during the First Year, * * *.



<P align="left" style="font-size: 10pt"><B>Each Year after the First Year</B>


<P align="left" style="font-size: 10pt">For each year after the First Year during the term of this Agreement, Licensee
shall have the right to exercise * * * Distribution Fees shall be applied to
each unit of Distributor Products exceeding ** * for such year. In the event
that Licensee fails to distribute the full amount of Distributor Products
covered by the option(s) that Licensee exercised during such year, the * * *.



<P align="left" style="font-size: 10pt"><B>Upon termination or expiration</B>


<P align="left" style="font-size: 10pt">Subject to Section&nbsp;7 of this Agreement, upon termination or expiration of this
Agreement, Licensee shall retain the right to continue to distribute
Distributor Products with payment of * * * for every unit distributed by
Licensee.




<P>
<HR size="1" width="18%" align="left" noshade>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top">
    <TD width="1%" nowrap align="right">***</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%"><B>CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.</B></TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">17
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">






<P align="left" style="font-size: 10pt">EXHIBIT B



<P align="center" style="font-size: 10pt">TRADEMARKS AND PROPRIETARY NOTICES


<P align="left" style="font-size: 10pt"><B>General</B>


<P align="left" style="font-size: 10pt">The Parties understand and agree that this Exhibit&nbsp;B shall be governed and
interpreted by the terms and conditions set forth in Section&nbsp;5.



<P align="left" style="font-size: 10pt"><B>For Distributor Products</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;Licensee shall (i)&nbsp;mark each copy of a Distributor Product on the
packaging and media label (the label affixed to the form of media) in an easily
readable typeface, with the following legend:



<P align="left" style="margin-left:3%; font-size: 10pt">&#147;Portions of this product are licensed from Desper Products, Inc., a
subsidiary of Spatializer Audio Laboratories, Inc. &#169; 1997-2004
Spatializer Audio Laboratories, Inc., All Rights Reserved Worldwide.
<I>Spatializer</I><SUP>&#174;</SUP>, Spatializer <I>N-2-2&#153;</I>, and the circle-in-square device
are trademarks of Desper Products, Inc.&#148;

<P align="left" style="font-size: 10pt">and (ii)&nbsp;include the above legend in all Distributor Product brochures,
manuals, descriptive literature and advertising. Such legend may appear in
English as shown above, or in the native language of the country into which the
Distributor Product is intended to be sold. In addition, the legend shall
include a listing of any other Licensor Trademark used on the Distributor
Product, along with an attribution of its ownership by Licensor, and a listing
of patent numbers applicable to the Distributor Product which Licensor
designates from time to time in writing to Licensee.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;Licensee agrees to have printed on the media label for each Distributor
Product, and on associated packaging, in a manner conforming to Licensor&#146;s
trademark usage guidelines, as may be amended from time to time, the trademark
&#147;<I>Spatializer<SUP>&#174;</SUP> N-2-2</I>, preceded by the circle-in-square device, or other
identifying mark approved by Licensor in writing in advance.


<P align="left" style="font-size: 10pt"><B>For Products of Licensee including a Distributor Product</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Products of Licensee shall have printed in a permanent form on the front
or top panel and on associated packaging of each product containing a
Distributor Product, in a location, size and typeface readily visible to users
and purchasers of the product, and in a manner conforming to Licensor&#146;s
trademark usage guidelines, a copy of which is attached hereto and which may be
amended from time to time, the trademark &#147;<I>Spatializer</I>&#174; <I>N-2-2</I>&#153;&#148; preceded by the
circle-in-square device, or other identifying mark approved by Licensor in
writing in advance. Where products provide control of the Distributor Product
or associated circuitry, Licensee agrees that such control is marked with the
term &#147;<I>Spatializer</I>&#174; <I>N-2-2</I>&#153;&#148; as applicable<B>. </B>Where such control occurs by way of
software interface, Licensee agrees to provide, in the customary locations
notice as follows:



<P align="left" style="margin-left:10%; font-size: 10pt">&#147;<I>Spatializer</I>&#174;
<I>N-2-2</I>&#153; &#091;or &#147;<I>OnTheGoFX</I>&#153;&#148;&#093;, digital virtual
surround processing provided by Desper Products, Inc.&#148;


<P align="center" style="font-size: 10pt">18
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">Licensee agrees to mark the back panel of each product containing a Distributor
Product in an easily readable typeface , with the following legend:




<P align="left" style="margin-left:10%; font-size: 10pt">&#147;Certain audio features of this product manufactured under a
license from Desper Products, Inc., <I>Spatializer N-2-2</I>&#153; &#091;and/or
&#147;<I>OnTheGoFX&#153;</I>&#093;&#148; and the circle-in-square device are trademarks owned
by Desper Products, Inc.&#148;

<P align="left" style="font-size: 10pt">and, include the above legend in all brochures, manuals, descriptive literature
and advertising, for products containing a Distributor Product. Such legend
may appear in English as shown above, or in the native language of the country
into which such product is intended to be sold. In addition, the legend shall
include a listing of any other Licensor trademark used on the product, along
with an attribution of its ownership by Licensor, and a listing of the
following U.S. patent numbers: #4,308,423, #4,355,203, #5,412,731, #5,896,456
and #6,307,941 where applicable. In the event that new patent numbers are set
forth in a supplemented writing, Licensee shall have a reasonable time to add
such numbers to the legend.


<P align="left" style="font-size: 10pt">Licensee agrees to identify Desper Products, Inc. as the source of the audio
features provided by the Distributor Product, on all written material and
advertising associated with products containing a Distributor Product, wherever
such written material or advertising refers to any of the features provided by
the Distributor Product (e.g. Digital Virtual Surround sound, Surround sound,
3-D Stereo, 3-D audio, 3-D sound, audio localization, mono to stereo
expansion), enhanced therein.



<P align="left" style="font-size: 10pt"><B>TRADEMARK USAGE GUIDELINES</B>



<P align="left" style="font-size: 10pt"><FONT face="Wingdings">&#110;</FONT> <B>Trademark Protection (&#174; and &#153; Usage)</B>


<P align="left" style="font-size: 10pt">Trademark usage is generally based on legal precedent, not idiomatic usage.
This sometimes results in awkward or redundant wording. We have done our best
to make these recommendations easy to abide by and they are requirements.
Please contact us if you have any questions or would like additional
information regarding the proper use of our trademarks and logo.


<P align="left" style="font-size: 10pt">Camera-ready artwork of our trademarks and logo are available upon request.


<P align="left" style="font-size: 10pt">Through registration with trademark authorities worldwide or through common-law
acceptance, Desper Products, Inc. owns the following trademarks. This table
shows which trademarks are currently registered with the US and other trademark
offices, and which are owned by common-law trademark rights.



<P align="center" style="font-size: 10pt">19
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="55%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="69%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="26%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Registered (&#174;)</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Common-Law (&#153;)</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>Spatializer</B>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>DDP</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><IMG src="v03127v0312700.gif" alt="(SPATIALIZER 3-D STERED LOGO)"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>N-2-2</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><IMG src="v03127v0312700.gif" alt="(SPATIALIZER N-2-2(TM) LOGO)"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>VBX</B></TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&#147;Proper&#148; trademark usage (as defined by national and international conventions)
dictates that:




<P align="left" style="margin-left:3%; font-size: 10pt">(1) <B>All trademarked words should be used as an adjective, not a noun. </B>In
other words, &#147;Spatializer&#148; should modify or describe the word that follows
it.



<P align="left" style="margin-left:3%; font-size: 10pt">(2) <B>Each trademarked word should be off-set from the surrounding text.</B>
Typically, we off-set trademarked words by italicizing them, though you may
choose to bold them or put them in all capital letters.


<P align="left" style="font-size: 10pt">Correct Usage



<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Spatializer</I><SUP>&#174;</SUP> 3-D Stereo provides highly effective 3-D stereo
enhancement at lower cost.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Spatializer</I><SUP>&#174;</SUP> <I>N-2-2</I>&#153;, digital virtual surround is fast becoming a standard.<I>.</I></TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">Incorrect Usage



<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Spatializer<SUP>&#174;</SUP> </I>is a leading audio technology.</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(&#147;Spatializer&#148; is being used as a noun.)

<P align="left" style="font-size: 10pt">Note: An exception occurs when &#147;Spatializer&#148; refers to the company Spatializer
Audio Laboratories, Inc. Then it can be a noun &#151; and never with a <SUP>&#174;</SUP> or &#153;, as
in &#151; &#147;Spatializer&#146;s President and Chief Executive
Officer Henry Mandell said,...&#148;.



<P align="left" style="font-size: 10pt"><B>Size and position of &#174; and &#153; symbols</B>


<P align="left" style="font-size: 10pt">As you will notice in the usage examples above, these two symbols belong in the
upper right hand corner of the trademarked word or symbol. The proper size and
position can be achieved by making the symbol the same font and font size as
the regular body text, and then making the symbol &#147;Superscript&#148;.


<P align="left" style="font-size: 10pt">Alternately, you could make the font at least 2 points smaller (for example,
leave the body text at 12 and change the symbol size to 10) and put it in a
text box to elevate it to the appropriate position. Some writing programs
allow you to adjust the character spacing, so you could raise the symbol
position without a text box.



<P align="left" style="font-size: 10pt"><B>Avoiding overuse of the &#174; and &#153; symbols</B>


<P align="left" style="font-size: 10pt">Although each occurrence of the <I>Spatializer </I>marks should be off-set from the
surrounding text (by italicizing or bolding the mark, for example), each use
does not necessarily require a &#174; or &#153; symbol. The following guidelines will
help you to determine the proper usage.



<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="right">1.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The first time a <I>Spatializer </I>trademark is used in a document, italicize
it and use the appropriate symbol. On subsequent occurrences, just
italicize it.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">20
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<P><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="right">2.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>If the document is long and in sections, use the appropriate symbol with
the first occurrence of the trademark in each section.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="right">3.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>If the trademark occurs in a title or subtitle, do the same
(italicization and symbol).</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt"><FONT face="Wingdings">&#110;</FONT> <B>Making best use of the </B><B><I>Spatializer </I></B><B>Marks and Logo</B>


<P align="left" style="font-size: 10pt">The <I>Spatializer </I>marks, when displayed in a prominent (but tasteful) manner, can
positively influence your customers&#146; buying decisions. The following
guidelines are designed to help you get the most from the <I>Spatializer </I>logos<I>.</I>
We will be more than happy to review your front panel designs for conformance
to these guidelines.


<P align="left" style="font-size: 10pt"><B>1. Your own brand name should appear on the front panel of the product and be
more prominent than the full </B><B><I>Spatializer </I></B><B>logo. </B>(The circle-in-square next to
&#147;<I>Spatializer</I>&#148;, with the tag line 3-D Stereo, or N-2-2 or OnTheGoFX below, lines
above and below text, and &#174; is &#147;the full <I>Spatializer </I>logo&#148;.)


<P align="left" style="font-size: 10pt">Your own brand name should be larger and placed in a position customarily
reserved for brand names. You do not want customers confusing the <I>Spatializer</I>
feature with the brand name, and neither do we. The same rule applies for the
product box, product literature and other printed materials.


<P align="left" style="font-size: 10pt"><B>2. You may use the components of the full </B><B><I>Spatializer </I></B><B>logo only to emphasize
the full logo presence.</B>


<P align="left" style="font-size: 10pt">Therefore, you may use just the circle-in-square or just &#147;Spatializer&#148; to mark
the <I>Spatializer </I>On/Off button on a remote control provided that the full logo
appears on the faceplate. Please refer to the Software and Hardware Controls
Section for more specific suggestions.


<P align="left" style="font-size: 10pt">Note: This does not give you permission to replace our tag line, 3-D Stereo or
N-2-2 or OnTheGoFX with a tag line of your own choosing. We do require that
you use 3-D Stereo and N-2-2 or OnTheGoFX whenever you refer to that specific
<I>Spatializer </I>technology. However, you should be using your own tag line when
you refer to the overall audio quality or the combination of features of your
product.


<P align="left" style="font-size: 10pt"><B>3. The Spatializer logo is always one solid color foreground over one solid
color background. </B>In most printed material, the foreground color is black and
the background color is white. When it comes to the product facing, we ask
that you be consistent with the look of your product. So, if the product is
computer-tan, with black writing, then the background of our logo should be
tan, with the foreground being the same black silk-screen. When it comes to
advertising, we ask that you maintain the integrity of our trademark by
selecting colors that lend it a sophisticated look. We ask that you refrain
from neon colors, and combinations like hot pink over lime yellow. Since color
is the most difficult aspect to define, we ask that if you are in doubt as to
the color scheme you are considering, please contact us with a copy of the
proposed artwork, for our prompt evaluation and response.


<P align="left" style="font-size: 10pt"><B>4. Logo size. </B>The Spatializer logo shall be reproduced in size and
prominence at least equal to the Dolby Digital Logo reproduced on your
products.


<P align="left" style="font-size: 10pt"><B>5. You may not make changes to our logo without written approval.</B>
Occasionally, we have received requests from our licensees to make changes to
the full <I>Spatializer </I>logo.




<P align="left" style="margin-left:3%; font-size: 10pt">&#149; Is the &#174; necessary? In all situations where it is possible to print
the &#174;, it is mandatory to do so. However, like in the case of television
on-screen menus, it may not be possible to reproduce the &#174; symbol. If
there are other situations in which you deem it


<P align="center" style="font-size: 10pt">21
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<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="left" style="margin-left:3%; font-size: 10pt">is impossible or impractical, you may request that we waive this
requirement. We will always provide a prompt, written response to these
requests. However, it would still be necessary to use the symbol in
other places on the same product (like the back plate) and in the
associated print materials.



<P align="left" style="margin-left:3%; font-size: 10pt">&#149; Is it permissible to narrow the spacing between the letters S, P, A, T,
I, A, L, I, Z, E, and R of the logo? You must submit artwork of your
proposed alterations. We will most likely allow this modification as
long as it preserves the essential look of the logo.


<P align="center" style="font-size: 10pt"><IMG src="v03127v0312702.gif" alt="(SPATIALIZER 3-D STEREO LOGO)">




<P align="left" style="margin-left:3%; font-size: 10pt">&#149; Do we allow visual designs to express <I>Spatializer </I>effects in print
materials and depicting the switch positions visually, like on a LCD?
Yes. We use this picture on the left which we call the &#147;Virtual
Speaker Array&#148; to depict the <I>Spatializer </I>3-D Stereo effect. It is our
pleasure to make this picture available to you in camera-ready or any
computer format that would be helpful to you. You must ask for
permission to make you own graphic interpretations of the <I>Spatializer</I>
effect, <B>especially </B>if it incorporates the components of the full
<I>Spatializer </I>logo. We also have <I>Spatializer N-2-2 and OnTheGoFX </I>visual
designs in camera-ready art or any computer format that would be
helpful to you. Below is an example of the full N-2-2 and OnTheGoFX
logos without a visual design.


<P align="left" style="font-size: 10pt"><IMG src="v03127v0312703.gif" alt="(SPATIALIZER N-2-2(TM) LOGO)">






<P align="left" style="font-size: 10pt"><IMG src="v03127v0312704.gif" alt="(SPATIALIZER DIGITAL ONTHEGOFX(TM) LOGO)">


<P align="left" style="font-size: 10pt">For translations please contact the Sales &#038; Marketing office by telephone at
(408)&nbsp;453.4180, or by facsimile at (408)&nbsp;437-5787. We can also be reached via
e-mail at info@spatializer.com.




<P align="center" style="font-size: 10pt">22
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<P align="left" style="font-size: 10pt"><B>Exhibit&nbsp;31.1</B>



<P align="center" style="font-size: 10pt"><B>CERTIFICATIONS</B>


<P align="left" style="font-size: 10pt">I, Henry R. Mandell certify that:


<P align="left" style="font-size: 10pt">1. I have reviewed this quarterly report on Form 10-Q of Spatializer Audio
Laboratories, Inc.;


<P align="left" style="font-size: 10pt">2. Based on my knowledge, this 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 report;


<P align="left" style="font-size: 10pt">3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;


<P align="left" style="font-size: 10pt">4. The registrant&#146;s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules&nbsp;13a-15(e) and 15d-15(e)) for the registrant and have:




<P align="left" style="margin-left:2%; font-size: 10pt">a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 report is being
prepared;



<P align="left" style="margin-left:2%; font-size: 10pt">b) Evaluated the effectiveness of the registrant&#146;s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and



<P align="left" style="margin-left:2%; font-size: 10pt">c) Disclosed in this report any change in the registrant&#146;s internal
control over financial reporting that occurred during the registrant&#146;s
most recent fiscal quarter (the registrant&#146;s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant&#146;s internal control over
financial reporting; and

<P align="left" style="font-size: 10pt">5. The registrant&#146;s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant&#146;s auditors and the audit committee of the registrant&#146;s board of
directors (or persons performing the equivalent functions):




<P align="left" style="margin-left:2%; font-size: 10pt">a) All significant weaknesses and deficiencies in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant&#146;s ability to record,
process, summarize and report financial information; and



<P align="left" style="margin-left:2%; font-size: 10pt">b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant&#146;s internal
control over financial reporting.


<P align="left" style="font-size: 10pt">Date: November&nbsp;10, 2004



<P align="left" style="font-size: 10pt">/s/ Henry R. Mandell



<P align="left" style="font-size: 10pt">Henry R. Mandell
<br>Chief Executive Officer and Chief Financial Officer




<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<TEXT>
<HTML>
<HEAD>
<TITLE>exv32w1</TITLE>
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<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="left" style="font-size: 10pt"><B>Exhibit&nbsp;32.1</B>



<P align="center" style="font-size: 10pt"><B>CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002<BR>
(SUBSECTIONS (a)&nbsp;AND (b)&nbsp;OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES<BR>
CODE)</B>


<P align="left" style="font-size: 10pt">Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)&nbsp;and
(b)&nbsp;of section 1350, chapter 63 of Title 18, United States Code), the
undersigned officer of Spatializer Audio Laboratories, Inc. (the &#147;Company&#148;)
hereby certifies with respect to the Quarterly Report on Form 10-Q of the
Company for the quarter ended September&nbsp;30, 2004 as filed with the Securities
and Exchange Commission (the &#147;10-Q Report&#148;) that to his knowledge:



<P align="center" style="font-size: 10pt">1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Report fully complies with the requirements of Section&nbsp;13(a) or 15(d) of the Securities and<BR>
Exchange Act of 1934; and



<P align="center" style="font-size: 10pt">2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information contained in the Report fairly presents, in all material respects, the financial condition<BR>
and results of operations of the Company.



<P align="left" style="font-size: 10pt">Date: November&nbsp;10, 2004



<P align="left" style="font-size: 10pt">/s/ Henry R. Mandell



<P align="left" style="font-size: 10pt">Henry R. Mandell
<br>Chief Executive Officer and Chief Financial Officer




<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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end

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