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<SEC-DOCUMENT>0000950129-05-002985.txt : 20050330
<SEC-HEADER>0000950129-05-002985.hdr.sgml : 20050330
<ACCEPTANCE-DATETIME>20050329215457
ACCESSION NUMBER:		0000950129-05-002985
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		9
CONFORMED PERIOD OF REPORT:	20041231
FILED AS OF DATE:		20050330
DATE AS OF CHANGE:		20050329

FILER:

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

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-26460
		FILM NUMBER:		05711408

	BUSINESS ADDRESS:	
		STREET 1:		2025 GATEWAY PLACE
		STREET 2:		SUITE 365
		CITY:			SAN JOSE
		STATE:			CA
		ZIP:			95110
		BUSINESS PHONE:		3102273370

	MAIL ADDRESS:	
		STREET 1:		2625 TOWNSGATE ROAD
		STREET 2:		SUITE 330
		CITY:			WESTLAKE VILLAGE
		STATE:			CA
		ZIP:			91361
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>v07167e10vk.htm
<DESCRIPTION>SPATIALIZER AUDIO LABORATORIES, INC. - DATED 12/31/2004
<TEXT>
<HTML>
<HEAD>
<TITLE>e10vk</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 1pt solid black; font-size: 1pt">&nbsp;</DIV>




<P align="center" style="font-size: 14pt"><B>UNITED STATES</B>

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

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



<P align="center" style="font-size: 10pt"><HR size="1" noshade width="18%" align="center" color="#000000">


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


<P align="center" style="font-size: 10pt"><HR size="1" noshade width="18%" align="center" color="#000000">



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



<P align="left" style="font-size: 12pt"><FONT face="Wingdings">&#254;</FONT>&nbsp;&nbsp; <B>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B>



<P align="center" style="font-size: 10pt"><B>For the period ended: December&nbsp;31, 2004</B>



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



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

<TR valign="top" style="font-size: 12pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD><FONT face="Wingdings">&#111;</FONT>&nbsp;&nbsp; <B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 1</B><B>5(d)</B><B> OF THE SECURITIES EXCHANGE ACT OF
1934</B></TD>
</TR>

</TABLE>


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


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



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


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- 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"><B>(State or other jurisdiction of</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>(I.R.S. Employer</B></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>incorporation or organization)</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Identification No.)</B></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><BR>
(Address of principal executive offices)



<P align="center" style="font-size: 10pt"><B>2025 Gateway Place, Suite&nbsp;365<BR>
San Jose, California 95110</B><BR>
(Address of principal corporate offices)



<P align="center" style="font-size: 10pt"><B>Telephone Number: (408)&nbsp;453-4180</B><BR>
(Registrant&#146;s telephone number, including area code)



<P align="center" style="font-size: 10pt"><B>Securities registered pursuant to Section&nbsp;12(b) of the Act:<BR>
None</B>



<P align="center" style="font-size: 10pt"><B>Securities registered pursuant to Section&nbsp;12(g) of the Act:<BR>
Common Stock, $0.01 par value</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant (1)&nbsp;has filed all reports required to be filed
by Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12&nbsp;months (or
for such shorter period that the registrant was required to file such reports), and (2)&nbsp;has been
subject to such filing requirements for the past 90&nbsp;days: Yes <FONT face="Wingdings">&#254;</FONT> No <FONT face="Wingdings">&#111;</FONT>


<DIV style="width: 100%; border-bottom: 1pt solid black; margin-top: 10pt; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>





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

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

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




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


<DIV align="left">
<!-- TOC -->
</DIV>
<DIV align="left">
<A name="tocpage"></A>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="100%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#101">PART I</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#102">Item&nbsp;1. Business</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#103">Item&nbsp;2. Properties</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#104">Item&nbsp;3. Legal Proceedings</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#105">Item&nbsp;4. Submission of Matters to a Vote of Security Holders</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#106">Item&nbsp;5. Market for Registrant&#146;s Common Equity and Related Stockholder Matters</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#107">Item&nbsp;6. Selected Consolidated Financial Data</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#108">Item&nbsp;7. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#109">Item&nbsp;7A. Quantitative and Qualitative Disclosures About Market Risk</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#110">Item&nbsp;8. Financial Statements and Supplementary Data</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#111">INDEPENDENT AUDITORS&#146; REPORT</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#112">CONSOLIDATED BALANCE SHEETS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#113">CONSOLIDATED STATEMENTS OF OPERATIONS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#114">CONSOLIDATED STATEMENTS OF CASH FLOWS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#115">CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY (DEFICIT)</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#116">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#117">Item&nbsp;9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#118">Item&nbsp;9A. Controls and Procedures</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#119">PART III</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#120">Item&nbsp;10. Directors and Executive Officers of the Registrant</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#121">Item&nbsp;11. Executive Compensation</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#122">Item&nbsp;12. Security Ownership of Certain Beneficial Owners and Management</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#123">Item&nbsp;13. Certain Relationships and Related Transactions</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#124">Item&nbsp;14. Principal Accounting Fees and Services</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#125">PART IV</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#126">Item&nbsp;15. Exhibits, Financial Statement Schedules and Reports on Form&nbsp;8-K</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#127">SIGNATURES</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-23.1</DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-31.1</DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-32.1</DIV></TD>
</TR>
<!-- End Table Body -->
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv10w3.htm">Exhibit 10.3</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv10w5.htm">Exhibit 10.5</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv10w6.htm">Exhibit 10.6</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv10w7.htm">Exhibit 10.7</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv21w1.htm">Exhibit 21.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv23w1.htm">Exhibit 23.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv31w1.htm">Exhibit 31.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="v07167exv32w1.htm">Exhibit 32.1</A></FONT></TD></TR>
</TABLE>
</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>

<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if disclosure of delinquent filers pursuant to Item&nbsp;405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant&#146;s knowledge,
in definitive proxy or information statements incorporated by reference in Part&nbsp;III of this Form
10-K or any amendment to this Form 10-K. <FONT face="Wingdings">&#111;</FONT>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate market value of the voting stock held by non-affiliates of the registrant
computed by reference to the price at which the common equity was last sold as of the last business
of the registrant&#146;s most recently completed second quarter (June&nbsp;30, 2004) was approximately
$4,227,783 and at February&nbsp;7, 2005 was approximately $2,818,522. In addition, affiliates held
non-voting preferred stock valued at $1,183,510 at both June&nbsp;30, 2004 and
February&nbsp;7, 2005.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of February&nbsp;7, 2005, there were 46,975,363 shares of the Registrant&#146;s Common Stock
outstanding.


<P align="center" style="font-size: 10pt"><B>DOCUMENTS INCORPORATED BY REFERENCE</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Portions of the definitive proxy statement for the 2004 Annual Meeting are incorporated by
reference into Part&nbsp;III hereof.


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

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

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

<P align="center" style="font-size: 10pt"><B>CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section&nbsp;21E of the Securities Exchange Act of 1934, as amended, and Section&nbsp;27A of the Securities
Act of 1933, as amended, reflecting management&#146;s current expectations. Examples of such
forward-looking statements include our expectations with respect to our strategy. Although we
believe that our expectations are based upon reasonable assumptions, there can be no assurances
that our financial goals will be realized. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, performance or
achievements, or industry results, to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Numerous factors may
affect our actual results and may cause results to differ materially from those expressed in
forward-looking statements made by or on behalf of our company. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words, &#147;believes,&#148; &#147;anticipates,&#148; &#147;plans,&#148;
&#147;expects&#148; and similar expressions are intended to identify forward-looking statements. The
important factors discussed under the caption &#147;Factors That May Affect Future Results&#148; in Item&nbsp;7.
Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations, herein,
among others, would cause actual results to differ materially from those indicated by
forward-looking statements made herein and represent management&#146;s current expectations and are
inherently uncertain. Investors are warned that actual results may differ from management&#146;s
expectations. We assume no obligation to update the forward-looking information to reflect actual
results or changes in the factors affecting such forward-looking information.

<DIV align="left">
<A name="101"></A>
</DIV>

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


<DIV align="left">
<A name="102"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;1. </B><B><I>Business</I></B>



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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Audio Laboratories, Inc. (&#147;Spatializer&#148; or &#147;Company&#148;) is a developer, licensor and
marketer of next generation technologies for the consumer electronics, personal computing,
entertainment and cellular telephone markets. Our technology is incorporated into products
offered by our licensees and customers on various economic and business terms. Our position as a
developer of next generation technologies is based on our business relationships with brand
leaders, such as Toshiba, Samsung, Sanyo and Matsushita. We conduct our audio business through our
parent company and our wholly owned subsidiary, Desper Products, Inc. (&#147;DPI&#148;). DPI has developed a
full complement of patented and proprietary 3-D or virtual audio signal processing technologies
directed to the consumer electronics and multimedia PC markets. We continue to expand our product
offerings to take advantage of the growing digital audio marketplace specifically for consumer
products like Digital Versatile Disc (&#147;DVD&#148;) players, portable mp3 players, digital televisions and
digital home, portable and cellular handset devices. As of December&nbsp;31, 2004, more than 47&nbsp;million
licensed units had been shipped covering all of these applications. DPI&#146;s virtual audio signal
processing technologies are currently incorporated in products offered by global brand leaders in
consumer electronics, PCs and cell phones including Toshiba, Matsushita, Samsung, Intervideo,
Sanyo, and Sharp. We are focused on broadening recognition of the Spatializer brand name through
association with these and other globally recognized consumer electronics and multimedia computer
brand leaders, and on broadening our audio technology and software base to position ourselves for
continued growth. We believe that with the accelerating growth in the digital audio/video
marketplace, the market for virtual audio technologies, and therefore for our products, is entering
a new phase of opportunity.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We were incorporated in the State of Delaware in February, 1994 as the successor company in a
Plan of Arrangement pursuant to which the outstanding shares of Spatializer Audio Laboratories,
Inc., a publicly held Yukon, Canada corporation, were exchanged for an equal number of shares of
our common stock. Our corporate office and research center is located at 2025 Gateway Place, Suite
365, San Jose, California 95110, Telephone (408)&nbsp;453-4180. We also maintain executive offices at
2625 Townsgate Road, Suite&nbsp;330, Westlake Village, California 91361. We have a Website at
<I>www.spatializer.com</I>. Copies of this Annual Report, including our financial statements and our
quarterly reports on Form 10-Q as well as other corporate information, including press releases, of
interest to our stockholders are available on our website promptly after filing or distribution. As
used herein, Spatializer, the &#147;Company,&#148; &#147;we&#148; or &#147;our&#148; means Spatializer Audio Laboratories, Inc.
and its wholly-owned subsidiaries.


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

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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>Desper Products, Inc. &#151; Virtual Audio Signal Processing Technologies</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DPI has developed a suite of proprietary advanced audio signal processing technologies for the
entire spectrum of applications falling under the general category of virtual audio. The objective
in each product category is to create or simulate the effect of a multi-speaker sonic environment
using two ordinary speakers (or headphones) for playback. The market for virtual audio is segmented
into six broad categories of technology as identified in the listing below. Each of these
technologies utilizes different underlying scientific principles in accomplishing its design
objectives and is targeted to a specific class of consumer electronics or multimedia computer
depending on the intended product use and functional capability of the product. DPI currently has
other audio signal processing technologies under development which will serve to expand its market
scope and partner product capabilities.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="1%">&nbsp;</TD>
    <TD width="24%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD><!-- VRule -->
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD><!-- VRule -->
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>

    <TD width="1%">&nbsp;</TD>
</TR><TR style="font-size: 1px" valign="bottom">
    <TD nowrap align="left" colspan="9" style="border-bottom: 1px solid #000000">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">    <TD width="1%" style="border-left: 1px solid #000000">&nbsp;</TD>

    <TD nowrap align="center"><B>Category of Technology</B></TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Product Categories</B></TD>
    <TD style="border-right: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Audio Enhancement</B></TD>
    <TD width="1%" style="border-right: 1px solid #000000">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
                <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Stereo Surround Sound
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Consumer electronics products providing
stereo playback &#151; DVD Players, Stereo
TV&#146;s, Stereo Components and Systems, Car
Audio, Laptop and Desktop Multimedia
Computers, Set-top Boxes
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Surround sound enhancement from an ordinary<BR>
stereo (two-channel) signal</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Micro-Speaker Virtualization<BR>
(Ring tones, music, multimedia)
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Cell Phones and Mobile Multimedia Players
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Widens sound stage
and improves stereo
separation from
Two-Channel Ring
tones, compressed
audio, FM and TV
broadcast and games
in small form
factor applications.</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Surround Sound Enhancement
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Products incorporating stereo audio
sources for playback through 5.1 or more
home theater systems: AV Receivers
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Creation of
spatially accurate
home theater
surround sound from
two channel sources</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Multi-Channel-Speaker<BR>
Virtualization
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Products incorporating multi-channel
audio sources like Dolby Digital&#174;
(AC-3), DolbyProLogic&#174; or MPEG-2. Home
Theater, DVD-Video, Multimedia
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Creation of
spatially accurate
multi-speaker
cinematic audio
experience from two
speakers utilizing
discrete
multi-channel audio
information</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Noise Reduction
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Computers and Recordable DVD utilizing
DVD/MPEG and decoding. Cell phone
handsets.
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Static noise
reduction combined
with stabilization
of dynamic audio
range</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Virtual Bass Enhancement
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Consumer electronics products providing
stereo playback &#151;Mobile Multimedia
Players, Cell Phones, DVD
Players/Recorders, Stereo TV&#146;s, Stereo
Components and Systems, Car Audio,
Laptop and Desktop Multimedia Computers
and Speakers and Headphones.
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Simulation of lower
frequency response
from speakers with
relatively high low
frequency
capability</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Dynamic Range Compression
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Laptop and Desktop Multimedia Computers,
Cell Phones and Portable Multimedia
Players running digital media player
software
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Prevents over-driving speakers, headphones or<BR>
ear buds while maximizing the dynamic audio<BR>
output</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Headphone Virtualization
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Any consumer, cell phone or mobile
application incorporating both stereo
and multi-channel audio sources like
Dolby Digital&#174; (AC-3), Dolby ProLogic&#174;,
MPEG-2 or stereo. DVD-Video, Multimedia
Computers utilizing DVD/MPEG Decoding or
stereo
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Creation of
spatially accurate
<I>multi- speaker
cinematic audio</I>
experience from
headphones
utilizing discrete
multi-channel audio
information</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Phase Corrected Equalization
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">All audio products with one or more<BR>
speakers
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Creation of more
recognizable and
&#147;cleaner&#148; music or
dialog from all
media sources</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD width="1%" style="border-left: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top" style="border-top: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">Virtual Digital Theatre
</DIV></TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">PCs and Notebooks
</TD>
    <TD style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
    <TD style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">Audio enhancement
to help ease the
transition of PCs
and Notebooks into
entertainment
platforms</TD>
    <TD width="1%" style="border-right: 1px solid #000000; border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR style="font-size: 1px" valign="bottom">
    <TD nowrap align="left" colspan="9" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>

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

<P align="center" style="font-size: 10pt">4
</DIV>

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


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our current technology product applications are directed to (1)&nbsp;speaker enhancement, (2)
stereo surround sound enhancement, (3)&nbsp;mobile entertainment enhancement and (4)&nbsp;noise reduction.


<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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>1.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>3D Stereo. </I></B>Based upon proprietary and patented methods of stereo signal
processing, our <I>Spatializer 3&#151;D Stereo </I>technology is designed to create a vivid and
expansive three- dimensional surround sound listening experience from any stereo source
input using only two ordinary speakers. Along with professional audio quality and coherent
stable sonic imaging, the technology includes our unique DDP&#153; (Double Detect and Protect&#153;)
algorithm. DDP continuously monitors the underlying stereo signal and dynamically optimizes
spatial processing, avoiding deleterious sonic artifacts common in other systems and
provides &#147;set and forget&#148; ease of use for consumers. First introduced in July&nbsp;1994 by DPI,
in the form of a 20 pin analog integrated circuit (IC)&nbsp;from Matsushita Electronics
Corporation (&#147;MEC&#148;), the technology is now incorporated into low-cost, standard process ICs
by three chip foundries (Matsushita, ESS Technologies, Inc. and OnChip Systems) for easy and
inexpensive implementation in any consumer electronics or computer products utilizing stereo
audio. The technology is currently available in both analog and digital formats. Matsushita
introduced a new Spatializer IC design in 1999, offering the <I>Spatializer 3-D Stereo </I>effect
in a simplified, lower cost package. In early 2002, we introduced a new algorithm-based
technology which provides a virtual surround sound effect from a two channel input for
DSP-based environments. In 2003, we introduced Spatializer ((environ)), especially designed
for cellular phones with two, closely spaced speakers to enhance both ring tones and music.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>2.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>N-2-2 Ultra Digital Virtual Surround</I></B>. In September&nbsp;1996, DPI introduced
<I>Spatializer N-2-2, </I>which we consider a &#147;core&#148;, and &#147;enabling&#148; technology for Dolby
Digital-based home theater products and personal computers. In mid-2001, DPI introduced
<I>Spatializer N-2-2 Ultra </I>as the latest generation of this core audio technology. The audio
standards for multi-channel digital audio(based upon geographic region) are multi-channel
audio formats (Dolby Digital&#174; (AC-3) and MPEG-2) which carry up to eight (or more) discrete
(independent)&nbsp;channels of audio &#151; the front left and right channels, a center channel (for
vocal tracks), two rear surround channels and a Low Frequency Effects (LFE or &#147;sub-woofer&#148;)
channel for sound effects. The <I>Spatializer N-2-2Ultra </I>software- based algorithms permit
spatially accurate reproduction of this multi-channel audio over any ordinary stereo system
using two rather than the five or six speakers normally required in traditional home theater
setups. <I>Spatializer N-2-2Ultra </I>runs in real-time on general purpose Digital Signal
Processing (&#147;DSP&#148;) hardware platforms like those offered by LSI, Acer Labs, Inc., NEC,
Motorola, MediaTek and Zoran; may be integrated with host based software-only MPEG-2 or DVD
decoders (like WinDVD and PowerDVD, offered by InterVideo and Cyberlink, respectively, for
the Intel&#174; Pentium&#174; series of microprocessors); and can be ported to any of the principal
audio codecs or media processor/accelerator platforms performing Dolby Digital (AC-3) or
MPEG-2 audio decoding. <I>Spatializer N-2-2Ultra </I>has been approved by Dolby Laboratories and
qualifies Spatializer licensees to use the newly created Dolby Digital VIRTUAL&#153; trademark on
products incorporating the technology. We believe our <I>Spatializer N-2-2 </I>Ultra process has
helped to widen and accelerate the market for DVD acceptance, because it delivers the full
cinematic audio experience to ordinary consumers without the additional expense and
complication of multi-speaker home theater playback systems. The Company holds a patent on
this technology.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>3.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>Vi.B.E</I></B><B>. </B>In early 1999, DPI introduced Spatializer Vi.B.E., a virtual bass
enhancement technology. Spatializer Vi.B.E. produces a dynamic bass response from even the
lowest-end speakers or headphones. This is particularly important in enhancing the audio of
all forms of portable digital audio devices. Spatializer Vi.B.E. uses proprietary technology
to generate the perception of realistic bass frequencies that are unaffected by actual
speaker system frequency response capability.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>4.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>VSP-11 </I></B>First introduced by DPI in early 2002, Spatializer VSP-11 (Virtual
Sound Processor 11) is a stand-alone application program for Microsoft Windows 95, 98, ME,
2000 and XP platforms that utilizes Spatializer proprietary psychoacoustic techniques to
allow consumers to enjoy the benefits of the renowned Spatializer audio enhancement
technologies on leading media players, soft DVD players and file sharing programs. This
means that Spatializer VSP-11 is a universal audio enhancement software package that will
enhance output from the Microsoft<I>&#174; </I>Media Player, Real Player<I>&#174;</I>, Real Jukebox<I>&#174;</I>, WinAmp<I>&#174;</I>,
WinDVD<I>&#174;</I>, PowerDVD<I>&#174;</I>, among others, without any special modification. It will run in
conjunction with any sound card, as well as with USB audio.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">5
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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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>5.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>Natural Headphone </I></B>Spatializer Natural Headphone, introduced by DPI in March
2001, renders spatially accurate multiple speaker positions simulating the typical home
theater or stereo arrangement through a headphone. The headphone algorithm delivers a high
performance simulated surround sound experience, using a reasonable amount of processing
power at a reasonable cost. Thus, this solution is equally practical and effective for both
low-power portable devices and home theater applications. Unlike typical virtual surround
sound headphone solutions, which rely heavily on reverberation which can sound unnatural,
Spatializer Natural Headphone utilizes a combination of techniques to provide an expanded,
yet natural sound field.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>6.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>PCE</I></B>, introduced in October&nbsp;2001, makes high frequencies clearer, crisper and
more brilliant while low frequencies are more dramatic, tighter and have more impact.
Spatializer&#174; PCE gives the manufacturer an inexpensive way to dramatically improve the sound
of low-end loudspeakers, such as the kind found in televisions, boom boxes and computers.
Spatializer PCE is also ideal for improving the quality of Internet audio, which can sound
rather lackluster and dull due to compression or low bit rates. It can be applied prior to
encoding audio streams, and can just as easily enhance the playback of the decompressed
audio. It can improve the clarity, intelligibility and impact of both dialog and music.
Spatializer PCE works by both modifying and smoothing non-linear phase response and by
creating psycho-acoustic cues. Typical equalization techniques cause phase distortion
(non-zero group delay) due to non-linear phase response. Spatializer PCE has a nearly-linear
phase response, which results in a near-zero group delay. This improves the &#147;naturalness&#148;,
or transparency of the dialog or music by not adding to phase distortion already present in
many playback systems. This technology is patent pending. Spatializer PCE can be custom
tailored for two or an array of speaker configurations. The technology, without a surround
sound effect, can enhance single speaker applications as well.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>7.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>enCompass AV </I></B>Spatializer enCompass AV, launched in late 2002, is designed to
offer high quality, multi-channel audio, even from mono or stereo sources. This technology
allows owners of home theater systems with five or more speakers to hear a surround sound
effect, utilizing all of their speakers to deliver full system utility from CDs, cassettes
or VHS tape or records.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>8.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>VirtuaLFE </I></B>processes the sub-woofer channel with proprietary psycho-acoustic
techniques to virtualize, reinforce and enhance the effect for accurate reproduction through
two speaker home audio or on-board television speakers. The result is an emotive low
frequency effect that brings DVDs alive as if an actual sub-woofer speaker were employed.
The efficient algorithm architecture makes implementation feasible on a wide array of home
entertainment products.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left"><B>9.</B>&nbsp;&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>Audio Alchemy </I></B>dynamically removes noise from up to six input channel
simultaneously. Utilizing state of the art noise removal and reduction techniques,
Spatializer Audio Alchemy dynamically adjusts to changing noise levels and environments.
Tailored for the human voice, Spatializer Audio Alchemy removes background noise such as
fans, motor hum, and tape hiss. Spatializer Audio Alchemy features an advanced equalization
processor to compensate for frequency response limitations in the audio recording hardware
and transducers. In addition, Spatializer Audio Alchemy also performs spatial reconstruction
to simulate the original acoustic environment, and normalizes the dynamic range of the
digital audio source to a level compatible with home theater environments. This technology
is patent pending.</TD>
</TR>

</TABLE>

<P align="left" style="font-size: 10pt">In addition, we offer three whole product solutions with multiple Spatializer technologies that
comprehensively address the unique audio delivery challenges inherent in each targeted platform.
The Spatializer HD Class is comprised of three new products specifically targeted at home audio,
cellular telephones and other mobile applications and personal computers. The Spatializer
technologies in each package operate in a complementary fashion, such that the concurrent
technologies deliver a more powerful and effective audio experience than that possible from a
single solution. Further, each technology has been optimized and customized for the targeted
application and is designed to overcome the audio challenges presented by small form factor,
transducer limitations and even cost constraints.


<P align="left" style="font-size: 10pt">Spatializer UltraMobile HD&#153; delivers higher definition digital audio to mobile audio systems
through the multiple and complementary use of Spatializer Natural Headphone, Spatializer Vi.B.E.
and Spatializer PCE. UltraMobile HD improves the performance of low cost headphones or ear buds, as
well as from compressed audio by opening up the sound field while improving bass performance. In
cellular telephone applications, Spatializer ((environ)) delivers maximum performance from
micro-speakers that are mounted closely together and helps compensate for the more limited dynamic
range as compared with standard size speakers. When applied to stereophonic ring tones, Spatializer
((environ)) creates a startling and expressive sound field when such speakers are utilized in
cellular handsets.



<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">Spatializer UltraTV HD&#153; delivers higher definition digital audio performance to digital
televisions, DVD players and DVD Recorders. HDTV signals can realistically be retrieved only in
limited ways, leading to customer disappointment. The Spatializer UltraTV HD processor is designed
to compensate for these shortcomings in digital home entertainment for the millions of households
without home theater systems. Realistic surround sound, near-sub-woofer effects and crisp dialog is
made possible through two speakers, rather than through expensive arrays of external speakers.
Another unique aspect of this product is that it is designed specifically for playback through
television speakers and can be custom tailored to the frequency aspects of a manufacturer&#146;s speaker
set<B>.</B>


<P align="left" style="font-size: 10pt">Spatializer UltraPC HD&#153; helps ease the transition of the personal computer from business tool
to a comprehensive component of the digital home entertainment experience. Spatializer UltraPC HD
includes Spatializer N-2-2 Ultra that delivers surround sound through only two speakers,
Spatializer Natural Headphone for personal surround sound, Spatializer VirtuaLFE&#153; that processes
the sub-woofer channel for a low frequency effect through ordinary speakers and Spatializer PCE for
dialog clarity. Each of these technologies has been optimized for small speaker or headphone
playback and can be custom tuned to a manufacturer&#146;s specific speaker set.



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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Until 2000, we licensed our technologies primarily through semiconductor manufacturing and
distribution licenses (&#147;Foundry Licenses&#148;) with semiconductor foundries. In turn, the foundries
manufacture and distribute integrated circuits ICs (integrated circuits) or DSPs (digital signal
processors) incorporating Spatializer technology to consumer electronics and multimedia computer
OEMs (original equipment manufacturers).


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2000, we began offering foundries the option of entering into a non-royalty bearing
distribution agreement with us. Under this business model, the foundry offers Spatializer
technology as an optional feature, promotes our technology in their sales materials and cooperates
with the Spatializer sales force in closing license agreements for Spatializer technology with the
OEM customer. This business model provides the foundry with an additional selling feature at no
additional cost to the foundry. The OEM can obtain use of the technology directly from Spatializer
without any additional mark-up from the foundry.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The terms of all of our licenses are negotiated on an individual basis requiring the payment
of a per unit running royalty according to sliding scales based upon cumulative volume. Some of our
licenses call for the payment of an up-front license issuance fee either in lieu of, or in addition
to the running royalty. Other agreements require the OEM customer, rather than the foundry, to pay
the royalty. Per unit royalties are generally reportable and payable 45&nbsp;days after the end of the
quarter following shipment from the foundry to the OEM or, in the case of a distribution agreement,
by the OEM to its accounts.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;OEMs who desire to incorporate these DSPs or ICs into their products are required to enter
into a license (&#147;OEM Licenses&#148;) with us before they may purchase the ICs in quantity. Foundry
Licenses generally have limited the sale of DSPs or ICs with Spatializer technology to OEMs who
have entered into an OEM License with us. OEM licenses generally provide for the payment of a
further per unit royalty by the OEM for OEM products incorporating a Spatializer IC (&#147;Licensed
Products&#148;) payable in the quarter following shipment by the OEM of its Licensed Products.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are currently negotiating new IC/DSP Foundry Licenses and OEM Licenses with potential
customers for Spatializer N-2-2 Ultra, Spatializer Vi.B.E., Spatializer Natural Headphone ,
Spatializer PCE and combinations and optimizations of these technologies under the Spatializer
Ultra HD series. Currently, all new licenses are negotiated by our Chief Executive Officer.


<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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>IC/DSP Foundry Licenses</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On August&nbsp;26, 2004, the Company announced that , through its wholly-owned
subsidiary, Desper Products, Inc., it entered into a major multi-technology licensing agreement
with Samsung Electronics, Co. Ltd. on August&nbsp;22, 2004.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2004, we have entered into non-exclusive Foundry Licenses for our Virtual
Audio Signal Processing technologies with Matsushita Electronics Corporation (&#147;MEC&#148;), Samsung
Electronics, Sigmatel, ESS Technology, Inc. (&#147;ESS&#148;), OnChip Systems, Inc. (&#147;OnChip&#148;), LSI Logic,
Inc. (&#147;LSI&#148;), Acer Labs, Inc. (&#147;Ali&#148;), MIPS Technologies, NJRC, Tvia, Inc., Texas Instruments,
Cirrus Logic and MediaTek. Foundry Licenses generally require the payment of per unit running
royalties based upon a sliding scale computed on the number of Spatializer ICs or DSPs sold.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2004, more than 47&nbsp;million ICs, programmable processors and DSPs
incorporating Spatializer audio signal processing technology had been manufactured and sold.


<P align="left" style="font-size: 10pt"><I>OEM Licensees and Customers</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2004, our technology has been incorporated in products offered by more than
105 separate OEM Licensees and customers on various economic and business terms. Some of these OEM
Licenses required a license issuance fee and/or a separate per unit royalty, while others were
licensed under the Logo Usage Agreement (&#147;LUA&#148;) or were authorized customers under bundled royalty
licenses with the IC foundries. The OEM Licensees and customers offer a wide range of products,
which include DVD players and recorders, cellular phones, portable digital audio players,
programmable processors, multimedia desktop personal computers, notebook computers and digital
televisions.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2004, four major customers, not presented in order of importance, each accounted for 10% or
more of our total revenues: Matsushita, Toshiba, Sharp and Samsung, each of whom accounted for
greater than 10% of our total 2003 revenues. One OEM accounted for 29%, one accounted for 25% each,
one accounted for 21% and one accounted for 13% of our royalty revenues during 2004. One other
account comprised more than 5%, but less than 10% of revenues. All other OEM&#146;s accounted for less
than 5% of royalty revenues individually. The following table is a partial list of the OEM
Licensees and authorized customers as of December&nbsp;31, 2004:


<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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Acer Labs</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Apple Computer</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Cirrus Logic</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>InterVideo</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>JVC</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>LG Electronics</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Logitech</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>LSI</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>MediaTek</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Micronas</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Mitsubishi Image and Information Works</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Motorola</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>NEC</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Panasonic Car Audio</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Panasonic TV</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Samsung</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Sanyo Corp.</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Sharp Corp.</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Sigmatel</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Texas Instruments</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Theta Digital</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Toshiba DVD</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Toshiba TV</I></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="left">&#149;&nbsp;&nbsp;</TD>
    <TD><I>Zoran</I></TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have extensive relationships with OEM licensees and customers outside the United States.
Japanese and Korean based entities accounted for 70% and 25% of our total revenues, respectively in
2004, 71% and 20% of our total revenues, respectively in 2003, and 50% and 17% of our total
revenues, respectively in 2002. The products incorporating our technology are, in turn, sold
throughout the world, in market segments and amounts that are consistent with the overall general
world markets for consumer electronics and software.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Customers, Revenues and Expenses</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We generate revenues in our audio business from royalties pursuant to our Foundry, OEM, and
other licenses, and from non-recurring engineering fees to port our technologies to specific
licensees&#146; applications. Our revenues, which totaled $1,106,000 in 2004, were derived almost
entirely from Foundry and OEM license fees and royalties.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We seek to maximize return on our intellectual property base by concentrating our efforts in
higher margin licensing and software


<P align="center" style="font-size: 10pt">8
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">products and eliminated our hardware product operations. Licensing operations have been
managed internally by our personnel and through use of an international sales representative
force.In 2004, four major customers, not presented in order of importance, each accounted for 10%
or more of our total revenues: Matsushita, Toshiba, Sharp and Samsung, each of whom accounted for
greater than 10% of our total revenues. One OEM accounted for 29%, one accounted for 25% each, one
accounted for 21% and one accounted for 13% of our royalty revenues during 2004. One other account
comprised more than 5%, but less than 10% of revenues. All other OEM&#146;s accounted for less than 5%
of royalty revenues individually.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2004, declining revenues were experienced from three major DVD customers resulting
primarily from the cessation of use of our products by these customers. In most of these cases, the
DVD player market, where we had a high concentration of accounts, became commoditized and resulted
in a steep decline in price and margins. Manufacturers were forced to strip out features, such as
those from our company, in order to compete. Another PC account migrated completely in 2003 to a
new operating system and chose not to include any audio software enhancements. In 2004, we expanded
our efforts to penetrate the DVD recorder, PC and cellular handset markets. While we achieved some
success in this regard, with 49% of 2004 revenue coming from these new sources, securing revenue
traction proved difficult since the accounts we lost represented approximately 56% of 2003 revenue.
Revenue from new or expanded relationships outside the DVD player category were insufficient to
totally offset these losses, resulting in a continued decline in revenue, although reductions in
overhead helped to significantly reduce the net loss compared to 2003.


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We compete with a number of entities that produce various audio enhancement processes,
technologies and products, some utilizing traditional two-speaker playback, others utilizing
multiple speakers, and others restricted to headphone listening. These include the consumer
versions of multiple speakers, matrix and discrete digital technologies developed for theatrical
motion picture exhibition (like Dolby Digital&#174;, Dolby ProLogic&#174;, and DTS&#174;), as well as other
technologies designed to create an enhanced stereo image from two or more speakers.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal competitors in the field of virtual audio are SRS Labs, Inc., Dolby
Laboratories, Inc<U>.</U>, Sonaptic. and Qsound Labs, Inc. In addition, some DSP foundries and
OEMs have proprietary virtual audio technologies that they regularly offer to OEMs at no cost.
These companies have, or may have, substantially greater resources than us to devote to further
technologies and new product developments.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pressure on OEMs to reduce their costs, particularly in the DVD market is intense. The
marketplace is also susceptible to undisciplined competitors who, from time to time, may offer
below market prices to generate short term revenue and larger market penetrations even if it does
not provide for viable margins. In the future, our products and technologies also may compete with
audio technologies and product applications developed by other companies including entities that
have business relationships with us. Factors that affect our ability to compete include product
quality, performance and features, conformance to existing and new standards, price, customer
support and marketing and distribution strategies.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that we will favorably compete in this market because we offer a single source,
complete suite of patented and proprietary 3D Stereo, interactive positional, virtual surround
sound, headphone and speaker virtualization technologies. By virtue of our specialized engineering
and OEM support, we can offer a &#147;turn-key&#148; audio solution to OEMs who do not possess this expertise
internally. We also have developed new products that address our customer&#146;s need for a low cost
solution. We also focus intensely on customer support and have expanded our low-cost contract
engineering capabilities with the use of a consulting firm in India. In addition, the strength of
our IC Foundry and OEM relationships and the Spatializer brand name recognition in the industry are
other key differentiators between both our branded and unbranded competition. Lastly, we continue
to explore new and alternative business models that we believe serve the interests of both our
customers and our stockholders.


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our research and development expenditures in 2004, 2003 and 2002 were approximately 54%, 28%
and 25% of total operating expenses respectively. These expenses consist of salaries and related
costs of employees and consultants engaged in ongoing research, design and development activities
and costs for engineering materials and supplies


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2004, we had three employees and consultants in our R&#038;D group representing
38% of our total human resources. In addition and not included above, we have the availability of
three dedicated engineers at an outside consulting company in India for applications engineering.
Our software, hardware and application engineers focus on developing intellectual property,


<P align="center" style="font-size: 10pt">9
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">technology solutions and consumer products. In 2004, we established a relationship with an
engineering services firm in Bangalore, India for the substantial transfer of all applications
engineering work to this firm. In addition to substantially lower cost for consulting services as
compared to domestic contractors, project completion dates have been reliable and throughput
expanded due to their relatively large engineering staff. Thus, multiple projects can be completed
simultaneously and within budgeted cost and time parameters.



<P align="left" style="font-size: 10pt"><B>Intellectual Property and Proprietary Information</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on a variety of intellectual property protections for our products and services,
including patent, copyright, trademark and trade secret laws, and contractual obligations. Our core
signal processing technology is covered by U.S. patents 5,412,731, 5,896,456 and 6,307,941. On
March&nbsp;20, 1998, we filed a patent application on our enCompass V 2.0 technology with the United
States Patent &#038; Trademark Office (&#147;USPTO&#148;) covering our enCompass 2.0 positional audio gaming
technology. In June&nbsp;2000, we filed an additional patent application for our reduced cost/higher
performance 3-D Stereo circuit design. In late 2002, we filed a patent application covering our
Spatializer PCE technology. In 2003, we filed a patent application for Spatializer Audio Alchemy.
Much of our intellectual property consists of trade secrets. In 2002, patent 6,307,941 was issued
by the USPTO covering our Spatializer N-2-2 technology. We possess copyright protection for its
principal software applications and has U.S. and foreign trademark protection for its key product
names and logo marks.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There can be no assurance that these measures will be successful, or that competitors will not
be able to produce a non-infringing competitive product or service. In addition, the laws of
certain countries in which our products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect our products and intellectual property rights to the
same extent as the laws of the United States, or at all. There can be no assurance that third
parties will not assert infringement claims against us, or that if required to obtain any third
party licenses as a result of an infringement dispute, we will be able to obtain such licenses.


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Due to our dependence on the consumer electronics market, we experience seasonal fluctuation
is sales and earnings. In particular, we believe that there is seasonality relating to the
Christmas season in the third and fourth quarters, as well as the first quarter, which is generally
the weakest. We are moving toward diversifying our key market segments in the consumer electronics
industry in an effort to even out our seasonal fluctuation. Overall, seasonality does not have a
material effect on our business.


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We began 2004 with four full-time and five part-time employees and sales representatives and
decreased our staff to three full time and five part-time employees, consultants and sales
representatives by December&nbsp;31, 2004. At year-end, there were two full-time employees and one
consultant engaged in research and development. In addition, we utilize an engineering firm with
three dedicated engineers to our projects on an as-needed basis. We employ the services of outside
professional consultants, particularly in the audio engineering area, due to the costly and tight
labor market for such professionals in Silicon Valley as well as the need for specialized expertise
in the course of our business. None of our employees are represented by a labor union or are
subject to a collective bargaining agreement. We consider our relations with our employees and
consultants to be satisfactory.

<DIV align="left">
<A name="103"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;2</B>. <B><I>Properties</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our corporate office and research center in San Jose, California, is the primary location for
our audio technology division, Desper Products, Inc. (&#147;DPI&#148;). We occupy approximately 1,300 square
feet with an annual rent on a full service basis of approximately $25,500 in calendar 2005 and
$26,275 in calendar 2006. The lease expires on December&nbsp;30, 2006 and is renewable at market rates
thereafter .


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our executive office is located in Westlake Village, California, where we occupy
approximately 100 square feet with an annual rent of approximately $5,300. The lease term on this
space expires on June&nbsp;30, 2005 and is renewable on a month to month basis thereafter. This space in
the Los Angeles area is used to facilitate business and contacts with the entertainment community
as well as with our accountants, lawyers and directors.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We lease an apartment in San Jose, California for use by the chief executive officer when away
from the executive office. The annual rent on this apartment is approximately $16,800. The lease is
on a month-to-month basis.


<P align="center" style="font-size: 10pt">10
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We lease our space at rental rates and on terms which management believes are consistent with
those available for similar space in the applicable local area. Our properties are well maintained
and we believe they are adequate to support our current requirements.

<DIV align="left">
<A name="104"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;3. </B><B><I>Legal Proceedings</I></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 the date of this Annual Report on Form 10-K, 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 the above
legal proceedings could change in the future.

<DIV align="left">
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</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;4. </B><B><I>Submission of Matters to a Vote of Security Holders</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no matters submitted to a vote of our security holders either through solicitation
of proxies or otherwise in the fourth quarter of the fiscal year ended December&nbsp;31, 2004.

<DIV align="left">
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</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;5. </B><B><I>Market for Registrant&#146;s Common Equity and Related Stockholder Matters</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Common Stock was listed and commenced trading on the NASDAQ SmallCap market on August&nbsp;21,
1995 under the symbol &#147;SPAZ&#148;. In January&nbsp;1999, the Common Stock was delisted by the NASDAQ SmallCap
Market due to our inability to maintain listing requirements. Our Common Stock immediately
commenced trading on the OTC Bulletin Board under the same symbol. The following table sets forth
the high and low bid price of our Common Stock as reported on the OTC Bulletin Board for fiscal
years 2003 and 2004. The quotations listed below reflect interim dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Period:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High (U.S. $)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low (U.S. $)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003</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:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.08</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.06</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004</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: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.06</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;7, 2005, the closing price reported by the OTC Bulletin Board was U.S. $0.06.
Stockholders are urged to obtain current market prices for our Common Stock. Computershare Investor
Services, LLC is our transfer agent and registrar.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no sales of unregistered securities by the Company during the years ended December
31, 2002, 2003 and 2004.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To our knowledge there were approximately 200 holders of record of the stock of the Company as
of February&nbsp;7, 2005. Our transfer agent has indicated that beneficial ownership is in excess of
4,000 stockholders.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not paid any cash dividends on its Common Stock and have no present intention of
paying any dividends. Our current policy is to retain earnings, if any, for use in operations and
in the development of its business. Our future dividend policy will be determined from time to time
by the Board of Directors.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has not repurchased any of its equity securities and as of the date hereof, has
not made any plans to do so.


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

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="107"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;6. </B><B><I>Selected Consolidated Financial Data</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following selected consolidated financial data should be read in conjunction with our
Consolidated Financial Statements and related Notes and with &#147;Management&#146;s Discussion and Analysis
of Financial Condition and Results of Operations&#148;, included in Item&nbsp;7. The selected financial data
for the years ended December&nbsp;31, 2003, 2002, 2001, 2000 and 1999 are derived from our consolidated
financial statements that have been audited by Farber &#038; Hass LLP, independent certified public
accountants. The consolidated statements of operation and cash flows for the years ended December
31, 2002, 2003 and 2004 and the report thereon are included elsewhere in this Report.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>Fiscal
Year Ended</B><BR><B>(&nbsp;&nbsp; , 000 Omitted)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2000</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2001</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Consolidated
Statement of Operations
Data:</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>
    <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:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,202</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,106</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost Of Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(248</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(97</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(131</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(122</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(111</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross Profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,954</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,507</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">995</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Operating Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,596</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,823</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,711</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,631</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,146</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other Income (Expense),
Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">73</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss from Discontinued
Operations
Income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">382</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(240</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(495</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(157</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic Income (Loss) Per
Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.01</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted Income (Loss) Per
Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.01</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted Average Common
Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,736,224</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,388,235</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">47,309,171</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,363</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Consolidated Balance
Sheet Data</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>
    <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: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,468</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">590</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">871</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Working Capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,124</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">603</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,753</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,746</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,464</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Redeemable Preferred Stock</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 align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Advances From Related
Parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">337</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Shareholders&#146; Equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,651</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,411</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,429</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">798</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">12
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<DIV align="left">
<A name="108"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;7. </B><B><I>Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</I></B>



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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $1,106,000 for the year ended December&nbsp;31, 2004 compared to $1,269,000
for the year ended December&nbsp;31, 2003, a decrease of 13%. Revenues are almost entirely comprised of
royalties pertaining to the licensing of Spatializer&#174; audio signal processing algorithms. A key
issue discussed is the difficulty in obtaining revenue traction when traditional revenue sources
are eroding, while being replaced by new revenue sources at a lower rate.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss was $157,000 for the year ended December&nbsp;31, 2004; ($0.00) basic per share, compared
to net loss of $495,000, ($0.01) per share basic and diluted, for the year ended December&nbsp;31, 2003.
Net loss for the current period is primarily the result of lower revenue, partially offset by lower
overhead. A key issue discussed is management&#146;s efforts to reduce overhead is view of declining
revenue, while maintaining competitiveness.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by operating activities was $343,939 for the year ended December&nbsp;31, 2004,
as compared to net cash used in operating activities of $253,965 for the year ended December&nbsp;31,
2003 and net cash provided by operating activities of $85,138 for the year ended December&nbsp;31, 2002.
The increase in cash flows from operations for the year ended December&nbsp;31, 2004 was primarily a
result of the increase in deferred income, a decrease in accounts receivable, partially offset by
the net loss. Deferred income increased due to the licensing prepayment and accounts receivable
decreased a portion of fourth quarter 2004 revenues being realized through the recognition of
deferred income. A key issue is the Company&#146;s ability to generate continued positive cash flow, or
if needed, raise additional capital to fund its business.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The business environment in which we operate is highly competitive and is offers substantial
risk. These risks should be studied and understood, as outlined in Risk Factors later in this
document.


<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;An important demonstration of our commitment to our stockholders is a clear explanation of the
Company&#146;s operating results, risks and opportunities. 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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&nbsp;</TD>
    <TD>to provide a narrative explanation of a company&#146;s financial statements &#147;in plain
English&#148; that enables the average investor 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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&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 and relationship
of past performance being 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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&nbsp;</TD>
    <TD>An understanding of our operating environment and its risks</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&nbsp;</TD>
    <TD>A review of our corporate governance structure</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">13
</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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&nbsp;</TD>
    <TD>A review of the important trends in the financial statements and our cash flow</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&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>
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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&nbsp;</TD>
    <TD>We Face Significant Pricing Pressure and Competition that can Result in Our Technology
Being Designed Out Within a Short Time Frame, or Impeding Efforts to Secure New Design Wins</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&nbsp;</TD>
    <TD>New Customer Product Development Can be Delayed. This Results in Delays In Revenues.
Further, Where our Products are Delayed, Competitive Products May Reach The Market Before,
or Replace Our Products.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&#149;&nbsp;&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>

</TABLE>

<P align="left" style="font-size: 10pt">The PC and consumer electronics markets are under intense pressure, primarily from retailers, to
reduce selling prices, with resultant pressure to reduce costs. In addition, pricing action by our
competitors may be very aggressive. Cost reductions are driven by lower cost sourcing, often in
China, design simplification and reduction in or substitution of 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 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. This also
results limited visibility with regard to future revenues and their impact on our operating
results. Our response has been to strengthen our value proposition, more aggressively price and
include additional features in our products. We have also entered new segments, such as cell
phones, with different competitive pressure. We also emphasize to our overseas sales
representatives the need for close customer support, with the objective that both new opportunities
and possible difficulties are brought to light as soon as possible.


<P align="left" style="font-size: 10pt">Manufacturer&#146;s design-in cycles for our technology range from four to twelve months, from the
decision to adopt our technology to actual cashflow. Many of our customers operate under very fluid
development schedules. These schedules are 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. Whether such processors become an industry standard, or gain wide acceptance in the
market, is speculative. 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 must request that our algorithm be
implemented. While these requests may be honored, processor manufacturers must schedule such
implementation as their resources or corporate strategies allow. Some chip makers, particularly in
the cell phone market, have already incorporated solutions from our competitors as a component of
the chip itself, making it costly and time consuming to implement alternate solutions like ours.
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




<P align="center" style="font-size: 10pt">14
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<P align="left" style="font-size: 10pt">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.



<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. These revenues are reported to us by our Licensees in formal, written royalty reports,
which serve as the basis for our quarterly revenue accruals. Infrequently, certain written reports
are received after our required reporting deadlines, sometimes due to contractual requirements. In
such cases, management tries to obtain verbal reports or informal reports from the Licensee. In the
absence of such information, management may utilize conservative estimates based on information
received or historical trends. In such isolated cases, management strives to under-estimate such
revenues to err on the side of caution. In the event such estimates are used, the revenue for the
following quarter is adjusted based on receipt of the written report. In addition, any error in
Licensee reporting, which is very infrequent, is adjusted in the subsequent quarter when agreed by
both parties as correct.


<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 and
trademarks, consisting primarily of legal and filing fees, and amortize such costs over the
remaining life of the asset (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"><B>Corporate Governance</B>



<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, chaired by Mr.&nbsp;Gilbert Segel, 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.


<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="center" style="font-size: 10pt">15
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">Our Audit Committee and Compensation and Stock Committee charters are available in print to any
stockholder upon request in writing to our principal executive office at 2625 Townsgate Road, Suite
330, Westlake Village, California 91361.



<P align="left" style="font-size: 10pt"><B>Key Components of the Financial Statements and Important Trends</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The financial statements, including Balance Sheet, results of operations, cash flow and
Changes in Stockholders&#146; Equity should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this report. MD&#038;A explains the key components of
each of these financial statements, key trends and reasons for reporting period-to-period
fluctuations.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Balance Sheet provides a snapshot view of our financial condition at the end of our fiscal
year. A balance sheet helps management and our stockholders understand the financial strength and
capabilities of our business. Balance sheets can help identify and analyze trends, particularly in
the area of receivables and payables. A review of cash compared to the comparable year and in
relation to ongoing profit or loss can show the ability of the Company to withstand business
variations. The relationship between Current Assets and Current Liabilities Working capital
(current assets less current liabilities) measures how much in liquid assets a company has
available to build its business . The presence of Deferred Revenue indicates cash received
on revenue to be earned over the next twelve months. Receivables that are substantially higher than
revenue for the quarter may indicate a slowdown of collections, with an impact on future cash
position. This is addressed further in MD&#038;A under <I>Liquidity and Capital Resources.</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Consolidated Statement of Operations tells the reader whether the Company had a profit or
loss. It shows key sources of revenue and major expense categories. It is important to note
period-to-period comparisons of each line item of this statement, reasons for any fluctuation and
how costs are managed in relation to the overall revenue trend of the business. These statements
are prepared using accrual accounting under generally accepted accounting standards. This is
addressed further in MD&#038;A under Revenues and Expenses.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Consolidated Statement of Cashflows explains the actual sources and uses of cash. Some
expenses of the Company, such as depreciation and amortization do not result in a cash outflow in
the current period, since the underlying patent expenditure or asset purchase was made years
earlier. New capital expenditures, on the other hand, resulted in a disbursement of cash, but will
be expensed in the Statement of Operations over its useful life. Fluctuations in Receivables and
payables also explain why the net change in cash is not equal to the loss reported on the Statement
of Operations. Therefore, it is possible that the impact of a net loss on cash is less or more than
the actual amount of the loss. This is discussed further in MD&#038;A under <I>Liquidity and Capital
Resources.</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Consolidated Statement of Changes in Stockholders&#146; Equity shows the impact of the
operating results on the Company&#146;s equity. In addition, this statement shows new equity brought
into the Company through stock sales or stock option exercise. This is discussed further in MD&#038;A
under <I>Liquidity and Capital Resources.</I>



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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion and analysis relates to our financial condition and results of
operations for the year ended December&nbsp;31, 2004 compared to the year ended December&nbsp;31, 2003, and
the year ended December&nbsp;31, 2003 compared to the year ended December&nbsp;31, 2002. The following
discussion of the financial condition and results of operations should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in this report.


<P align="left" style="font-size: 10pt"><B>For the Year Ended December&nbsp;31, 2004, Compared to the Year Ended December&nbsp;31, 2003</B>



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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $1,106,000 for the year ended December&nbsp;31, 2004 compared to $1,269,000
for the year ended December&nbsp;31, 2003, a decrease of 13%. Revenues are almost entirely comprised of
royalties pertaining to the licensing of Spatializer&#174; audio signal processing algorithms.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While the overall decrease was relatively modest, the revenue mix by licensee platform was
significantly different year over year. The decrease in revenues is attributed primarily to the
loss or reduction at three key DVD player accounts and one PC account which in aggregate, generated
approximately 56% of total fiscal 2003 revenue. In each case, these licensees decided to use no
licensed virtual surround solution or opted for a free solution from their chip supplier, driven
primarily by cost reduction pressure. These losses


<P align="center" style="font-size: 10pt">16
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<P align="left" style="font-size: 10pt">were partially offset by three new revenue sources in cellular phones, mobile audio semiconductors
and PCs, and the expansion of an existing license relating to recordable DVD.



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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit decreased to $995,000 for the year ended December&nbsp;31, 2004 compared to $1,147,000
in the comparable period last year, a decrease of 13%. Gross margin held steady at 90% of revenue
in the year ended December&nbsp;31, 2004 compared with 90% of revenue for the comparable period last
year. The decrease in gross profit results from lower revenues in the current year We maintain a
high margin since revenues are from licensing and royalty activities, which have little or no
associated direct manufacturing or selling costs other than commissions paid to our independent
representatives that solicit and oversee the particular accounts. All development costs are
expensed as engineering and development expenses in the period they are incurred.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses for the year ended December&nbsp;31, 2004 decreased to $1,146,000 (105% of
sales) from $1,631,000 (128% of sales) for the year ended December&nbsp;31, 2003, a decrease of 30%. The
decrease in operating expenses results primarily from reductions in general and administrative
expense and sales and marketing expense. General and Administrative expenses declined due to the
relocation to smaller and less expensive offices in December&nbsp;2003 and lower occupancy-related
expenses. Sales and marketing expenses declined due to the elimination of a marketing and business
development executive position and related travel in the fourth quarter of 2003 and the
restructuring of our Japan sales operation. These responsibilities were transferred to another
executive and to a new commissioned representative firm in Japan.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative expense decreased to $615,000 for the year ended December&nbsp;31, 2004
from $811,000 for the year ended December&nbsp;31, 2003, a decrease of 24%. The decrease is primarily
due to the relocation of our offices to smaller and lower cost facilities in December&nbsp;2003, upon
expiration of an existing lease, lower occupancy related expenses, partially offset by increased
legal and accounting expenses related to public filings, in part in response to the additional
requirements imposed on public companies by the Sarbanes-Oxley Act and increased travel by the CEO.
General operating costs include rent, telephone, legal, public filing, office supplies and
stationery, postage, depreciation and similar costs.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and Development costs decreased to $393,000 for the year ended December&nbsp;31, 2004,
compared to $459,000 for the year ended December&nbsp;31, 2003, a decrease of 14%. The decrease in
research and development expense was due to the commencement of the use of lower cost specialist
consultants in India in the second half of 2004.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We continued efforts to identify, validate, and develop new product ideas at DPI. Specific
engineering efforts were directed toward the launch of Spatializer Audio Alchemy, refinement of
Spatializer Natural Headphone, development of new cell phone solutions and applications engineering
to port our technology to leading processor platforms.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and Marketing costs decreased to $138,000 for the year ended December&nbsp;31, 2004, compared
to $361,000 for the year ended December&nbsp;31, 2003, a decrease of 62%. The reduction in such expenses
resulted from the elimination of a sales consultant position, the elimination of a sales executive
position in the third quarter of 2003 and fewer trade show participations.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss was $157,000 for the year ended December&nbsp;31, 2004; ($0.00) basic per share, compared
to net loss of $495,000, ($0.01) per share basic and diluted, for the year ended December&nbsp;31, 2003.
Net loss for the current period is primarily the result of lower revenue, partially offset by lower
overhead.


<P align="center" style="font-size: 10pt">17
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<P align="left" style="font-size: 10pt"><B>For the Year Ended December&nbsp;31, 2003, Compared to the Year Ended December&nbsp;31, 2002</B>



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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $1,269,000 for the year ended December&nbsp;31, 2003 compared to $1,856,000
for the year ended December&nbsp;31, 2002, a decrease of 32%. Revenues are almost entirely comprised of
royalties pertaining to the licensing of Spatializer&#174; audio signal processing algorithms.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The decrease in revenues is attributed primarily to the loss or reduction at two key accounts
which generated in excess of 20% of total revenue each, partially offset by revenue from a new
account. The first lost account was in the PC market, which completed its migration to a new
operating system in which it chose not to include any software audio enhancements. The second
account was in the DVD player market, where it selected a lower cost solution for its low cost,
high volume DVD players.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit decreased to $1,147,000 for the year ended December&nbsp;31, 2003 compared to
$1,725,000 in the comparable period last year, a decrease of 34%. Gross margin decreased to 90% of
revenue in the year ended December&nbsp;31, 2003 compared with 93% of revenue for the comparable period
last year. The decrease in gross profit results from lower revenues in the current year and from
lower gross margin. The decrease in the gross margin percentage reflects a change in mix to
commissionable foreign royalty revenue compared to non-commissionable U.S. sourced revenue. We
maintain a high margin since revenues are from licensing and royalty activities, which have little
or no associated direct manufacturing or selling costs other than commissions paid to our
independent representatives that solicit and oversee the particular accounts.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses for the year ended December&nbsp;31, 2003 decreased to $1,631,000 (128% of
sales) from $1,711,000 (92% of sales) for the year ended December&nbsp;31, 2002, a decrease of 5%. The
decrease in operating expenses results primarily from reductions in sales and marketing due to the
elimination of a marketing and business development executive position and related travel in late
2003. These responsibilities were transferred to another executive and to a new representative firm
in Japan.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the fourth quarter of fiscal 2003, we implemented a cost reduction program that included
the elimination of an executive position, relocation of the corporate offices to smaller and lower
cost facilities, replacement of a stipended representative with a commissioned representative and
other overhead related cost savings. The annualized reduction to be provided by these initiatives
is expected to result in an overall overhead reduction of at least 20%.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative costs increased to $811,000 for the year ended December&nbsp;31, 2003
from $766,000 for the year ended December&nbsp;31, 2002, an increase of 6%. The increase is primarily
due to increased legal expenses related to public filings, in part in response to the additional
requirements imposed on public companies by the Sarbanes-Oxley Act, and increased travel by the
CEO. General operating costs include rent, telephone, legal, public filing, office supplies and
stationery, postage, depreciation and similar costs.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and Development costs increased to $459,000 for the year ended December&nbsp;31, 2003,
compared to $433,000 for the year ended December&nbsp;31, 2002, an increase of 6%. The increase in
research and development expense was due to strategic use of outside specialist consultants, wage
increases and increased health insurance premiums for such personnel.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We continued efforts to identify, validate, and develop new product ideas at DPI. Specific
engineering efforts were directed toward


<P align="center" style="font-size: 10pt">18
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<P align="left" style="font-size: 10pt">the launch of Spatializer Audio Alchemy, refinement of Spatializer Natural Headphone,
development of the HD Series of whole product solutions and applications engineering to port our
technology to leading processor platforms.



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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and Marketing costs decreased to $361,000 for the year ended December&nbsp;31, 2003, compared
to $513,000 for the year ended December&nbsp;31, 2002, a decrease of 30%. The reduction in such expenses
resulted from the elimination of a sales consultant position, the elimination of a sales executive
position in the third quarter of 2003 and fewer trade show participations.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss was $495,000 for the year ended December&nbsp;31, 2003; ($0.01) basic per share, compared
to net income of $18,000, ($0.00) per share basic and diluted, for the year ended December&nbsp;31,
2002. Net loss for the current period is primarily the result of lower gross margin, partially
offset by lower overhead.


<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 December&nbsp;31, 2004, we had $871,000 in cash and cash equivalents as compared to $590,000 at
December&nbsp;31, 2003. The increase in cash and cash equivalents is attributed to an increase in
deferred revenue resulting from prepayments on a licensing agreement of $391,395, partially offset
by the operating loss of $174,103. We had working capital of $586,000 at December&nbsp;31, 2004 as
compared with working capital of $793,000 at December&nbsp;31, 2003.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by operating activities was $343,939 for the year ended December&nbsp;31, 2004,
as compared to net cash used in operating activities of $253,965 for the year ended December&nbsp;31,
2003 and net cash provided by operating activities of $85,138 for the year ended December&nbsp;31, 2002.
The increase in cash flows from operations for the year ended December&nbsp;31, 2004 was primarily a
result of the increase in deferred income, a decrease in accounts receivable, partially offset by
the net loss. Deferred income increased due to the licensing prepayment and accounts receivable
decreased a portion of fourth quarter 2004 revenues being realized through the recognition of
deferred income.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We use cash in investing activities primarily to secure patent and trademark protection for
our proprietary technology and brand name, and to purchase short-term investments such as bank
certificates of deposit. Cash used in investing activities totaled $20,587, $20,709 and $95,891,
respectively, in the years ended December&nbsp;31, 2004, 2003, and 2002. All expenditures for on-going
research and development are expenses and therefore included in the Net Loss.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash flows used in financing activities totaled $41,994 for the year ended December&nbsp;31,
2004 and cash provided by financing activities totaled $5,746 and $0 for the years ended December
31, 2003 and 2002, respectively.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In November&nbsp;2002, the Board of Directors and the holders of our previously outstanding Series
B Preferred Stock agreed to exchange the Series&nbsp;B Preferred Stock for a new Series&nbsp;B-1 Preferred
Stock, which are convertible commencing in December&nbsp;2005 into restricted Common Stock at a 10%
discount, based on the 10&nbsp;day average closing bid price prior to the conversion, but subject to a
minimum conversion of $.56 per share and a maximum of $1.12 per share. The exchange was completed
in December&nbsp;2002. In connection with the exchange the Series&nbsp;B-1 Preferred Stock, we withdrew the
Series&nbsp;A and Series&nbsp;B Preferred Stock and, therefore, currently the Series&nbsp;B-1 Preferred Stock is
our only authorized or outstanding class of preferred stock.


<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. Since the director who was an indirect beneficiary
of the demand note retired from the Board of Directors in June&nbsp;2003, the demand note is classified
as a note payable at December&nbsp;31, 2004. There are no installments due in more than twelve months
as of December&nbsp;31, 2004.


<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="center" style="font-size: 10pt">19
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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;Future payments due under operating lease obligations as of December&nbsp;31, 2004 are described
below:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>Payments due by period</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Less than</B></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="center" colspan="2" style="border-bottom: 1px solid #000000"><B>More than</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Contractual obligations</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1 year</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1-3 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>3-5 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>5 years</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-Term Debt Obligations</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital Lease Obligations</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating Lease Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">54,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,680</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">26,275</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">54,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,680</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">26,275</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>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future cash flow will come primarily from the audio signal processing licensing, 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
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. We currently 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 transitioning platforms. The four new or
expanded licensing deals from such sources that generated approximately 60% of fiscal 2004 revenue
support this belief. Further, our cost reduction initiative implemented in the fourth quarter of
2003 has lowered the revenues needed to reach the break-even point.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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 its products and software
solutions in a market that treats some audio products, including those of our competitors, on a
commodity basis in those cases where the OEM product is considered a commodity product. While our
software applications deliver what we and most manufacturers who listen to it believe is a
significantly superior audio experience, the competitive market forces that pressure manufacturers
to reduce their costs may create some resistance to new technology adoption or use. In addition,
certain of our competitors appear to be pursuing a business plan that disregards commercially
reasonable pricing to achieve a larger market penetration even if the penetration will not provide
for viable margins or returns. 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">&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 a short-term and long-term basis. To
the extent that we do not achieve current operating levels or are required to fund contingencies,
we will be required to use some of our cash reserves and this could impact our longer term
liquidity. In addition, we wish to achieve accelerated growth and to take advantage of the dynamic
market forces in which we operate, rather than to be affected by them. We believe our current cash
reserves and cash generated from our existing operations and customer base are sufficient for us to
meet our operating obligations and the anticipated additional research and development for our
audio technology business for at least the next 12&nbsp;months. We will also continue to consider and
evaluate capital investment or business arrangements with financial or strategic participants or
investors as such opportunities become available to 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, 2004, we had net operating loss carry forwards for Federal income tax purposes
of approximately $26,500,000 which are available to offset future Federal taxable income, if any,
through 2013. Approximately $21,700,000 of these net operating loss carry forwards is subject to an
annual limitation of approximately $1,000,000.


<P align="center" style="font-size: 10pt">20
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<P align="left" style="font-size: 10pt">In December&nbsp;2003, the FASB issued SFAS 132R &#147;<I>Employers&#146; Disclosures about Pensions and Other
Postretirement Benefits&#151;an amendment of FASB Statements No.&nbsp;87, 88, and 106&#148;</I>. This Statement
revises employers&#146; disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by FASB Statements No.&nbsp;87,
<I>Employers&#146;Accounting for Pensions, </I>No.&nbsp;88, <I>Employers&#146; Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits, </I>and No.&nbsp;106, <I>Employers&#146; Accounting
for Postretirement Benefits Other Than Pensions. </I>This Statement retains the disclosure requirements
contained in FASB Statement No.&nbsp;132, <I>Employers&#146; Disclosures about Pensions and Other Postretirement
Benefits, </I>which it replaces. It requires additional disclosures to those in the original Statement
132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The Company will adopt the provisions
of SFAS 132R on January&nbsp;1, 2004. The adoption of this pronouncement is not expected to have a
material effect on the Company&#146;s financial position, results from operations or cash flows.



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In November&nbsp;2004, the FASB issued SFAS No.&nbsp;151, <I>&#147;Inventory Costs-an amendment of ARB. No.&nbsp;43,
Chapter&nbsp;4&#148;. </I>This Statement amends the guidance in ARB No.&nbsp;43, Chapter&nbsp;4, <I>&#147;Inventory Pricing&#148;</I>, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph&nbsp;5 of ARB 43, Chapter&nbsp;4, previously stated that &#147;... under some
circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges....&#148; This
Statement requires that those items be recognized as current-period charges regardless of whether
they meet the criterion of &#147;so abnormal.&#148; In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.&nbsp;152, &#147;<I>Accounting for Real Estate Time-Sharing
Transactions &#150; an amendment of FASB statements no. 66 and 67</I>&#148;. This Statement amends FASB Statement
No.&nbsp;66, &#147;<I>Accounting for Sales of Real Estate</I>&#148;, to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP)&nbsp;04-2, <I>Accounting for Real Estate Time-Sharing Transactions. </I>This Statement also amends FASB
Statement No.&nbsp;67, &#147;<I>Accounting for Costs and Initial Rental Operations of Real Estate Projects</I>&#148;, to
state that the guidance for (a)&nbsp;incidental operations and (b)&nbsp;costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.&nbsp;153, &#147;<I>Exchanges of Nonmonetary assets &#150; an amendment of
APB Opinion No.&nbsp;29&#148;. </I>This Statement amends APB Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.&nbsp;123R, <I>&#147;Share Based Payment&#148;</I>. This Statement is a
revision of FASB Statement No.&nbsp;123, &#147;<I>Accounting for Stock-Based Compensation</I>&#148;. This Statement
supersedes APB Opinion No.&nbsp;25, &#147;<I>Accounting for Stock Issued to Employees</I>&#148; and its related
implementation guidance. This Statement establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or services that are based
on the fair value of the entity&#146;s equity instruments or that may be settled by the issuance of
those equity instruments. The Statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties other than
employees provided in Statement 123 as originally issued and EITF Issue No.&nbsp;96-18, &#147;<I>Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.</I>&#148;   This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6, &#147;<I>Employers&#146; Accounting for
Employee Stock Ownership Plans</I>&#148;.





<P align="left" style="font-size: 10pt"><B>Factors That May Affect Future Results</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section&nbsp;21E of the Securities Exchange Act of 1934, as amended, and Section&nbsp;27A of the Securities
Act of 1933, as amended, reflecting management&#146;s current expectations. Examples of such
forward-looking statements include our expectations with respect to our strategy. Although we
believe that our expectations are based upon reasonable assumptions, there can be no assurances
that our financial goals will be realized. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results, performance or
achievements, or industry results, to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Numerous factors may
affect our actual results and may cause results to differ materially from those expressed in
forward-looking statements made by or on behalf of our company. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words, &#147;believes,&#148; &#147;anticipates,&#148; &#147;plans,&#148;
&#147;expects&#148; and similar expressions are intended to identify forward-looking statements. The
important factors discussed under the caption &#147;Factors That May Affect Future Results&#148; in Item&nbsp;7.
Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations, herein,
among others, would cause actual results to differ materially from those indicated by
forward-looking statements made herein and represent management&#146;s current expectations and are
inherently uncertain. Investors are warned that actual results may differ from management&#146;s
expectations. We assume no obligation to update the forward-looking information to reflect actual
results or changes in the factors affecting such forward-looking information.

<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 have experienced a loss from operations in three of the last four years. We experienced
declining losses in the second and third quarters of 2004, and a profit in the fourth quarter of
2004. 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,
or achieve or sustain future profitability, and we may have to rely on the sale of shares or on
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="center" style="font-size: 10pt">22
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The PC and consumer electronics markets are under intense pressure, primarily from retailers,
to reduce selling prices, with resultant pressure to reduce costs. 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. Cost reductions are driven by lower cost sourcing, often in China, design
simplification and reduction in or substitution of features. Therefore, we are seeking commercial
acceptance of our products in highly competitive markets. We have responded by offering additional
products targeted to each price and quality segment of the market, more aggressively price and
feature enrich our products and enter new segments, such as cell phones, with different competitive
pressure. 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 the case
with DVD players. It also may result in the elimination of features, including ours, if cost is of
paramount importance. 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.

<P align="left" style="font-size: 10pt"><I>Because Our Relative Size and Power Is Small Compared To That of Our Customers, Our Business
Leverage With Some Customers Is Generally Weak and Communication Not Always Transparent</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We deal with some of the largest global consumer electronics makers in the world, the vast
majority of which are in Asia. Spatializer is a small company and there are other options for
manufacturers, including those from our competitors, their chip suppliers, or eliminating the use
of audio enhancement technology altogether. As such, our leverage with our customers is generally
weak. In addition, the culture in our local markets may not dictate clear, direct and transparent
communication of business plans or technology usage as is the culture in our home country. When
this occurs, we could receive very short notice of discontinued use of our technology and revenues
from such an account would typically begin a steep decline in the subsequent quarter, resulting in
period-to-period fluctuation. This also results in limited visibility with regard to future
revenues and its impact on our operating results. Our response has been to strengthen our business
relationships with more onsite visits, increase our understanding of cultural differences and focus
more intently on service. We also emphasize to our overseas sales representatives the need for
close customer support, with the objective that both new opportunities and possible difficulties
are brought to light as soon as possible.

<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>In addition, standards
may be adopted by cell phone system operators or manufacturers that may impede or prevent the
penetration of non-standard technology onto their platforms. While our efforts are focused on
promoting our technology to such potential customers, there is no assurance that we will be
successful in making our technology a standard.


<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 and the


<P align="center" style="font-size: 10pt">23
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">uncertainties concerning the ability of our current products and new products to achieve
meaningful commercial acceptance, 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 cashflow. 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;<I>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</I>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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, we anticipate being
dependent upon a limited number of OEMs for a large port of our net sales. Our four largest
customers as of December&nbsp;31, 2004 accounted for 30%, 25%, 21% and 13% of our net sales.. 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 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;<I>Demand for Our Products is Subject to Risks Beyond Our Control.</I>


<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. As
a result, 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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&#149;&nbsp;&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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&#149;&nbsp;&nbsp;</TD>
    <TD>the technical, sales and marketing and management capabilities of our OEM customers;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&#149;&nbsp;&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>Because The Technology Environment In Which We Operate Is Rapidly Changing, We May Not Be
Successful In Establishing And Maintaining The Technological Superiority Of Our Products Over Those
Of Our Competitors.</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. There can be no assurance that we will be able to favorably
compete in this market in the future.

<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


<P align="center" style="font-size: 10pt">24
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">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, all new licenses are negotiated by Henry R. Mandell, our Chief Executive Officer, with
whom we have an employment agreement with a term expiring in November&nbsp;2006.


<P align="left" style="font-size: 10pt"><I>The Market For Our Stock May Be Not Remain Liquid And The Stock Price May Be Subject To Volatility</I>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our stock is quoted on the OTC Bulletin Board, where low trading volume and high volatility is
often experienced. While a few firms make a market in our stock, the historically low trading
volume and relatively few market makers of our stock makes it more likely that a severe fluctuation
in volume, either up or down, will significantly impact the stock price. There can be no assurance
that these market makers will continue to quote our stock and a reduction in such market makers
would negatively impact trading liquidity. Further, with our constrained resources and increased
cost and time associated with implementation of Sarbanes-Oxley, it may not be possible for us to
remain listed on the OTC Bulletin Board in the future as a fully reporting company. This and the
existing limited market and volume in the trading of our stock, may result in our shareholders
having difficulty selling our common stock.The trading price of our Common Stock has been, and will
likely continue to be, subject to wide fluctuations in response to quarterly variations in our
operating results, announcements of new products or technological innovations by the Company or our
competitors, strategic alliances between us and third parties, general market fluctuations and
other events and factors, some of which may be beyond our control.

<DIV align="left">
<A name="109"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;7A. </B><B><I>Quantitative and Qualitative Disclosures About Market Risk</I></B>


<P align="left" style="font-size: 10pt">We have not been exposed to material future earnings or cash flow fluctuations from changes in
interest rates on our short-term investments at December&nbsp;31, 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.



<P align="center" style="font-size: 10pt">25
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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="110"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;8. </B><B><I>Financial Statements and Supplementary Data</I></B>


<DIV align="left">
<A name="111"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>INDEPENDENT AUDITORS&#146; REPORT</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>To the Board of Directors Of Spatializer Audio Laboratories, Inc.:</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have audited the accompanying consolidated balance sheets of Spatializer Audio
Laboratories, Inc. and subsidiaries (The &#147;Company&#148;) as of December&nbsp;31, 2004 and 2003 and the
related consolidated statements of operations, shareholders&#146; equity, and cash flows for the years
ended December&nbsp;31, 2004, 2003 and 2002. These consolidated financial statements are the
responsibility of the Company&#146;s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Spatializer Audio Laboratories, Inc. and subsidiaries
as of December&nbsp;31, 2004 and 2003, and the results of its operations and its cash flows for the
years ended December&nbsp;31, 2004, 2003 and 2002 in conformity with
accounting principles generally
accepted in the United States of America.


<P align="left" style="font-size: 10pt">/s/ FARBER &#038; HASS LLP



<P align="left" style="font-size: 10pt">Camarillo, California<BR>
February&nbsp;28, 2005


<P align="center" style="font-size: 10pt">26
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<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>


<DIV align="left">
<A name="112"></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="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">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">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">871,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">589,797</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts Receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">325,712</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: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Prepaid Expenses and Other Current Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,940</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:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total Current Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,267,807</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: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and Equipment, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,527</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:15px; text-indent:-15px">Intangible Assets, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">166,710</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">192,485</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other Assets</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>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,464,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,205,145</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">LIABILITIES AND STOCKHOLDERS&#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">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notes Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66,252</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:30px; text-indent:-15px">Notes Payable to Related Party, Short Term</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">37,500</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">71,873</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,466</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Wages and Benefits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,446</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,973</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Professional Fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Commissions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,182</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,856</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,979</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,197</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred Income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">391,395</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:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total Current Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">665,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">177,992</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Notes Payable to Related Party, Long Term</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">70,746</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Series&nbsp;B-1 Redeemable Convertible Preferred Shares, $0.01 par
value: 1,000,000 shares authorized; 118,351 shares issued and
outstanding at December&nbsp;31, 2004 (liquidation preference
of $1,183,510)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,182</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,182</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stockholders&#146; Equity (Deficit):</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:75px; text-indent:-15px">Common shares, $0.01 par value; 65,000,000 shares authorized;
46,975,363 and 47,015,865 shares issued and outstanding at
December&nbsp;31, 2004 and 2003, respectively</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" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Additional Paid-In Capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,428,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,428,461</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Accumulated Deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(46,100,885</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(45,943,395</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Total Shareholders&#146; Equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">797,735</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">955,225</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,464,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,205,145</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to consolidated financial statements



<P align="center" style="font-size: 10pt">27
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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>


<DIV align="left">
<A name="113"></A>
</DIV>

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


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Royalty Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,105,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,269,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,855,934</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cost of Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,395</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">122,417</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">130,516</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">994,528</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,146,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,725,418</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and Administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">615,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">811,024</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">765,637</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and Development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">393,004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">458,940</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">432,826</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and Marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">137,889</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">360,692</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">512,727</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,146,305</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,630,656</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,711,190</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Operating Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(151,777</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(483,787</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,228</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest Income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,982</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,432</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest Expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,295</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13,447</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,493</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other Income (Expense), Net</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,313</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,246</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,036</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Income (Loss) Before Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(157,090</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(490,033</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,192</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(400</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,420</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,100</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(495,453</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,292</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Basic and Diluted Income (Loss) per Share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Weighted-Average Shares Outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,363</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,309,171</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:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to consolidated financial statements



<P align="center" style="font-size: 10pt">28
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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>


<DIV align="left">
<A name="114"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(495,453</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,292</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided (Used) by 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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,591</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">54,737</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,915</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,313</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,766</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Stock and Options Issued for Services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accounts Receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,699</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">153,612</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(56,460</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Prepaid Expenses, Deposits and Other Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(35,510</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,370</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accounts Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(17,561</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,155</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accrued Expenses and Other Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,581</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(45,427</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,286</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred Revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">391,395</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: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Discontinued Operations</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 nowrap align="left">&nbsp;</TD>
    <TD align="right">(100,000</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Cash Provided (Used) by Operating Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">343,939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(253,965</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85,138</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchase of Property and Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,007</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,771</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(74,993</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Intangible Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,580</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(18,938</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,898</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Cash Used by Investing Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,587</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,709</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(95,891</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Exercise of Options and Warrants</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notes Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66,252</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:30px; text-indent:-15px">Notes and Amounts Due to (from)&nbsp;Related Parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(108,246</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108,246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repayments/Termination of Notes Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(112,500</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&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:15px; text-indent:-15px">Net Cash Provided (Used) by Financing Activities.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(41,994</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,746</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:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase (Decrease) in Cash and Cash Equivalents.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">281,358</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(268,928</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,753</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents, Beginning of Year</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">869,478</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents, End of Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">871,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">589,797</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">858,725</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash Paid During the Year 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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,493</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,400</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to consolidated financial statements



<P align="center" style="font-size: 10pt">29
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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>


<DIV align="left">
<A name="115"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY (DEFICIT)</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="30%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>10% Series B Convertible</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Common</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">&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="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Preferred Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Common Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Additional</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Par</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Par</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Paid-In-</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Shareholders&#146;</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Capital</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Deficit</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Equity</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2001</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">87,967</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">474,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,402,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(45,466,234</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,411,568</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of 10% Series&nbsp;B to
Redeemable Series&nbsp;B-1</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(87,867</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(880</TD>
    <TD nowrap>)</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>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(880</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Series&nbsp;B Pfd. Share dividend</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>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(302</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(302</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,292</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">474,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,402,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(45,447,942</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,428,678</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options Exercised Warrants
Exercised</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 align="right">166,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,667</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,333</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">10,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options Issued for Services</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,000</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">12,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cancellation of Unissued
Performance Shares</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 nowrap align="left">&nbsp;</TD>
    <TD align="right">(557,740</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,578</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,578</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: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>&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="left">&nbsp;</TD>
    <TD align="right">(495,453</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(495,453</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,015,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">470,159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,428,461</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(45,943,395</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">955,225</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cancellation of Unissued
Performance Shares</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 nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,500</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(405</TD>
    <TD nowrap>)</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 valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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>&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="left">&nbsp;</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">469,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,428,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(46,100,885</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">797,735</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">See accompanying notes to consolidated financial statements




<P align="center" style="font-size: 10pt">30
</DIV>


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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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>


<DIV align="left">
<A name="116"></A>
</DIV>

<P align="center" style="font-size: 10pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B>



<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 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"><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>Reclassification
&#151; </B>Certain 2003 and 2002 amounts have been reclassified to
conform with the current year presentation. In that regard, the
Company has reflected the issuance of 15,384 shares of Class&nbsp;B-1 Convertible Preferred Stock that was originally recorded in Additional
Paid-in Capital. This resulted in a reclassification of $154 to Convertible Preferred Stock from APIC.



<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. The Company recognizes
revenue in accordance with SEC Staff Accounting Bulletin 101.


<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 December&nbsp;31, 2004 and 2003, substantially
all cash and cash equivalents were on deposit at one financial institution.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2004, three major customers, not presented in order of importance, each
accounted for 10% or more of our total accounts receivable: Matsushita, Sharp and Toshiba
Corporation, each of whom accounted for greater than 10% of our total 2004 accounts receivable. One
customer accounted for 31.0%, another accounted for 27% and one accounted for 18% of our total
accounts receivable at December&nbsp;31, 2004. At December&nbsp;31, 2003, one customer accounted for 42%, one
customer accounted for 23% and one customer accounted for 16%.


<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.- </B>Sales to foreign customers were 95%, 91% and 90% of total sales
in the years ended December&nbsp;31, 2004 and 2003 and 2002, respectively.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Major Customers &#151; </B>During the year ended December&nbsp;31, 2004, four customers accounted for 29%,
25%, 21% and 13%, respectively, of the Company&#146;s net sales. During the year ended December&nbsp;31,
2003, three customers accounted for 34%, 20%, and 20%, respectively, of the Company&#146;s net sales.


<P align="center" style="font-size: 10pt">31
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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>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>Advertising Costs &#151; </B>Costs incurred for producing and communicating advertising are expensed
when incurred and included in selling, general and administrative expenses. Consolidated
advertising expense amounted to $4,289, $2,960 and $4,087 in 2004, 2003 and 2002, respectively.


<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&nbsp;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.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Earnings Per Share &#151; </B>The Company determines earnings per share in accordance with Statement of
Financial Accounting Standards No.&nbsp;128, <I>Earnings Per Share </I>(&#147;SFAS 128&#148;). 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.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since the Company generated a net loss in 2004 and 2003, outstanding stock options and
warrants would have been anti-dilutive and are not applicable to this calculation.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The impact of Statement 128 on the calculation of earnings per share is as follows:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BASIC:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income (Loss) Available to Common Shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,292</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted Average Shares Outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic Earnings(Loss) per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">DILUTED:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income (Loss) Available to Common Shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,292</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted Average Shares Outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Effect of Dilutive Stock Options and Warrants
Based on the Treasury Stock Method Using Average Market Price</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted Earnings per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.0000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Average Market Price of Common Stock</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">.1234</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Ending Market Price of Common Stock</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">.06</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table presents contingently issuable shares, options and warrants to purchase
shares of common stock at December&nbsp;31, 2002. Those that were outstanding during 2004 and 2003 were
not included in the computation of diluted loss per share because the impact would have been
anti-dilutive:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,671,500</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,671,500</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Stock Option Plan &#151;</B>The Company determines the effect of stock based compensation in accordance
with SFAS No.&nbsp;123, <I>Accounting for Stock-Based Compensation,</I> as amended which permits entities to recognize as
expense using the &#147;fair-value&#148; method over the


<P align="center" style="font-size: 10pt">32
</DIV>

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

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

<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">vesting period of all employee stock-based awards on the date of grant. Alternatively, SFAS
No.&nbsp;123 allows entities to continue to utilize the &#147;intrinsic value&#148; method for equity instruments
granted to employees and provide pro forma net income (loss)&nbsp;and pro forma earnings (loss)&nbsp;per
share disclosures for employee stock option grants after 1994 as if the fair-value-based method
defined in SFAS No.&nbsp;123 has been applied. The Company has elected to continue to utilize the
&#147;intrinsic value&#148; method for employee stock option grants and provide the pro forma disclosure
provisions of SFAS No.&nbsp;123 (Note 8).


<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;121, <I>Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, </I>on January&nbsp;1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the carrying amounts
of the assets exceed the fair value of the assets (see Notes 4). Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Segment Reporting </B>- The Company adopted SFAS 131, <I>Disclosures about Segments of an Enterprise
and Related Information </I>(&#147;SFAS No.&nbsp;131&#148;), in December&nbsp;1997. MDT has been considered a discontinued
operation since September&nbsp;1998. As of December&nbsp;31, 2002, 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="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Recent Accounting Pronouncements </B>- In January&nbsp;2003 the FASB issued Interpretation 46
&#147;Consolidation of Variable Interest Entities, an interpretation of ARB No.&nbsp;51&#148;. This Interpretation
requires a Company to consolidate the financial statements of a &#147;Variable Interest Entity&#148; (&#147;VIE&#148;),
sometimes also known as a &#147;special purpose entity&#148;, even if the entity does not hold a majority
equity interest in the VIE. The Interpretation requires that if a business enterprise has a
&#147;controlling financial interest&#148; in a VIE, the assets, liabilities, and results of the activities
of the VIE should be included in consolidated financial statements with those of the business
enterprise, even if it holds a minority equity position. This Interpretation was effective
immediately for all VIE&#146;s created after January&nbsp;31, 2003; for the first fiscal year or interim
period beginning after June&nbsp;15, 2003 for VIE&#146;s in which a Company holds a variable interest that it
acquired before February&nbsp;1, 2003.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In May&nbsp;2003 the FASB issued SFAS 150 &#147;Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity&#148;. This Statement establishes standards for how an
issuer of debt or equity classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. This Statement is effective for financial instruments entered into
or modified after May&nbsp;31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June&nbsp;15, 2003.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In December&nbsp;2003, the FASB issued SFAS 132R &#147;Employers&#146; Disclosures about Pensions and Other
Postretirement Benefits&#151;an amendment of FASB Statements No.&nbsp;87, 88, and 106&#148;. This Statement
revises employers&#146; disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by FASB Statements No.&nbsp;87,
<I>Employers&#146;Accounting for Pensions, </I>No.&nbsp;88, <I>Employers&#146; Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits, </I>and No.&nbsp;106, <I>Employers&#146; Accounting
for Postretirement Benefits Other Than Pensions. </I>This Statement retains the disclosure requirements
contained in FASB Statement No.&nbsp;132, <I>Employers&#146; Disclosures about Pensions and Other Postretirement
Benefits, </I>which it replaces. It requires additional disclosures to those in the original Statement
132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. The Company will adopt the provisions
of SFAS 132R on January&nbsp;1, 2004.



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In November&nbsp;2004, the FASB issued SFAS No.&nbsp;151, <I>&#147;Inventory Costs-an amendment of ARB. No.&nbsp;43,
Chapter&nbsp;4&#148;. </I>This Statement amends the guidance in ARB No.&nbsp;43, Chapter&nbsp;4, <I>&#147;Inventory Pricing&#148;</I>, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph&nbsp;5 of ARB 43, Chapter&nbsp;4, previously stated that &#147;... under some
circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges....&#148; This
Statement requires that those items be recognized as current-period charges regardless of whether
they meet the criterion of &#147;so abnormal.&#148; In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.&nbsp;152, &#147;<I>Accounting for Real Estate Time-Sharing
Transactions &#150; an amendment of FASB statements no. 66 and 67&#148;</I>. This Statement amends FASB Statement
No.&nbsp;66, &#147;<I>Accounting for Sales of Real Estate&#148;, </I>to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP)&nbsp;04-2, <I>Accounting for Real Estate Time-Sharing Transactions. </I>This Statement also amends FASB
Statement No.&nbsp;67, &#147;<I>Accounting for Costs and Initial Rental Operations of Real Estate Projects&#148;, </I>to
state that the guidance for (a)&nbsp;incidental operations and (b)&nbsp;costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.&nbsp;153, &#147;<I>Exchanges of Nonmonetary assets &#150; an amendment of
APB Opinion No.&nbsp;29&#148;. </I>This Statement amends APB Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">In December&nbsp;2004, the FASB issued SFAS No.&nbsp;123R, <I>&#147;Share Based Payment&#148;</I>. This Statement is a
revision of FASB Statement No.&nbsp;123, &#147;<I>Accounting for Stock-Based Compensation&#148;</I>. This Statement
supersedes APB Opinion No.&nbsp;25, &#147;<I>Accounting for Stock Issued to Employees&#148; </I>and its related
implementation guidance<I>. </I>This Statement establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or services that are based
on the fair value of the entity&#146;s equity instruments or that may be settled by the issuance of
those equity instruments. The Statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties other than
employees provided in Statement 123 as originally issued and EITF Issue No.&nbsp;96-18, &#147;<I>Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.&#148; </I>This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6, &#147;<I>Employers&#146; Accounting for
Employee Stock Ownership Plans&#148;.</I>




<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company believes that the adoption of these pronouncements will not have a material effect
on the Company&#146;s financial position, results from operations or cash flows.


<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


<P align="center" style="font-size: 10pt">33
</DIV>

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

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

<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">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, 2004 and 2003 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 at December&nbsp;31, 2004 and notes payable to a related party
2003 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, 2004 and 2003, 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="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Office Computers, Software, Equipment and Furniture</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">331,867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">309,744</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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:15px; text-indent:-15px">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: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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 style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">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 valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less Accumulated Depreciation and Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">602,727</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:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and Equipment, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">29,527</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">42,022</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<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, 2004 and 2003 consist of the following:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capitalized Patent, Trademarks and Technology Costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">522,827</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">505,487</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less Accumulated Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">356,117</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:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible Assets, Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">166,710</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">192,485</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&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 align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">25,733</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,702</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,702</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,702</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">90,871</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">166,710</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">The Company was indebted to the Desper Family Trust, a related party, in the amount of $54,349
at December&nbsp;31, 2004. 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 $112,500 related party 10% demand
note to a three- year 10% term note. Principal and interest of $5,191 are due monthly, which we
pay on a current basis. Since the director who was an indirect beneficiary of the demand note
retired from the Board of Directors in June&nbsp;2003, the demand note is classified as a note
payable at December&nbsp;31, 2004. There are no installments due in more than twelve months as of
December&nbsp;31, 2004


<P align="center" style="font-size: 10pt">34
</DIV>

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

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




<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>(6)&nbsp;Shareholders&#146; Equity</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>During the year ended December&nbsp;31, 2004, shares were issued or converted as follows:</I><BR>
Unissued Performance Shares held in escrow were cancelled.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Options to purchase common shares in exchange for services were issued with a value of $1,000.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><I>During the year ended December&nbsp;31, 2003, shares were issued or converted as follows:</I>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">An employee exercised options to purchase 166,666 shares of common stock were exercised in 2003,
increasing shareholders&#146; equity by $10,000.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">Options to purchase common shares in exchange for services were issued with a value of $12,000.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>Capitalization</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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 Corporations 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="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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 Corporations 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="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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 US and is designated as a liquidation preference. The stock will rank prior to the
Company&#146;s common stock. No dividends will be paid on the Series&nbsp;B-1 Preferred Stock. Conversion
rights vested on January&nbsp;1, 2003 to convert the Series&nbsp;B-1 Preferred Stock to common at a certain
formula based on an average closing share price, subject to a floor of $0.56 and a ceiling of
$1.12. At December&nbsp;29, 2005 certain mandatory conversion requirements exist subject to the above
formula. The Series&nbsp;B-1 Preferred Stock has no voting power. Certain restrictions on trading exist
based on date sensitive events based on the Company&#146;s Insider Trading Policy. 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. In 2004, the Company has reflected the issuance of
15,384&nbsp;shares of Class&nbsp;B-1 Convertible Preferred Stock that was originally recorded in
Additional Paid-in Capital. This resulted in a reclassification of $154
to Convertible Preferred Stock from APIC.


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt"><B>(7)&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, 4,697,536 as
of December&nbsp;31, 2004. Stock options are granted with an exercise price at the minimum 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 December&nbsp;31, 2004, there were 2,062,536 additional shares available for grant under the
Plan. The per share weighted-average fair value of stock options granted during 2004, 2003 and 2002
was $0.09, $0.05 and $0.11, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: 2004- expected dividend yield
0%, risk-free interest rate of 4.1%, expected volatility of 150% and an expected life of 5&nbsp;years;
2003- expected dividend yield 0%, risk-free interest rate of 2.25%, expected volatility of 137% and
an expected life of 5&nbsp;years; 2002 &#151; expected dividend yield 0%, risk-free interest rate of 6%,
expected volatility of 427% and expected life of 5&nbsp;years


<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


<P align="center" style="font-size: 10pt">35
</DIV>

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

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

<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">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="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NET INCOME (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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As Reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(495,453</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,292</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro Forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(172,770</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(538,368</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(136,498</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BASIC AND DILUTED 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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As Reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.01</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro Forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock option activity during the periods indicated is as follows:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <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="center" colspan="2"><B>Weighted-Average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
     <TD colspan="3" align="center" style="border-bottom: 1px solid #000000"><B>Exercisable</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2001</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>1,529,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,872,299</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,300,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(500,799</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2.29</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>2,668,332</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,671,500</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:15px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,200,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(166,666</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.06</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options forfeited/expired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(669,834</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>2,540,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,035,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">200,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.09</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">600,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.43</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>2,381,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,635,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.11</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Warrant activity for the periods indicated below is as follows:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Warrants</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Warrant Price</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants outstanding at December&nbsp;31, 2001</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,100,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.65</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants issued</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants expired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,100,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.65</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants outstanding at December&nbsp;31, 2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants issued</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants expired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants outstanding at December&nbsp;31, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants issued</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants expired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warrants outstanding at December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the warrants were granted in 1999 and were issued in connection with private
placements. At December&nbsp;31, 2002, all such warrants had expired, without exercise.


<P align="center" style="font-size: 10pt">36
</DIV>

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

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

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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company files a consolidated return for U.S. income tax purposes. Income tax expense for
the years ended December&nbsp;31, 2004, 2003 and 2002 consisted of the following:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">State franchise tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Federal taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,400</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain revenues received from customers in foreign countries are subject to withholding taxes
that are deducted from outgoing funds at the time of payment. These taxes range from approximately
10% to 16.5% and are recorded as net royalty revenue.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income tax expense for the years ended December&nbsp;31, 2004, 2003 and 2002 differed from the
amounts computed by applying the U.S. federal income tax rate of 34&nbsp;percent to loss before income
taxes primarily due to the generation of additional net operating loss carry forwards for which no
tax benefit has been provided.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets at December&nbsp;31, 2004 is composed primarily of the net loss carry forwards. The
net change in the total valuation allowance for the year ended December&nbsp;31, 2004 was insignificant.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable losses, management believes it is more likely than not
the Company will not realize the benefits of these deductible differences and has established a
valuation allowance to fully reserve the deferred tax assets at December&nbsp;31, 2004. Additionally,
the ultimate realizability of net operating losses may be limited by change of control provisions
under Section&nbsp;382 of the Internal Revenue Code.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At
December 31, 2004 and 2003, deferred income tax assets were primarily
composed of:

<P align="left" style="font-size: 10pt">Federal at 15% tax rate:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued Vacation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">(6,048</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">(4,338</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net
operating loss carryforward</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,550,763</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,533,605</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accum
Amortization &#038; depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,189</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;</TD>
    <TD align="right">5,831</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">State
deferred tax asset</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;</TD>
    <TD align="right">(62,021</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;</TD>
    <TD align="right">(92,751</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">R &#038; D
credit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">314,971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288,450</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign Tax
Credit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,838</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,838</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax Asset</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,839,692</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,766,635</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less:
Valuation Allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">(1,839,692</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">(1,766,635</TD>
    <TD nowrap>)</TD>

</TR>


<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net deferred
tax asset</DIV></TD>
    <TD>&nbsp;</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>

</TABLE>
</DIV>

<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 other 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 for all operating leases of approximately $52,000 through December, 2006. Rent expense
amounted to approximately $23,000, $ 83,000 and $78,000 for the years ended December&nbsp;31, 2004, 2003
and 2002, 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. The amount charged to
administrative expense for the Plan in 2004, 2003 and 2002 was approximately $2,000 per annum.


<P align="center" style="font-size: 10pt">37
</DIV>

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

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

<P align="left" style="font-size: 10pt"><B>(12)&nbsp;Quarterly Financial Data (unaudited)</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a summary of the quarterly results of operations for the years ended December
31, 2004 and 2003:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Quarter Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>June 30</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>September 30</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">170,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">234,860</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">205,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">495,060</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross Margin</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">153,675</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">216,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">179,210</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">444,916</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(123,796</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(123,259</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(80,576</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">170,141</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic (Loss) Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Quarter Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>June 30</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>September 30</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">332,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">250,902</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">341,339</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">344,667</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross Margin</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">296,436</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">228,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">306,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">315,836</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(74,449</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(212,461</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(106,502</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(102,041</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic (Loss) Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">38
</DIV>

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

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

<DIV align="left">
<A name="117"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;9. </B><B><I>Change in and Disagreements with Accountants on Accounting and Financial Disclosure</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.

<DIV align="left">
<A name="118"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;9A. </B><B><I>Controls and Procedures</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We carried out an evaluation of the effectiveness of our 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 our
disclosure controls and procedures as of the end of the period covered by this report 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 our internal control over financial reporting that occurred during the
quarter ended December&nbsp;31, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

<DIV align="left">
<A name="119"></A>
</DIV>

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


<DIV align="left">
<A name="120"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;10. </B><B><I>Directors and Executive Officers of the Registrant</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information required for this item incorporated by reference to our Proxy Statement for the
2004 Annual Meeting of Stockholders.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Code of Ethics</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We adopted a Code of Ethics that applies to all of our directors, officers and employees,
including our Chief Executive Officer, our Chief Financial Officer and other senior financial
officers. The Company will provide a copy of our code of ethics to any person, free of charge,
upon written request sent to our principal executive office at 2625 Townsgate Road, Suite&nbsp;330,
Westlake Village, California 91361.

<DIV align="left">
<A name="121"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;11. </B><B><I>Executive Compensation</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information required for this item incorporated by reference to our Proxy Statement for the
2004 Annual Meeting of Stockholders.

<DIV align="left">
<A name="122"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;12. </B><B><I>Security Ownership of Certain Beneficial Owners and Management</I></B>



<P align="center" style="font-size: 10pt"><B>Equity Compensation Plan Information</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <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="center" colspan="2"><B>Number of securities</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of securities</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>remaining available for</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>to be issued</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted-average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>future issuance under</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>upon exercise of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>exercise price of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>equity compensation plans</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>outstanding options,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>outstanding options,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(excluding securities</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Plan category</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>warrants and rights</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>warrants and rights</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>reflected in column (a))</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(a)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(b)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(c)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity
compensation plans
approved by security
holders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2,635,000 </TD>
    <TD nowrap>(1)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">0.12 </TD>
    <TD nowrap>(1)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,062,536</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity compensation
plans not approved by
security holders.</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,635,000</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">2,062,536</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">39
</DIV>

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

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



<P>
<HR size="1" width="18%" align="left" noshade color="#000000">

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

<TR valign="top">
    <TD width="1%" nowrap align="left">(1)</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%">Represents options to acquire the Company&#146;s Common Stock under the Company&#146;s 1995 Stock
Option Plan and 1996 Incentive Plan approved by the Company&#146;s stockholders in 1995 and 1996,
respectively. The 1995 Plan authorizes grants of options to purchase authorized but unissued
common stock in an amount of up to 10% of total common shares outstanding at each calendar
quarter or 4,697,536 as at December&nbsp;31, 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 as determined by the committee on date of grant.
The 1996 Plan supplements the 1995 Plan by allowing for stock appreciation, incentive shares
and similar accruals aggregating not more than the equivalent of 500,000 shares and the
regrant of any Performance Shares that become available for regrant. See Note 2.</TD>
</TR>

</TABLE>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The remaining information is required for this item is incorporated by reference to our Proxy
Statement for the 2005 Annual Meeting of Stockholders.

<DIV align="left">
<A name="123"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;13. </B><B><I>Certain Relationships and Related Transactions</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information required for this item incorporated by reference to our Proxy Statement for the
2005 Annual Meeting of Stockholders.

<DIV align="left">
<A name="124"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;14. </B><B><I>Principal Accounting Fees and Services</I></B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information required for this item incorporated by reference to our Proxy Statement for the
2005 Annual Meeting of Stockholders.

<DIV align="left">
<A name="125"></A>
</DIV>

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


<DIV align="left">
<A name="126"></A>
</DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;15. </B><B><I>Exhibits, Financial Statement Schedules and Reports on Form&nbsp;8-K</I></B>



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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;8.


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


<P align="center" style="font-size: 10pt">40
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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;The following Exhibits are filed as part of, or incorporated by reference into, this Report:

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="94%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Description</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.1*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Arrangement Agreement dated as of March&nbsp;4, 1994 among Spatializer-Yukon, DPI and
Spatializer-Delaware (Incorporated by reference to the Company&#146;s Registration Statement on Form
S-1,Registration No 33-90532, effective August&nbsp;21, 1995.)</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">3.1*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Incorporation of
Spatializer-Delaware as filed February&nbsp;28, 1994. (Incorporated
by reference to the Company&#146;sRegistration Statement on Form&nbsp;S-1, Registration No.
33-90532,effective August&nbsp;21, 1995.)</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">3.2*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Amended and Restated Bylaws of
Spatializer-Delaware. (Incorporated by reference to the Company&#146;s
Registration Statement on Form&nbsp;S-1,Registration No.&nbsp;33-90532, effective August&nbsp;21, 1995.)</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">3.3*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Designation of
Series&nbsp;B 10% Redeemable Convertible Preferred Stock of the Company
as filed December&nbsp;27, 1999(Incorporated by reference to the Company&#146;s Annual Report on
Form10-K, for the period ended December&nbsp;31, 1999.)</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">3.4*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Amendment of Certificate of Incorporation of the Company as filed on February
25, 2000 (Incorporated by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for the period
ended December&nbsp;31, 1999.)</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">3.5*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Designation of Series&nbsp;B-1 Redeemable Convertible Preferred Stock as filed
December&nbsp;20, 2002 (Incorporated by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for
the period ended December&nbsp;31, 2002.)</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">3.6*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Elimination of Series&nbsp;A Preferred Stock as filed December&nbsp;26, 2002 (Incorporated
by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for the period ended December
31,2002.)</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">3.7*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Elimination of Series&nbsp;B Preferred Stock as filed December&nbsp;26,2002 (Incorporated
by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for the period ended December
31,2002.)</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">4.1*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Performance Share Escrow Agreements dated June&nbsp;22, 1992 among Montreal Trust Company of Canada,
Spatializer-Yukon and certain shareholders with respect to escrow of 2,181,048 common shares of
Spatializer-Yukon. (Incorporated by reference to the Company&#146;s Registration Statement on Form
S-1, Registration No.&nbsp;33-90532,effective August&nbsp;21, 1995.)</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">4.2*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Modification Agreement for Escrowed Performance Shares. (Incorporated by reference to the
Company&#146;s Definitive Proxy Statement dated June&nbsp;28, 1996 and previously filed with the
Commission.)</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">4.3*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Exchange Agreement effective December&nbsp;26, 2002 entered into by holders of Series&nbsp;B
Preferred Stock in connection with exchange of same for Series&nbsp;B-1 Preferred Stock
(Incorporated by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for the period ended
December&nbsp;31, 2002.)</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">10.1*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Spatializer-Delaware Incentive Stock Option Plan (1995 Plan). (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August
21,1995.)</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">10.2*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Spatializer-Delaware 1996 Incentive Plan. (Incorporated by reference to the Company&#146;s Proxy
Statement dated June&nbsp;25, 1996 and previously filed with the Commission.)</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">10.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Stock Option Agreement</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">41
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">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="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="94%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Description</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">10.4*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">License Agreement dated June&nbsp;29, 1994 between DPI and MEC. (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532, effective August
21,1995.)</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">10.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated November&nbsp;12, 2004, between the Company and Henry Mandell, as amended.</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">10.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Related Party Promissory Note to the Successor Trustee of the Ira A. Desper Marital Trust dated
November&nbsp;1, 2003.</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">10.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lease for Office and Research Center in San Jose, CA.</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">10.8
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">License Agreement between Spatializer Audio Laboratories, Inc., Desper Products, Inc. and
Samsung Electronics, effective August&nbsp;22, 2004. (Incorporated by reference to the Company&#146;s
Quarterly Report on Form&nbsp;10-Q for the period ended September&nbsp;30, 2004.)</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">21.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Subsidiaries of the Company</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">23.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Independent Auditors</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">31.1
</DIV></TD>
    <TD>&nbsp;</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>&nbsp;</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>&nbsp;</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 (Certification will not be deemed &#147;filed&#148; for purposes of
Section 18 of the Securities Exchange Act of 1934)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P>
<HR size="1" width="18%" align="left" noshade color="#000000">

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

<TR valign="top">
    <TD width="1%" nowrap align="left">*</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="96%">Previously filed.</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">42
</DIV>

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





<DIV align="left">
<A name="127"></A>
</DIV>

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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="2%">&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">Dated: March&nbsp;22, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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">SPATIALIZER AUDIO LABORATORIES, INC.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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">(Registrant)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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">/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">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"><I>Chief Executive Officer &#038; Chief Financial Officer</I></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="30%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Signature</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Title</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Date</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">/s/ Carlo Civelli
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March&nbsp;22, 2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Carlo Civelli</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">/s/ James D. Pace
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March&nbsp;22, 2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">James D. Pace</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">/s/ Gilbert N. Segel
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March&nbsp;22, 2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Gilbert N. Segel</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">/s/ Henry R. Mandell
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March&nbsp;22, 2005</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Henry R. Mandell</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
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</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">43
</DIV>

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<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>2
<FILENAME>v07167exv10w3.htm
<DESCRIPTION>EXHIBIT 10.3
<TEXT>
<HTML>
<HEAD>
<TITLE>exv10w3</TITLE>
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<DIV style="font-family: 'Times New Roman',Times,serif">



<P align="right" style="font-size: 10pt">EXHIBIT 10.3



<P align="center" style="font-size: 12pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
INCENTIVE STOCK OPTION AGREEMENT</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THIS INCENTIVE STOCK OPTION AGREEMENT (the &#147;Agreement) is dated for reference as set
forth on the signature page hereof and is between SPATIALIZER AUDIO LABORATORIES, INC. (the
&#147;Company&#148;), and the person hereafter identified (the &#147;Optionee&#148;), with respect to an option (the
&#147;Option&#148;) to purchase that number of common shares in the capital of the Company (the &#147;Shares&#148;)
hereafter stated at an exercise price per share as hereafter stated.


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


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;The Company desires to grant an Option to the Optionee to purchase Shares as an incentive
for Optionee&#146;s continued performance as a director, officer or employee of the Company or its
subsidiaries.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;The Board of Directors of the Company or an authorized committee thereof has authorized the
grant of an Option to the Optionee to purchase the number of Shares hereafter set forth (the
&#147;Optioned Shares&#148;) at the exercise price hereafter set forth (the &#147;Exercise Price&#148;).


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOW THEREFORE in consideration of the premises and of the covenants and conditions hereinafter
set forth, the parties hereto agree as follows:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;<U>Grant of Option</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company hereby grants an Option, upon the terms and conditions set forth herein, as
follows:


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


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


<P align="left" style="font-size: 10pt">2.&nbsp;<U>Effectiveness</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This grant shall be effective as of <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>. Such effective date is hereafter
referred to as the &#147;Date of Grant.&#148;


<P align="center" style="font-size: 10pt">&nbsp;
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;<U>Exercise Price</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;$<U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>per share


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;<U>Exercise</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Option to purchase up to <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>shares shall vest as follows:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any Option granted under the Plan may be exercised by the Optionee or, if applicable, the
legal representatives of an Optionee, giving notice to the Company specifying the number of Shares
in respect of which such Option is being exercised and accompanied by payment (by cash or certified
check payable to the Company) in an amount equal to the number of Shares in respect of which the
Option is being exercised multiplied by the Exercise Price specified in this Agreement. Upon any
such exercise of an Option the Company shall cause the transfer agent and registrar of Shares of
the Company to promptly deliver to such Optionee or the legal representative of such Optionee, as
the case may be, a Share Certificate in the name of such Optionee or the legal representative of
such Optionee, as the case may be, representing the number of Shares specified in the notice.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;<U>Option Not Transferable</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Option is not transferable or assignable except by will or by the laws of descent and
distribution.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.&nbsp;<U>Investment Intent and Restrictions on Resale</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company may require, as a condition of exercising the Option, that the Optionee execute an
undertaking in a form acceptable to the Company, that the Shares are being purchased as an
investment and not with a view to distribution. The Optionee:



<P align="left" style="margin-left:3%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. agrees not to offer or sell or otherwise dispose of the Shares unless the Shares are
subsequently registered under the United States Securities Act of 1933, as amended, or an
exemption from registration is available;



<P align="left" style="margin-left:3%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. consents to the placing of a restrictive legend on any share certificates issued to
the Optionee should such be necessary in order to comply with securities laws applicable to
the Company; and



<P align="left" style="margin-left:3%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c. acknowledges that securities laws applicable to the Company may require the Optionee
to hold any Shares issued to Optionee for a certain period prior to resale


<P align="center" style="font-size: 10pt">2
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">thereof.

<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.&nbsp;<U>Termination of Options</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Option shall terminate, to the extent not previously exercised, upon the occurrence of the
first of the following events:



<P align="left" style="margin-left:4%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. Five years after the Date of Grant.



<P align="left" style="margin-left:4%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. Thirty (30)&nbsp;days after the Optionee&#146;s cessation to act as a director, officer or
employee of the Company or any of its subsidiaries for any reason (other than death);



<P align="left" style="margin-left:4%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c. One year after the Optionee&#146;s death; in such event, the Option may be exercised
within such one year period by the person to whom the Optionee&#146;s rights under the Option
shall pass by the Optionee&#146;s will or by the laws of descent and distribution to the extent
that the Optionee was entitled to exercise the Option at his death.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.&nbsp;<U>Representations of Optionee</U>



<P align="left" style="margin-left:3%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Optionee hereby confirms and represents that:



<P align="left" style="margin-left:3%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. Optionee is a director, officer or employee of the Company or a subsidiary of the
Company at the date hereof; and


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.&nbsp;<U>Adjustments in Shares</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Option confers upon the Optionee the option to purchase Shares in the capital of the
Company as constituted at the date hereof. If, prior to the exercise of the Option, at any time or
from time to time, there shall be any reorganization of the capital stock of the Company, by way of
consolidation, subdivision, merger, amalgamation or otherwise, or the payment of any stock
dividends, then there shall automatically be an adjustment in either or both of the number of
Shares of the Company which may be purchased pursuant hereto or the price at which such Shares may
be purchased, by corresponding amounts, so that the Optionee&#146;s rights hereunder shall thereafter be
as reasonably as possible equivalent to the rights originally granted to the Optionee by the
Option.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10.&nbsp;<U>Professional Advice</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The acceptance and exercise of the Option and the issuance of Optioned Shares may have
consequences under federal, provincial and state tax and securities laws which may vary depending
on the individual circumstances of the Optionee. Accordingly, the Optionee


<P align="center" style="font-size: 10pt">3
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<DIV style="font-family: 'Times New Roman',Times,serif">
<P align="left" style="font-size: 10pt">acknowledges that he
has been advised to consult his personal legal and tax advisor in connection with this Agreement
and his dealings with respect to the Option or the Optioned Shares.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.&nbsp;<U>Regulatory Approvals</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Option shall be subject to any necessary approval of and acceptance by the Vancouver Stock
Exchange and any other regulatory authority having jurisdiction over the securities of the Company.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12.&nbsp;<U>Shareholder&#146;s Approvals</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the approval of the shareholders of the Company to the Option or any amendment of this
Agreement shall be required by the prevailing policies of the regulatory bodies having jurisdiction
over the securities of the Company, then the Option or any amendment made to this Agreement, as the
case may be, shall be subject to the approval of the shareholders of the Company.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13.&nbsp;<U>Tax Treatment</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Optionee acknowledges that the tax treatment of this option, Shares subject to this option or
any events or transactions with respect thereto may be dependent upon various factors or events
which are not determined by this agreement. Company makes no representations with respect to and
hereby disclaims all responsibility as to such tax treatment.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14.&nbsp;<U>Withholding Tax</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the exercise of any rights granted in this agreement or the disposition of shares following
exercise of such rights results in Optionee&#146;s realization of income which for U.S or Canadian
income tax purposes is, in the opinion of Company, subject to withholding of tax, Optionee will pay
to Company, if and when requested by Company, an amount equal to such withholding tax (or Company
may withhold such amount from Optionee&#146;s salary) prior to delivery of certificates evidencing the
shares purchased.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;15.&nbsp;<U>Entire Agreement</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Agreement supersedes all prior and contemporaneous oral and written statements and
representations and contains the entire agreement between the parties with respect to this Option.


<P align="center" style="font-size: 10pt">4
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;16.&nbsp;<U>Governing Law</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Agreement shall be construed and enforced in accordance with the laws of the
State of California.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;17.&nbsp;<U>Notices</U>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any notice to be given hereunder shall be deemed to have been well and sufficiently given if
mailed by prepaid registered or certified mail or delivered to the parties at the addresses
specified herein or at such other address as each party may from time to time direct in writing.
Any such notice shall be deemed to have been received if mailed, seven days after the time of
mailing and if delivered, upon delivery. If normal mail service is interrupted by a mail dispute,
slowdown, strike, force majeure, or other cause, notice sent by mail shall not be deemed to be
received until actually received, and the party giving such notice shall use such other service as
may be available to ensure prompt delivery or shall deliver such notice. The addresses of the
parties are as follows:

<DIV align="center">
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    <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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U>Company</U>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><U>Optionee</U></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">2025 Gateway Place, Suite&nbsp;365</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">San Jose, CA 95110</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">(408) 453-4180 (Voice)</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">(408) 437-5787 (Fax)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
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<P align="left" style="font-size: 10pt">IN WITNESS WHEREOF the parties have executed these presents as of the day and year set forth
hereafter.



<P align="left" style="font-size: 10pt">Dated: <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>


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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><U>Company</U>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><U>Optionee</U></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">By:<U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U></TD>
</TR>
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<TYPE>EX-10.5
<SEQUENCE>3
<FILENAME>v07167exv10w5.htm
<DESCRIPTION>EXHIBIT 10.5
<TEXT>
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<P align="right" style="font-size: 10pt">EXHIBIT 10.5

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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This
Employment Agreement (this &#147;Agreement&#148;) sets out the terms and conditions of your
employment by Spatializer Audio Laboratories, Inc., a Delaware corporation (the &#147;Company&#148;).


<P align="left" style="font-size: 10pt"><B>1. Period of Employment.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;Your employment by the Company under the terms of this Agreement is effective as
of November&nbsp;12, 1999 (the &#147;Commencement Date&#148;). Your employment will continue under the
terms of this Agreement for a period of three years (3)&nbsp;years (the &#147;Initial Term&#148;) from the
Commencement Date, and shall be automatically renewed thereafter for additional one year
periods
(&#147;Successive Terms&#148;), until terminated in accordance with the terms of this Agreement or
until you
are notified that the Agreement will not be automatically renewed. Such notification is to be
provided to you no less than 6&nbsp;months before the commencement of a Successive Term and if you
elect to terminate your employment during the Initial Term or any Successive Term, you shall
provide the Company with notice pursuant to Section&nbsp;8(A)(1).


<P align="left" style="font-size: 10pt"><B>2. Job Description.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;You are to be employed as the Company&#146;s Chief Executive Officer (&#147;CEO&#148;) and you
shall continue to be employed as the Company&#146;s Chief Financial Officer (&#147;CFO&#148;). As CEO, you
shall be responsible for the general and active supervision and management over the business
of the
Company and over its officers, assistants, agents and employees. In your capacity as CFO, you
shall
have the general care and custody of the funds and securities of the Company, the bank and
trust
accounts of the Company and you shall exercise general supervision over expenditures and
disbursements made by Company as well as the Company&#146;s preparation of financial records and
reports in connection therewith as may be necessary. If requested by the Board of Directors of
the
Company (the &#147;Board&#148;), your duties shall include performing services on behalf of the Company
or to affiliates of the Company and in that regard, you agree to serve as the President and
Treasurer
of Desper Products, Inc (&#147;DPI&#148;). Finally, you agree to serve as a Director of DPI when so
elected
by the Company as sole shareholder of DPI. You shall devote your full professional time and
energy, attention, skills and ability to the performance of your duties during your employment
and
shall faithfully and diligently endeavor to promote the business and best interests of the
Company.
You shall make available to the Board and the officers of the Company all knowledge possessed
by you relating to any aspect of your duties and responsibilities hereunder. You agree that
during
your employment with the Company, you will not render or perform services for any other
corporation, entity, person or firm actively involved with the Industry without the prior
written
consent of the Board. For purposes of this Agreement, the term the &#147;Industry&#148; shall consist of
firms
engaged in the development, licensing and marketing of digital audio signal processing
technologies
for the consumer electronics, personal computing, enterprise computing and entertainment
industries,
or those activities of a kind with which you were concerned or involved in the term of this
Agreement. You hereby agree to appear and actively participate on behalf of the Company in the
Industry and in the general promotion of its business.


<P align="center" style="font-size: 10pt">1
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;You further agree, during the course of your employment under this Agreement, to
conduct yourself and all business on behalf of the Company in a manner intended to be in full
compliance with all laws applicable to the duties undertaken by you during this Agreement.


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;<U>Salary</U>. As compensation for the performance by you of your obligations hereunder,
and provided that you satisfactorily perform your obligations hereunder, you will receive an
annual
salary of two hundred thousand dollars ($200,000) on the normal payroll schedule followed by
the
Company. On each anniversary of the Commencement Date, you will be eligible for a salary
increase as approved by the Compensation Committee.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;<U>Performance
Shares</U>. In addition to your salary, as set forth above, as
November
12, 1999, those 168,628 performance shares held by the Company&#146;s former CEO, Stephen D.
Gershick directly, and those 674,516 performance shares held in escrow for him shall be
transferred
directly to you, to be released in accordance with the terms of that Escrow Agreement dated
June
22, 1992. as amended (the &#147;Escrow Agreement&#148;). Other than due to your voluntary termination
pursuant to Section&nbsp;8(A)(1) or 8(B) or termination for Cause as defined in Section&nbsp;8(A)(2),
the
Company will continue to distribute these performance shares to you under the schedule in the
Escrow Agreement. If you complete the Initial Term of this Agreement, in all events, all
remaining
performance shares will be distributed to you in accordance with the schedule in the Escrow
Agreement.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C.&nbsp;<U>Stock
Options</U>. Of the previously issued 500,000 options to acquire Company
common stock, par value $.01 (&#147;Common Stock&#148;) held by you, all 500,000 of such options shall
be
treated as having been fully vested at November&nbsp;12,1999 and shall be immediately exercisable
by
you from that date. Additionally, as November&nbsp;12, 1999, you shall be granted options
to acquire
an additional 750,000 options to acquire Common Stock, of which 250,000 shares shall be
exercisable at $.50 and immediately vested; 250,000 shares shall be exercisable at $.55 and
will vest
on November&nbsp;12, 2000; and 250,000 shares shall be exercisable at $.75 and will vest on November
12, 2001.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D.&nbsp;<U>Annual
Bonus</U>. You shall be entitled to receive, in addition to your annual
compensation set forth above, a bonus equal to 5% of the Company&#146;s income after taxes each
year,
provided however, that in no case shall your bonus exceed $100,000 in any given year.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E.&nbsp;<U>Other Benefits</U>:


<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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">(1)&nbsp;&nbsp;</TD>
    <TD>During the term of this Agreement, you will be entitled, at
Company expense,
to such medical, disability, accident, life or other insurance or welfare
plans,
programs or arrangements as may be offered generally to the employees of
the Company.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">(2)&nbsp;&nbsp;</TD>
    <TD>The Company shall pay or reimburse you for all reasonable
and necessary
business expenses incurred by you which relate to the business of the
Company, as approved by the Board, with such payments or reimbursements</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">2
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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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>to be made monthly on the first scheduled payroll period in the month
following that month in which such expenses were incurred, and upon
presentation of receipts or other evidence of such expenses. These expenses
include, but are not limited to the necessary reasonable and customary
expenses associated with your work at the Company&#146;s Santa Clara, California
office, including an apartment of reasonable nature in the Santa Clara
area,
automobile use in the Santa Clara area, round-trip airfare and airport car
service to and from the Santa Clara area and meals while working in the
Santa Clara area.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">(3)&nbsp;&nbsp;</TD>
    <TD>A monthly automobile allowance of nine hundred ($900) dollars.</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F.&nbsp;The compensation provided to you pursuant to this Agreement shall be subject to any
required federal, state, local and other governmental withholdings or other deductions that
may be
required from time to time under applicable tax laws.


<P align="left" style="font-size: 10pt"><B>4. Place of Work. </B>Your principle place of work shall be at the Company&#146;s business offices
located at 20700 Ventura Boulevard, Suite&nbsp;140, in Woodland Hills, California. You also agree to
be available to travel and to work from time to time in such other places as may be requested by
the
Company for the reasonable performance of your duties. You have agreed that you will be available
to work from the Company&#146;s Santa Clara, California office on average of four (4)&nbsp;days per week but
this commitment shall not apply in the event of any Change of Control (as defined below) and shall
not, in any event, require you to relocate your principal residence to the Santa Clara, California
area.



<P align="left" style="font-size: 10pt"><B>5. Authorizations. </B>You agree to provide to the Company, as a condition precedent to your
employment under this Agreement, all legally required proof of your authorization to work in the
United States. You further agree to allow the Company to use your name, biography and likeness
in connection with information that may be disseminated concerning the Company. You hereby
warrant and represent that there are no existing or proposed agreements to which you are a party
that
may adversely affect your ability to your duties under this Agreement.



<P align="left" style="font-size: 10pt"><B>6. Vacations and Holidays.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;You will be entitled to take as vacation time all official Company holidays each year,
as offered to all Company employees. You will also be entitled to three weeks of paid vacation
each year.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;Holiday and vacation days accrued may be carried over from one year to the next as
outlined in the Company&#146;s employment manual or unless otherwise agreed in advance by the
Board.
Unused holiday days may be reimbursed to you as hours worked at your normal basic salary rate
at the sole discretion of the Board.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C.&nbsp;If you leave the Company before taking vacation days due to you, you will receive
a pro-rata payment of your salary in respect to those vacation days you have not used during
the
year, in accordance with the Company&#146;s policy then in effect for executive officers.


<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"><B>7. Sick Pay.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;The Company, subject to your compliance with the following procedures, will pay
you your salary in respect of periods of absence through illness or injury for up to 14&nbsp;days
absence
(in the aggregate) in any period of 12&nbsp;months, or until the Company&#146;s Short term Disability
Plan
begins payments. Unless otherwise required by law, sick leave is only to be used when, owing
to
health reasons, you are unable to work.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;Your unused sick leave is not carried forward from one year to the next and you will
not be paid for unused sick leave.


<P align="left" style="font-size: 10pt"><B>8. Termination.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;<U>Notice
of Termination</U>.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;If you desire to terminate your employment with the Company, you must give
the Company 30&nbsp;days prior written notice; provided however, that if a Change of Control (as
defined
below) or a change in you place of work, as set forth in Section&nbsp;4 above, is made, you may
choose
to terminate your employment by providing 10&nbsp;days prior written notice to the Company. A
&#147;Change of Control&#148; shall mean if and when (i)&nbsp;any person, as that term is used in Section
13(d) and
14(d)(2) of the Securities Exchange Act of 1934 (the &#147;Exchange Act&#148;), becomes or is discovered
to
be a beneficial owner (as defined in Rule&nbsp;13d-3 under the Exchange Act as in effect on the
date
hereof) directly or indirectly of securities of the Company representing 20% or more of the
combined
voting power of the Company&#146;s then outstanding securities (unless such person is known by you
to
already be a beneficial owner on the date of this Agreement); and (ii)&nbsp;the individuals who, as
of the
date hereof, constitute the Board of Directors of the Company cease for any reason to
constitute at
least a majority of the Board of Directors of the Company, unless such change is approved
unanimously by the Board of Directors in office immediately prior to such cessation.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;Except in the case of termination for &#147;Cause&#148; (as defined below), if the
Company desires to terminate your employment, for any reason, the Company must give you 30
days written notice. Termination not for &#147;Cause&#148; is subject to the conditions set forth in
Section&nbsp;8(C)(2) below.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3)&nbsp;Any salary paid or owing to you from the Company upon termination shall
be subject to any deductions for:


<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="6%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">i.&nbsp;&nbsp;</TD>
    <TD>Social Security, disability, unemployment or other
taxes customarily
paid by an employer and employee;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">ii.&nbsp;&nbsp;</TD>
    <TD>for any deductions in respect of any indebtedness
that you may have
to the Company; and</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">iii.&nbsp;&nbsp;</TD>
    <TD>for any obligations the Company may have to any
third party on your
behalf.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">4
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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">



</TABLE>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(4)&nbsp;The Company may, in its sole discretion, choose to pay your salary for
the
duration of the notice period set forth in Section&nbsp;8(A)(3) in lieu of
providing notice above or
following such notice of termination of employment, require you to carry
out none or only some of
your duties at or away from the Company offices.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;For purposes of this Agreement, the following events shall constitute &#147;Termination
Events&#148;:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;Any termination of which notice is given under Section&nbsp;8(A) above;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;Termination of this Agreement by the Company for &#147;Cause.&#148; For purposes
of this Agreement, the term &#147;Cause,&#148; when used in connection with the termination of this
Agreement by the Company shall mean, and shall be limited to: (a)&nbsp;your commission of a felony;
(b)&nbsp;your failure to act on behalf of the Company in its business or in the Industry in breach
of this
Agreement; (c)&nbsp;your participation actively in a Restricted Business in violation of Section&nbsp;11
hereof,
without the Board&#146;s prior written consent; provided that the Company shall provide to you
written
notice of its belief that you are in breach pursuant to this section and that you shall have a
period of
30&nbsp;days from the date you receive such written notice of such event or breach to cure such
event or
breach. In the event of any termination for &#147;Cause&#148; the Company shall be entitled to
immediately
Terminate your employment with the Company; or


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3)&nbsp;Your failure to substantially perform the duties required of you hereunder for
a period of 30 consecutive days or for shorter periods aggregating 30&nbsp;days in any 6&nbsp;month
period on
account of a physical or mental disability or incapacity, as verified by a written statement
from a
physician mutually agreeable to you and the Company or your death.
<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. Upon the occurrence of a Termination Event, you shall be entitled to the following
payments from the Company:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;<U>Payments in the Event of a Voluntary Termination or a Termination for
Cause</U>: Upon the termination of your employment as a result of a voluntary termination by you
pursuant to Section&nbsp;8(A)(1) or a termination for Cause by the Company, you shall be entitled
to any
Base Salary and accrued vacation pay if any, due and owing at the date of such termination,
but not
yet paid. You shall not be entitled to any other compensation or payments hereunder after the
date
of, or otherwise with respect to, such termination of your employment.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;<U>Payments
Upon Termination not for Cause. Non-Renewal of Employment. Change of Control of the Company or Place of Work:</U> Upon the termination of your
employment
not for Cause (including on account of your disability or death) or due to a Change in Control
or a
change in your place of work as set forth in Section&nbsp;4 above, you shall be entitled to six
months full
salary and any accrued vacation, plus one year of Company medical and health benefits.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3)&nbsp;<U>Timing of Payments:</U> If you comply with the requirements of Section&nbsp;13, the
Company will pay all amounts payable to you under Section&nbsp;8(D) no later than fifteen (15)
business
days after the Termination Event, and shall be paid in legal tender into such bank account as
you (or


<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">your legal representative) may designate; provided that the Company shall be entitled to
withhold
any amounts payable to you until you have fully complied with
Section&nbsp;13.



<P align="left" style="font-size: 10pt"><B>9. Confidentiality.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;You acknowledge that you may acquire the trade secrets and confidential information
of the Company (&#147;Confidential Information&#148;) during the course of your employment and that the
unauthorized disclosure of any such Confidential Information could cause serious harm and
damage
to the Company.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;For the purpose of avoiding such harm you agree that you must not make use of,
divulge or communicate to any person (other than with proper authority) any Confidential
Information of or relating to the Company or any of its customers or suppliers or any holding
company or subsidiary of the Company including (but not limited to) such Confidential
Information
as: details of customers, potential customers, consultants, suppliers and potential suppliers,
product
details, prices, financial and accounting information, financial statements, discounts,
specific product
applications, product designs, product plans, manufacturing processes, computer programs,
algorithms, future product developments, research reports, marketing plans, existing trade
arrangements or terms of business, which you may receive or become aware of as a result of
being
in the employment of the Company. This obligation of confidentiality towards such Confidential
Information shall continue to apply without limit in time after the termination (for whatever
reason)
of your employment but it shall not apply to information which is or is already disclosed into
the
public domain for reasons other than your fault or is required to be disclosed by law, but
only to the
extent that it is so disclosed.


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;Any proprietary rights whatsoever, including without limitation patents, copyrights
and design rights, as a result of the development of, and the application of, all work
produced by you
during your employment under this Agreement, including (but not limited to) any invention,
design,
discovery or improvement, secret process, computer program, documentation, confidential
information, copyright work or other material which you conceive, discover or create during or
in
consequence of your employment with the Company shall belong to the Company (&#147;Proprietary
Property&#148;). You must promptly communicate to the Company all information concerning such
Proprietary Property and if requested provide all such assistance at the Company&#146;s expense as
is
necessary to secure the vesting of all rights to such Proprietary Property in the Company.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;You
hereby irrevocably appoint the Company as your attorney-in-fact with full power
in your name to execute and sign any document and do any other thing which the Company may
consider to be desirable for the purposes of giving effect to this Section&nbsp;10 and agree to
notify and
confirm whatever the Company may lawfully do as your attorney-in-fact.


<P align="left" style="font-size: 10pt"><B>11. Non-Solicitation.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;You shall not during employment, or for a period of 12&nbsp;months after the
Termination
Date, either personally or by an agent and either on his own account or for
or in association with any


<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">other person directly or indirectly solicit, endeavor to entice away, induce to break their
contract of
employment or offer employment to any Restricted Person.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;For the purposes of this section the following words have the following
meanings:


<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%" style="background: transparent">&nbsp;</TD>

<TD width="98%" colspan="2" align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;i.&nbsp;&nbsp;
&#147;Restricted Business&#148; means any business in the Industry.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="98%" colspan="2" align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ii.&nbsp;&nbsp;
&#147;Restricted Person&#148; means any person who has at any time in the period of
twelve months prior to the Termination Date been employed by the Company or who is a
consultant to the Company, who works in the Restricted Business and who was known to or
worked with you during that period.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="98%" colspan="2" align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;iii.&nbsp;&nbsp;
&#147;Termination Date&#148; means the date on which your employment under this
Agreement terminates.</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt"><B>12. Non-Interference with Suppliers. </B>You shall not for a period of 12&nbsp;months after the
Termination Date either personally or by an agent and either on your own account or for or in
association with any other person directly or indirectly interfere or seek to interfere or take
such steps
as may be likely to interfere with the continuance of supplies to the Company in respect of the
Restricted Business and the Industry (or the terms relating to such supplies) from any supplier or
seek to damage the relationship between any supplier and the Company who has supplied goods or
services to the Company in the 12&nbsp;month period immediately prior to the Termination Date.



<P align="left" style="font-size: 10pt"><B>13. Return of Documents, Materials and Equipment. </B>You shall within 72 hours of a
Termination Date, deliver to the Company, at the Company&#146;s expense, and at any other time as the
Company may request, all equipment owned or leased by the Company for your office use, and all
documents, financial records, technology, software, source codes, object codes, hardware (and all
copies thereof), all products, product samples, product designs or
proto-types, or other items
relating
to the business of the Company, in whatever medium, that you possess or have under your control.
For purposes hereof, any equipment, supplies or materials for which you received reimbursement
from the Company shall be presumed to be owned by the Company.



<P align="left" style="font-size: 10pt"><B>14. Indemnification.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;You hereby agree to indemnify, defend and hold harmless the Company, and each
of its officers, directors, shareholders, agents, employees and attorneys for the Company,
their
successors and assigns, from and against, and pay or reimburse each of them for, any and all
claims,
losses, damages, judgments, amounts paid in settlement, costs and legal, accounting or other
expenses that any of them may sustain or incur as a result of any misrepresentation or any
non-performance of any covenant or other obligation on the part of you contained in this
Agreement.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;The Company agrees to indemnify, defend and hold harmless you from and against,
and pay or reimburse you for any and all claims, losses, damages, judgments, amounts paid in
settlement, costs and legal, accounting or other expenses that any of you may sustain or incur
as a
result of any misrepresentation or any non-performance of any covenant or other obligation on
the
part of the Company contained in this Agreement.


<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"><B>15. Entire Agreement. </B>This Agreement constitutes the entire Agreement of the parties relating
to the subject matter hereof. There are no terms, conditions or obligations other than those
contained
in this Agreement. This Agreement supersedes all prior communications, representations or
agreements between the parties relating to the subject matter hereof. This Agreement may not be
amended except in writing executed by you and the Company.



<P align="left" style="font-size: 10pt"><B>16. Separability of Provisions. </B>The invalidity or unenforceability of any particular provision
of this Agreement shall not effect the other provisions hereof; all of which shall remain
enforceable
in accordance with their terms. Should any of the obligations hereunder be found illegal or
unenforceable, such obligations shall be enforceable within whatever terms a court of competent
jurisdiction shall deem allowable by law.



<P align="left" style="font-size: 10pt"><B>17. Assignment. </B>You may not assign, sell, subcontract, delegate or otherwise transfer your
obligations under this Agreement, without the prior written consent of the Board, and any attempted
assignment or delegation shall be void and without effect.



<P align="left" style="font-size: 10pt"><B>18. Governing Law. </B>This Agreement shall be governed by and construed in accordance with
the laws of the Delaware for agreements wholly negotiated, entered into and performed within the
State of Delaware.



<P align="left" style="font-size: 10pt"><B>19. Injunctive Relief. </B>You hereby acknowledge that the Company and its affiliated companies
are new and evolving companies and that protection of Proprietary Property and Confidential
Information are important to future prospects for growth and business development of the Company.
You further acknowledge that the Company may not have an adequate remedy at law in the event
of any breach or threatened breach by you of any provision of Sections&nbsp;9,10,11,12 and 13, and that
the Company may suffer irreparable damage and injury as a result. Accordingly, in the event of any
such breach or threatened breach, you hereby consent to the
application the Company for injunctive
relief against you by any court of competent jurisdiction without the posting of any bond or
security
therefor.



<P align="left" style="font-size: 10pt"><B>20. Policies and procedures. </B>You further agree to abide by the Company&#146;s policies and
procedures and any changes that may be made to them from time to time.



<P align="left" style="font-size: 10pt"><B>21. Counterparts. </B>This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which, together, shall
constitute
One and the same instrument.



<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;<B>WHEREAS, </B>this Agreement is hereby entered to by the undersigned as of the date indicated
below.


<P align="left" style="font-size: 10pt">Dated:<U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="46%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">SPATIALIZER AUDIO LABORATORIES, 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>
    <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">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Stephen W. Desper</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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">Name:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"> Stephen W. Desper</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">Title:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director and designated signatory</TD>
</TR>
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</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">9
</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="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="25%">&nbsp;</TD>
    <TD width="75%">&nbsp;</TD>
</TR>
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<TR valign="bottom">
    <TD valign="top" nowrap><DIV style="margin-left:0px; text-indent:-0px"><B>AGREED AND ACCEPTED BY EMPLOYEE:</B></DIV></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px; border-bottom: 1px solid #000000">/s/
Henry R. Mandell</DIV></TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Henry R. Mandell</DIV></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<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"><B>SPATIALIZER AUDIO LABORATORIES, INC.</B>



<P align="center" style="font-size: 10pt">February&nbsp;5, 2002



<P align="left" style="font-size: 10pt">Henry R. Mandell<BR>
5192 Pesto Way<BR>
Agoura Hills, CA 91301


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This letter agreement amends certain terms of the Employment Agreement (the &#147;Agreement&#148;)
effective as of November&nbsp;12, 1999 between you and Spatializer Audio Laboratories, Inc. (the
&#147;Company&#148;) regarding: (i)&nbsp;your compensation and (ii)&nbsp;the terms of your severance in the event of
&#147;Change in Control&#148; pursuant to the Agreement. We are pleased that you will be continuing with the
Company for another year. For calendar year 2002, your base compensation will consist of a salary
of $214,200, a monthly car allowance of $1,250 and the other executive benefits consistent with the
Company&#146;s current arrangements with you. In addition, in accordance with our discussions, we have
agreed that the Agreement is hereby amended as follows:


<P align="left" style="font-size: 10pt">&#147;<U><B>Compensation</B></U>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;<U>Performance Shares</U>. Pursuant to Sections 3(b) of the Agreement, you were to be
issued Performance Shares in the Company which are subject to the terms of that certain Escrow
Agreement, dated as of June&nbsp;22, 1992, as amended, by and among the Company and the signatories
thereto.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
November&nbsp;2000, 168,632 performance shares were issued to you, but you declined to accept
these shares (the &#147;2000 Performance Shares&#148;) and, in lieu thereof, in 2001 you were granted options
to acquire 250,000 shares exercisable at $0.22 per share (&#147;2001 Options&#148;). In June of 2001,
252,944 of the 674,516 Performance Shares held in escrow for you (the &#147;2001 Performance Shares&#148;)
were released, but you declined to accept the 2001 Performance Shares and now wish to decline the
2001 Options.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In lieu of your decision to decline the 2001 Performance Shares and the 2001 Options, the
Company has agreed to release to you from escrow 425,000 performance shares, therefore:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3(b) of the Agreement is amended to read as follows:


<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">Henry R. Mandell<BR>
February&nbsp;5, 2002<BR>
Page 2


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;B. <U>Performance Shares</U>. In addition to your salary, as set forth above, we agree that
as of December&nbsp;20, 2001, 425,000 performance shares including performance shares released to you in
accordance with the terms of that Escrow Agreement dated June&nbsp;22, 1992, as amended (the &#147;Escrow
Agreement&#148;) and subsequently declined by you along with additional performance shares (previously
returned to escrow when the holders left the employ of the Company) shall be and hereby are
reallocated to your account as of January&nbsp;2, 2002 and held for you along with the 252,942
performance shares previously allocated to and held in escrow for you pursuant to this Agreement.
Other than due to your voluntary termination pursuant to Section&nbsp;8(A)(1) or 8(B) or termination for
Cause as defined in Section&nbsp;8(A)(2), the Company will continue to distribute these performance
shares to you under the schedule in the Escrow Agreement. If you complete the Initial Term of this
Agreement, in all events, all remaining performance shares will be distributed to you in accordance
with the schedule in the Escrow Agreement.&#148;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3(c) of the Agreement is amended to read as follows:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;C. <U>Stock Options</U>. Of the previously issued 500,000 options to acquire Company common
stock, par value $.01 (&#147;Common Stock&#148;) held by you, all 500,000 of such options were fully vested
at November&nbsp;12, 1999 and were immediately exercisable by you from that date, including options to
acquire 250,000 shares of Common Stock exercisable at $1.00. Additionally, as of November&nbsp;12,
1999, you were granted options to acquire an additional 750,000 options to acquire Common Stock, of
which 250,000 shares were exercisable at $.50 and immediately vested; 250,000 shares were
exercisable at $.55 and vested on November&nbsp;12, 2000; and the 250,000 shares vested on November&nbsp;12,
2001 and were exercisable at $.75. The options to acquire 250,000 shares of Common Stock at an
exercise price of $1.00 and options to acquire 250,000 shares of Common Stock at an exercise price
of $.75 are terminated as of November&nbsp;12, 2001. If you are an employee of the Company on the day
following the Company&#146;s 2002 Annual Shareholders Meeting, you will be granted on that date, in your
capacity as an employee, options to purchase 500,000 shares of Common Stock which shall be fully
vested and convertible at the Fair Market Value (as defined the Company&#146;s 1996 Incentive
Compensation Plan) of the Company&#146;s Common Stock as of the date of grant.


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;Section&nbsp;8(C)(2) of the Agreement, is hereby amended to read as follows:



<P align="left" style="margin-left:3%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;Upon the termination of your employment not for Cause (including on account of
your disability or death) a change in your


<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">Henry R. Mandell<BR>
February&nbsp;5, 2002<BR>
Page 3



<P align="left" style="margin-left:3%; font-size: 10pt">place of work as set forth in Section&nbsp;4 above, you shall be entitled to six
months full salary and any accrued vacation, plus one year of Company medical and
health benefits. Upon termination of your employment in the event of a Change in
Control, you shall be entitled to twelve months full salary, any accrued vacation
and medical and health benefits.&#148;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except as set forth herein, the Agreement shall remain in full force and effect and shall
otherwise be unaffected hereby. If the foregoing accurately and completely sets forth the terms and
understanding of our agreement, please indicate your acceptance by signing the enclosed copy of
this letter in the indicated space below.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="45%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Very truly yours,</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">SPATIALIZER AUDIO LABORATORIES, INC.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Gilbert N. Segel</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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">Gilbert N. Segel, for the Compensation</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">Committee</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="20%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top" style="border-bottom: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">/s/ Henry R. Mandell</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">Henry R. Mandell</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

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


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



<P align="center" style="font-size: 10pt">February&nbsp;21, 2005



<P align="left" style="font-size: 10pt">Henry R. Mandell<BR>
2025 Gateway Place, Suite&nbsp;365<BR>
San Jose, CA 95110


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



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This letter agreement, effective as of November&nbsp;12, 2004, amends the following terms of the
Employment Agreement (the &#147;Agreement&#148;) between you and Spatializer Audio Laboratories, Inc. (the
&#147;Company&#148;) effective as of November&nbsp;12, 1999, as amended on February&nbsp;2, 2002 and amended hereby:
(i)&nbsp;the extension of the term of the Agreement for an additional one-year period until November&nbsp;12,
2006 and (ii)&nbsp;the grant of stock options to replace stock options previously issued to you which
stock options have since expired unexercised. We are pleased that you will be continuing with the
Company for another year. Your base compensation, consisting of a salary of $214,200 and all other
executive benefits remain unchanged. In addition, in accordance with our discussions, we have
agreed that the Agreement is hereby amended as follows:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following sentence shall be added to Section&nbsp;3.C. of the Agreement:



<P align="left" style="margin-left:3%; font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;As of February&nbsp;21, 2005, you are hereby granted an option to purchase 500,000
shares of Common Stock at an exercise price of $0.10 per share. An option to
purchase 250,000 shares of Common Stock is immediately vested as of February&nbsp;21,
2005 and an option to purchase the remaining 250,000 shares of Common Stock shall
vest on November&nbsp;12, 2005 as long as you remain continuously employed by the Company
or a subsidiary until such time.&#148;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except as set forth herein, the Agreement shall remain in full force and effect and shall
otherwise be unaffected hereby. If the foregoing accurately and completely sets forth the terms and
understanding of our agreement, please indicate your acceptance by signing the enclosed copy of
this letter in the indicated space below.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="45%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Very truly yours,</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">SPATIALIZER AUDIO LABORATORIES, 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>
    <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">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Gilbert N. Segel</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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">Gilbert N. Segel, for the Compensation</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">Committee</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="20%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top" style="border-bottom: 1px solid #000000"><DIV style="margin-left:0px; text-indent:-0px">/s/ Henry R. Mandell</DIV></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Henry R. Mandell</DIV></TD>
    <TD>&nbsp;</TD>

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



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

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>4
<FILENAME>v07167exv10w6.htm
<DESCRIPTION>EXHIBIT 10.6
<TEXT>
<HTML>
<HEAD>
<TITLE>exv10w6</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="right" style="font-size: 10pt">EXHIBIT 10.6

<P><BR>
<P align="center" style="font-size: 10pt"><U>PROMISSORY NOTE</U>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">$112,500.00
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">November&nbsp;1,&nbsp;2003</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;FOR VALUE RECEIVED, the undersigned (the &#147;Maker&#148;) will pay to the order of the SUNTRUST BANK
NATURE COAST, AS SUCCESSOR TRUSTEE OF THE IRA A. DESPER MARITAL TRUST (hereinafter together with
any holder hereof, called &#147;Holder&#148;) at
P.O.&nbsp;Box&nbsp;1029, Crystal River, FL&nbsp;34423, or at such other
place as the Holder may from time to time designate in writing, the principal sum of One Hundred
Twelve Thousand Five Hundred and 00/100 Dollars ($112,500.00), together with interest at the rate
ten percent (10%) per annum on the unpaid principal balance from time to time outstanding, from the
date hereof, payable as follows:


<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="10%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>The first payment of $5,191.30 shall be due and payable on December&nbsp;1, 2003, and continuing on
the first day of each and every month thereafter until the entire balance of principal and interest
is paid in full.</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Note is, by mutual consent of the parties hereto, and for mutual considerations passing
to each party hereto, receipt of which is hereby acknowledged by all parties hereto, a replacement
of and in substitution of that certain obligation of maker hereof to Payee hereof in the principal
sum of $112,500.00 and as is more particularly described in LOST INSTRUMENT BOND #5927420 wherein
Sun Trust Bank is principal; Desper Products, Inc. and Spatializer Audio Laboratories, Inc. are
Obligees; and Safeco Insurance Company of America is Surety; such obligation being also described
in the Annual Report of Maker for the year 2002 as note
&#091;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#093; on page
&#091;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#093; thereof.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although Maker is executing this Note in California, this Note and its terms and provisions
are to be governed and construed by and in accordance with the laws of the State of Florida. The
Maker expressly consents to jurisdiction in Florida. Furthermore, exclusive venue for any dispute
shall lie solely in Pirrellas County, Florida.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Note may be prepaid in whole or in part at any time without payment of premium or
penalty. Any prepayments shall be applied to the last installments due hereunder.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Holder shall have the optional right to declare the amount of the total unpaid balance
hereof to be due and forthwith payable in advance of the maturity date, as fixed herein, upon the
Maker&#146;s failure to remit any monthly payment when due. Upon exercise of this option by the Holder,
the entire unpaid principal shall bear interest at the maximum contract rate permitted by law until
paid. Forbearance to exercise this option with respect to any failure or breach of the undersigned
shall not constitute a waiver of the right as to any continuing failure or breach or any subsequent
failure or breach.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Time is of the essence of this contract and, in the event of default, if this Note is collected
by law or through an attorney at law, or under advice therefrom the undersigned agrees to pay all
costs of collection, including reasonable attorneys&#146; fees. Such attorneys&#146;


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

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<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">fees and costs shall
include, but note be limited to, fees and costs incurred in all matters of collection and
enforcement, construction and interpretation, before, during and after suit, trial, proceedings and
appeals, as well as appearances in and connected with any bankruptcy proceedings or creditor&#146;s
reorganization or arrangement proceedings.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No act of omission or commission of the Holder, including specifically any failure to exercise
any right, remedy or recourse, shall be deemed to be a waiver or release of the same, such waiver
or release to be effected only through a written document executed by the Holder and then only to
the extent specifically recited therein. A waiver or release with reference to any one event shall
not be construed as continuing, as a bar to, or as a waiver or release of, any subsequent right,
remedy or recourse as to a subsequent event.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Maker, for itself, its legal representatives, successors and assigns, hereby: (a)&nbsp;for any
default due to Maker&#146;s failure to pay any amount due and owing under this Note, expressly waives
presentment, demand for payment, notice of dishonor, protest, notice of non-payment or protest, and
diligence in collection; (b)&nbsp;consents that the time of all payments or any part thereof may be
extended, rearranged, renewed or postponed by the Holder hereof; and (c)&nbsp;agrees that the Holder, in
order to enforce payment of this Note, shall not be required first to institute any suit or to
exhaust any of its remedies against the undersigned.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In this Note, whenever the context so requires, the neuter gender includes the feminine and/or
masculine, as the case may be, and the singular number includes the plural.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The undersigned is duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full power and authority to enter into this Note, and the undersigned
corporate officer has full power and authority to execute this Note on behalf of the undersigned.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The undersigned has executed this Note on the day and year first above written.


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">MAKER:<BR>
<BR>
<BR>
SPATIALIZER AUDIO LABORATORIES INC.<BR>
a Delaware Corporation<BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD valign="top">By:&nbsp;&nbsp;</TD>
    <TD colspan="2" style="border-bottom: 1px solid #000000" align="left">/s/ HENRY MANDELL
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
     <TD colspan="2" style="border-bottom: 1px solid #000000" align="left">Its:&nbsp;&nbsp;CEO&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;11/6/03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>


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


</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>5
<FILENAME>v07167exv10w7.htm
<DESCRIPTION>EXHIBIT 10.7
<TEXT>
<HTML>
<HEAD>
<TITLE>exv10w7</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">



<P align="right" style="font-size: 10pt">EXHIBIT 10.7



<P align="center" style="font-size: 10pt"><U><B>OFFICE LEASE AGREEMENT</B></U>



<P align="center" style="font-size: 10pt">by and between



<P align="center" style="font-size: 10pt">C.M. STRATPLAN, INC.,



<P align="center" style="font-size: 10pt">a California corporation



<P align="center" style="font-size: 10pt">(&#147;Landlord&#148;)



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



<P align="center" style="font-size: 10pt">Spatializer Audio Laboratories, Inc.,



<P align="center" style="font-size: 10pt">a Delaware corporation



<P align="center" style="font-size: 10pt">(&#147;Tenant&#148;)



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



<P align="center" style="font-size: 10pt">1,288 rentable square feet



<P align="center" style="font-size: 10pt">at San Jose Gateway



<P align="center" style="font-size: 10pt">(&#147;Premises&#148;)



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

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

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




<P align="center" style="font-size: 10pt"><U><B>TABLE OF CONTENTS</B></U>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="93%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="0%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">1.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Parties</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Premises</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">3.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Definitions</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">4.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lease Term</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Term</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Commencement Date</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Commencement Date Memorandum</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Tenant Delays</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">E.                           Early Entry</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">F.                           Termination</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">5</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Rent</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Monthly Rent</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Prorations</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Periodic Adjustments</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">6.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Late Payment Charges</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">7.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Security Deposit</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">8.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Holding Over</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">9.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant Improvements</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">10.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Condition of Premises</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">11.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Use of the Premises</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Tenant&#146;s Use</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Compliance</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Toxic Material</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Transportation Systems Management</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">E.                           Rules and Regulations</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">12.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Quiet Enjoyment</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">13.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Alterations</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">14.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Surrender of the Premises</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">15.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Operating Expenses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Payment by Tenant</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Operating Expenses</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Adjustment</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Failure to Pay</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">16.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Taxes and Assessments</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Payment by Tenant</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Annual Assessments</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Taxes Levied Against Tenant&#146;s Alterations and Personal Property</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Failure to Pay</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">17.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Utilities and Services</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">18.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Repair and Maintenance</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Premises, Building and Outside Area</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B                            Control and Reconfiguration</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Waiver</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Compliance with Governmental Regulations</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">E.                           Repair Where Tenant at Fault</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">19.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Fixtures</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</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="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="93%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="0%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">20.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Liens</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">21.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Landlord&#146;s Right to Enter the Premises</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">22.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Signs</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">23.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Insurance</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Indemnification</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Tenant&#146;s Insurance</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           All-Risk Insurance</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Evidence of Insurance</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">E.                           Co-Insurer</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">F.                           Insurance Requirements</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">G.                           No Limitation of Liability</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">H.                           Landlord&#146;s Disclaimer</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">I.                           Increased Coverage</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">24.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Waiver of Subrogation</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">25.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Damage or Destruction</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Partial Damage &#151; Insured</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Partial Damage &#151; Uninsured</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Total Destruction</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Landlord&#146;s Obligations</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">E.                           Damage Near End of Term</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">26.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Condemnation</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Total Taking &#151; Termination</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Partial Taking</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           No Apportionment of Award</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Temporary Taking</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">27.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Assignment and Subletting</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Landlord&#146;s Consent</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Information to be Furnished</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Landlord&#146;s Alternatives</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Proration</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">E.                           Executed Counterpart</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">F.                           Surrender of Lease</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">G.                           No Mortgages</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">H.                           Effect of Default</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">I.                           Permitted Transfers</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">28.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Default</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Tenant&#146;s Default</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Remedies</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Landlord&#146;s Default</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">29.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Subordination</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">30.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Notices</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">31.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Attorneys&#146; Fees</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">32.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Estoppel Certificates</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">33.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Transfer of the Project by Landlord</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">34.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Landlord&#146;s Right to Perform Tenant&#146;s Covenants</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">35.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant&#146;s Remedy</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">36.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Mortgagee Protection</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">37.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Brokers</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">38.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Acceptance</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</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="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="93%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="0%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">39.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Recording</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">40.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Modifications for Lender</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">41.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Parking</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">42.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Use of &#147;San Jose Gateway&#148; Prohibited</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">43.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Interest</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">44.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Quitclaim</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">45.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Relocation</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">46.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">General</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">A.                           Captions</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">B.                           Executed Copy</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.                           Time</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">D.                           Severability</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">E.                           Choice of Law</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">F.                           Interpretation</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">G.                           Effect of Remeasurement</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">H.                           Binding Effect</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">I.                           Waiver</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">J.                           Entire Agreement</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">K.                           Authority</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">L.                           Exhibits</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">M.                           Counterparts</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



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

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

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




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



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



<P align="center" style="font-size: 10pt"><B>(&#147;INFORMATION SHEET&#148;)</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="46%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">A. <B><U>PARTIES</U></B></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><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">1. Landlord:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.M. STRATPLAN, INC., a California corporation.</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">2. Tenant:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Spatializer Audio Laboratories, Inc., a Delaware corporation</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:15px; text-indent:-15px">B. <B><U>EFFECTIVE DATE</U></B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">September 14, 2004</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:15px; text-indent:-15px">C. <B><U>BASIC LEASE PROVISIONS</U></B></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><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">1. Premises:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">San Jose Gateway</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:45px; text-indent:-15px">a. Address:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">2025 Gateway Place</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">San Jose, California  95110</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:45px; text-indent:-15px">b. Suite:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">365</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:45px; text-indent:-15px">c. Floor:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Third</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:45px; text-indent:-15px">d. Total Building</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">One Hundred Fifty-Eight Thousand Three Hundred rentable area (approx.):        Thirty-Two (158,332) rentable square feet</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">2. Rentable Area and Load
Factor:</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><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">a. Rentable Area</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">One Thousand Two Hundred Eighty-Eight (1,288) rentable square feet</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">b. Load Factor (approx.)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">14%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">3. Term:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">24 months</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">4. Estimated Commencement Date:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">January 1, 2005.  Landlord shall provide one (1) month and two (2) weeks of Early Occupancy.</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">5. Tenant&#146;s Property Percentage:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">0.81%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">6. Base Rent:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><U>Two Thousand One Hundred Twenty Five and 20/100 Dollars ($2,125.20) based on a rate of _One and 65/100 Dollars ($1.65) per rentable square foot per month for each of months one (1) through twelve (12) of the term; and</U></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><U>Two  Thousand One Hundred Eight Nine and 60/100 Dollars ($2,189.60) based on a rate of _One and 70/100 Dollars ($1.70) per rentable square foot per month for each of months thirteen (13) through twenty four (24) of the term.</U></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">7. Security Deposit:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">$2,125.20</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">8. Operating Expense Base Year:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">2005</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">9. Adjustments to Rent:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Refer to Paragraph C.6 above.</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&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">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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

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<H5 align="left" style="page-break-before:always">&nbsp;</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="48%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="46%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">10. Broker(s):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Dual Agency wherein Marne Michaels with Colliers International represents Tenant and Susan Gregory and Marne Michaels with of Colliers International represents Landlord.</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:30px; text-indent:-15px">11. Address for Notices:</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><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:50px; text-indent:-15px">&nbsp;Landlord:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">C.M. Stratplan, Inc.<BR></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">c/o C. M. Capital Corporation<BR></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">525 University Avenue, Suite 1500<BR></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Palo Alto, California  94301</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">with a copy to:</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Property Manager Office<BR></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">2025 Gateway Place, Suite 100<BR></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">San Jose, California  95110</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&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><DIV style="margin-left:50px; text-indent:-15px">&nbsp;Tenant:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Spatializer Audio Laboratories, Inc.<BR></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">2025 Gateway Place, Suite 365<BR></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</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>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&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">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



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

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




<P align="center" style="font-size: 10pt"><U><B>OFFICE LEASE AGREEMENT</B></U>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;<U><B>Parties</B></U>. THIS OFFICE LEASE AGREEMENT (&#147;Lease&#148;), effective as of the date
(&#147;Effective Date&#148;) set forth at B of the Office Lease Agreement Information Sheet (&#147;Information
Sheet&#148;), is entered into by and between C.M. Stratplan, Inc., a California corporation
(&#147;Landlord&#148;), and the entity set forth in the Information Sheet at A.2. (&#147;Tenant&#148;).


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;<U><B>Premises</B></U>. Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, a portion of that certain Building (&#147;Building&#148;) in the City of San Jose, County of Santa
Clara, State of California containing the total rentable floor area set forth in C.2. of the
Information Sheet, as more particularly shown on <U>EXHIBIT A</U> (&#147;Premises&#148;), and located at the
address, and in the suite and floor, designated on the Information Sheet at C.1 of the Information
Sheet, together with a right in common to the Outside Area, as defined in Paragraph&nbsp;3.K., of the
Property, as defined in Paragraph&nbsp;3.M. Tenant&#146;s right to use the Outside Area shall be a right in
common with other tenants of the Property and is subject to the reasonable rules and regulations
and changes therein from time to time promulgated by Landlord governing the use of the Outside
Area.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;<U><B>Definitions</B></U>. The following initially capitalized terms shall have the following
meanings when used in this Lease:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Alterations</B></U>. Any alterations, additions or improvements made in, on or about the
Building or the Premises after the Commencement Date, including, but not limited to, lighting,
heating, ventilating, air conditioning, electrical, telecommunication cabling, partitioning,
drapery and carpentry installations.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Building</B></U><B>. </B>That certain building on the Property, commonly known as 2025 Gateway
Place, San Jose, California 95110, containing an aggregate rentable area in the approximate amount
set forth in the Information Sheet at C.1.d.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>CC&#038;R&#146;s</B></U>. The Declaration of Covenants, Conditions, Restrictions and Easements dated
May&nbsp;25, 1972 established by Dillingham Development Company and recorded on June&nbsp;2, 1972 in Book
9862 at page 57 et. Seq., of the official records of Santa Clara County, California, as they may be
amended from time to time. Tenant hereby acknowledges that it has received and read a copy of the
present CC&#038;R&#146;s.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>City</B></U>. The City of San Jose, State of California.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Commencement Date</B></U>. The Commencement Date of this Lease shall be the first day of
the Lease Term determined in accordance with Paragraph&nbsp;4.B.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F. <U><B>County</B></U>. The County of Santa Clara, State of California.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;G. <U><B>HVAC</B></U>. Heating, ventilating and air conditioning.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;H. <U><B>Interest Rate</B></U><B>. </B>Interest Rate shall have the meaning set forth in Paragraph&nbsp;43.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I. <U><B>Landlord&#146;s Agents</B></U>. Landlord&#146;s authorized agents, together with any partners and
any subsidiary, parent, and affiliate corporations of Landlord, and any directors, officers,
shareholders and employees of Landlord or of any such agents, partners, or subsidiary, parent or
affiliate corporations.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;J. <U><B>Monthly Rent</B></U>. The rent payable pursuant to Paragraph&nbsp;5.A., as adjusted from time
to time pursuant to the terms of this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;K. <U><B>Outside Area</B></U>. All areas and facilities within the Property, but outside the
Building, as defined in Paragraph&nbsp;3.M., provided and designated by Landlord for the general use and
convenience of Tenant and other tenants and occupants of the Building, including, without
limitation, the parking areas, access and perimeter roads, sidewalks, landscaped areas, service
areas, trash disposal facilities, and similar areas and facilities, and the exterior walls and
windows of the Building, subject to the reasonable rules and regulations and changes therein from
time to time promulgated by Landlord governing the use of the Outside Area.


<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&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">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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

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<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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;L. <U><B>Project</B></U>. The Property, Building (including the Premises), and Outside Area.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;M. <U><B>Property</B></U>. That certain real property, described in <U>EXHIBIT B</U> and
consisting of approximately five and seven hundred and forty-four hundredths (5.744) acres, upon
which is located the Building .



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;N. <U><B>Real Property Taxes</B></U>. Any form of assessment, license, fee, rent tax, levy,
interest or penalty (if a result of Tenant&#146;s delinquency), or tax (other than net income, estate,
succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct
or indirect power to tax, or by any city, county, state or federal government or any improvement or
other district or division thereof, whether such tax is: (i)&nbsp;determined by the value or area of
the Project or any part thereof (or any improvements now or hereafter made to the Project or any
portion thereof by Landlord, Tenant or other tenants) or the rent and other sums payable hereunder
by Tenant or by other tenants, including, but not limited to, any gross income or excise tax
levied by any of the foregoing authorities with respect to receipt of such rent or other sums due
under this Lease; (ii)&nbsp;upon any legal or equitable interest of Landlord in the Project or any part
thereof; (iii)&nbsp;upon this transaction or any document to which Tenant is a party creating or
transferring any interest in the Project; (iv)&nbsp;levied or assessed in lieu of, in substitution for,
or in addition to, existing or additional taxes against the Project whether or not now customary or
within the contemplation of the parties; (v)&nbsp;assessed for the purpose of constructing or
maintaining or reimbursing the cost of construction of any streets, utilities or other public
improvements; (vi)&nbsp;surcharged against the parking area; or (vii)&nbsp;levied upon any personal property
of Landlord, Tenant or other tenants located on or used exclusively in connection with the
operation of the Project.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;O. <U><B>Rent</B></U>. Monthly Rent plus any other amounts payable by Tenant under this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;P. <U><B>Sublet</B></U>. Any assignment or transfer of any estate or interest in this Lease; any
subletting or parting with or sharing of the occupation, control, or possession of the Premises, or
of any part thereof or any right or privilege appurtenant thereto; allowing anyone to conduct
business at or from the Premises (whether as concessionaire, franchisee, licensee, permittee,
subtenant or otherwise); if Tenant is a corporation, any transfer of the effective voting control
of Tenant; if Tenant is a partnership, the resignation, death or the cessation of existence of a
general partner; if Tenant is composed of more than one person or entity, any purported transfer
from one to one or any more of the others composing Tenant or to any other person; any other
transfer by voluntary or involuntary act or by operation of law (including by merger or
consolidation); or any attempt to do any of the foregoing.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q. <U><B>Subrent</B></U>. Any consideration of any kind received, or to be received, by Tenant
from a subtenant if such sums are related to Tenant&#146;s interest in this Lease or in the Premises,
including, but not limited to, bonus money and payments (in excess of fair market value) for
Tenant&#146;s assets including its trade fixtures, equipment and other personal property, goodwill,
general intangibles, and any capital stock or other equity ownership of Tenant.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;R. <U><B>Subtenant</B></U>. The person or entity with whom a Sublet agreement is proposed to be or
is made.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;S. <U><B>Tenant Improvements</B></U>. Those certain improvements to the Premises to be constructed
by Landlord pursuant to <U>EXHIBIT C</U>.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;T. <U><B>Tenant&#146;s Agents</B></U>. Tenant&#146;s agents, employees, officers, directors, invitees or
licensees.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;U. <U><B>Tenant&#146;s Property Percentage</B></U>. The percentage determined by dividing the
approximate rentable square footage of the Premises by the approximate total rentable square
footage of the Building. Tenant&#146;s Property Percentage is currently agreed to be the percentage set
forth in C.5. of the Information Sheet, subject to adjustment as a result of a remeasurement of the
Premises and/or the Building by Landlord pursuant to Paragraph&nbsp;46.G.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;V. <U><B>Tenant&#146;s Personal Property</B></U>. Tenant&#146;s trade fixtures, furniture, equipment and
other personal property in the Premises.


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    <TD width="7%">&nbsp;</TD>
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    <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>
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;W. <U><B>Term</B></U>. The term of this Lease set forth in Paragraph&nbsp;4.A., as it may be extended
hereunder pursuant to any options to extend granted herein or by any written amendments to or
extensions of this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;<U><B>Lease Term</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Term</B></U><B>. </B>The Term shall be a period set forth at C.3. of the Information Sheet,
commencing on the Commencement Date, as defined below, and ending 5:00 p.m. on the last day of such
period, unless the Term is sooner terminated as hereinafter provided.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Commencement Date</B></U><B>. </B>Commencement Date shall be defined to mean the earliest to
occur of the following, as determined by Landlord:



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;the date Tenant commences occupancy of any portion of the Premises; or


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;the Estimated Commencement Date specified in the Information Sheet at C.4.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If, for any reason, Landlord cannot deliver possession of the Premises to Tenant by the
Estimated Commencement Date, Landlord shall not be subject to any liability therefor, nor shall
such failure affect the validity of this Lease or the obligations of Tenant hereunder; but in such
case, Tenant shall not be obligated to pay any Monthly Rent hereunder, subject to the provisions
contained in Paragraph&nbsp;4.D., until the date that Landlord gives Tenant notice that all work for the
Tenant Improvements to be constructed or performed pursuant to <U>EXHIBIT C</U> has been
substantially completed (which date shall then be deemed the Commencement Date).


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Commencement Date Memorandum</B></U>. When the actual Commencement Date is determined, the
parties shall execute a Commencement Date Memorandum, in the form attached hereto as <U>EXHIBIT
D</U>, setting forth the date.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Tenant Delays</B></U><B>. </B>If the Commencement Date of this Lease has not occurred on or
before the Estimated Commencement Date, and if the cause of any delay in the occurrence of the
Commencement Date is attributable to Tenant, then commencing on such date as the Commencement Date
would have occurred but for any delay attributable to Tenant, and continuing on the first day of
each calendar month thereafter until the Commencement Date, Tenant shall pay to Landlord the
Monthly Rent set forth in Paragraph&nbsp;5. Payments for any partial month shall be prorated on the
basis of a thirty (30)&nbsp;day month. Delays attributable to Tenant shall include those caused by:



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;Tenant&#146;s change requests in the space plan or the Plans for Tenant Improvements attached
as <U>EXHIBIT C-1</U> after their approval by Landlord;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;Tenant&#146;s failure to complete any of its own improvement work to the extent Tenant delays
completion by the City of its final inspection and approval of the Tenant Improvements described in
<U>EXHIBIT C</U>;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;Tenant&#146;s failure to approve cost estimates if such approvals are required pursuant to
<U>EXHIBIT C</U>; or


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv)&nbsp;Interference with Landlord&#146;s work caused by Tenant or by Tenant&#146;s contractors or
subcontractors.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Early Entry</B></U><B>. </B>Landlord gives permission for Tenant to enter the Premises six weeks
prior to the Commencement Date for the purpose of fixturing or any other purpose permitted by
Landlord, such early entry shall be at Tenant&#146;s sole risk and subject to all the terms and
provisions hereof, except for the payment of Monthly Rent which shall commence on the date set
forth in Paragraph&nbsp;4.B. Landlord shall have the right to impose such additional conditions on
Tenant&#146;s early entry as Landlord shall deem appropriate.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F. <U><B>Termination</B></U><B>. </B>Either party, at its option, may terminate this Lease by giving
written notice of its election to terminate to the other party if the Commencement Date has not
occurred
on or before one hundred twenty (120)&nbsp;days after the Estimated Commencement Date specified in
the Information Sheet at C.4. through no fault of the terminating party.

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

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    <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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;<U><B>Rent</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Monthly Rent</B></U><B>. </B>In advance, on or before the first day of each calendar month,
without prior notice or demand, deduction or offset, Tenant shall pay monthly rent (&#147;Monthly Rent&#148;)
to Landlord, in lawful money of the United States at the Office of the Property Manager specified
in the Information Sheet at C.11., or to such other place or person as Landlord may designate in
the manner set forth in Paragraph&nbsp;30. Monthly Rent shall consist of the sum of the following:



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;<U><B>Base Rent</B></U><B>. </B>Base Rent (&#147;Base Rent&#148;) in the amount specified at C.6. of the
Information Sheet (subject to adjustment as provided for at C.9 of the Information Sheet); and


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;<U><B>Monthly Operating Expense Reimbursement</B></U><B>. </B>Monthly Operating Expense Reimbursement
(&#147;Monthly Operating Expense Reimbursement&#148;) equal to one twelfth (1/12) of Tenant&#146;s Property
Percentage of the amount by which Landlord&#146;s estimate of the Operating Expenses for the relevant
calendar year of the Term exceed the Base Year Operating Expenses, as such terms are defined in
Paragraph&nbsp;15.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Prorations</B></U><B>. </B>If the Commencement Date is not the first (1st) day of a month, or if
the termination date is not the last day of a month, a prorated monthly installment based on a
thirty (30)&nbsp;day month shall be paid for the fractional month during which this Lease commences or
terminates.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;6.&nbsp;<U><B>Late Payment Charges</B></U><B>. </B>TENANT ACKNOWLEDGES THAT LATE PAYMENT BY TENANT TO LANDLORD
OF RENT AND OTHER CHARGES PROVIDED FOR UNDER THIS LEASE WILL CAUSE LANDLORD TO INCUR COSTS NOT
CONTEMPLATED BY THIS LEASE, THE EXACT AMOUNT OF SUCH COSTS BEING EXTREMELY DIFFICULT OR
IMPRACTICABLE TO FIX. THEREFORE, IF ANY INSTALLMENT OF RENT OR ANY OTHER CHARGE DUE FROM TENANT IS
NOT RECEIVED BY LANDLORD WITHIN FIVE DAYS OF THE DATE DUE, TENANT SHALL PAY TO LANDLORD AN
ADDITIONAL SUM EQUAL TO FIVE PERCENT (5%) OF THE AMOUNT OVERDUE AS A LATE CHARGE. THE PARTIES
AGREE THAT THIS LATE CHARGE REPRESENTS A FAIR AND REASONABLE ESTIMATE OF THE COSTS THAT LANDLORD
WILL INCUR BY REASON OF THE LATE PAYMENT BY TENANT. SUCH LATE CHARGE SHALL BE IN ADDITION TO, AND
NOT IN LIEU OF, ANY INTEREST THAT MAY ACCRUE ON ANY SUCH OVERDUE AMOUNT PURSUANT TO THE PROVISIONS
OF PARAGRAPH 43.

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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><U>Initials</U>:</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">&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 style="font-size: 1px">
    <TD valign="top" style="border-top: 1px solid #000000"><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" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Landlord
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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</DIV>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;7.&nbsp;<U><B>Security Deposit</B></U><B>. </B>By execution hereof, Landlord acknowledges receipt of the sum
set forth at C.7. of the Information Sheet from Tenant, as security for the faithful performance by
Tenant of all of the terms and conditions of this Lease to be kept and performed by Tenant during
the term hereof (&#147;Security Deposit&#148;). The Security Deposit shall secure Tenant&#146;s obligations
hereunder to pay rent and all other sums due to Landlord hereunder, to maintain the Premises and
repair damages thereto as provided in this Lease, to surrender the Premises to Landlord in clean
condition and good repair upon termination of this Lease and timely to discharge Tenant&#146;s other
obligations hereunder. Landlord may use and commingle the Security Deposit with other funds of
Landlord. If Tenant fails to perform its obligations hereunder, then Landlord may, but without any
obligation so to do, apply all or any portion of the Security Deposit toward fulfillment of
Tenant&#146;s unperformed obligations. If Landlord does so apply any portion of the Security Deposit,
Tenant, upon demand by Landlord, shall immediately pay to Landlord a sufficient amount in cash to
restore the Security Deposit to its full original amount. On termination of this Lease, if Tenant
has then fully performed all its obligations hereunder, Landlord shall return the Security Deposit
to Tenant. If Landlord, prior to the expiration of the term of this Lease, sells or otherwise
transfers Landlord&#146;s rights or interest under this Lease, Landlord may deliver the Security Deposit
to the transferee, whereupon, Landlord shall have no further liability to Tenant concerning the
Security Deposit.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.&nbsp;<U><B>Holding Over</B></U><B>. </B>If Tenant remains in possession of all or any part of the Premises
after the expiration of the Term, with the consent of Landlord, such tenancy shall be from
month-to-month only and not a renewal hereof or any extension for any further term, and in such
case, Base Rent shall be increased to an amount equal to one hundred fifty percent (150%) of the
Base Rent paid during the last

<P align="center" style="font-size: 10pt">4


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    <TD align="left" valign="top">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">month of the Term and all other sums due hereunder shall be payable
in the amount and at the time applicable at the time of expiration and at the time specified in
this Lease and such month-to-month tenancy shall be subject to every other term, covenant and
agreement of this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.&nbsp;<U><B>Tenant Improvements</B></U><B>. </B>Landlord and Tenant agree to the terms and procedures for the
planning, construction and funding of the construction of the Tenant Improvements as set forth in
<U>EXHIBIT C</U>.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;10.&nbsp;<U><B>Condition of Premises</B></U><B>. </B>Within ten (10)&nbsp;days after the Commencement Date, Tenant
and Landlord shall conduct a walk- through inspection of the Premises with Landlord and jointly
prepare and sign a final punch-list of items needing additional work by Landlord. Other than the
items specified in the punch-list, by taking possession of the Premises, Tenant shall be deemed to
have accepted the Premises in &#147;As Is&#148; condition as improved with the Tenant Improvements in good,
clean and completed condition and repair, subject to all applicable laws, codes and ordinances.
The punch-list to be prepared by Tenant shall not include any damage to the Premises caused by
Tenant&#146;s move-in, which damage shall be repaired or corrected by Tenant, at its expense. Tenant
acknowledges that neither Landlord nor Landlord&#146;s Agents have made any representations or
warranties as to the suitability or fitness of the Premises or any other part of the Project
(including, without limitation, the interbuilding network cabling) for the conduct of Tenant&#146;s
business or for any other purpose, nor has Landlord or Landlord&#146;s Agents agreed to undertake any
Alterations or construct any Tenant Improvements to the Premises except as expressly provided in
this Lease. If Tenant fails to submit a punch-list to Landlord within the ten (10)&nbsp;day period, it
shall be deemed that there are no items needing additional work or repair. Landlord&#146;s contractor
shall complete all reasonable punch-list items within thirty (30)&nbsp;days after the walk-through
inspection or as soon as practicable thereafter. Upon Landlord or Landlord&#146;s contractor&#146;s
indication to Tenant of the completion of such punch-list items, Tenant shall acknowledge the
completion of such items in writing to Landlord. If Tenant fails either to so acknowledge the
completion of such items within seven (7)&nbsp;days of such stated completion or within such seven day
period to specify in writing to Landlord in reasonable detail any such previously listed punch-list
items that remain uncompleted, all such items shall be deemed approved by Tenant.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;11.&nbsp;<U><B>Use of the Premises</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Tenant&#146;s Use</B></U><B>. </B>Tenant shall use the Premises solely for general office purposes and
shall not use the Premises for any other purpose without obtaining the prior written consent of
Landlord. Tenant agrees that the Property is subject and this Lease is subordinate to the CC&#038;R&#146;s.
Tenant acknowledges that it has read the CC&#038;R&#146;s and knows the contents thereof. Throughout the
Term, Tenant shall faithfully and timely perform and comply with the CC&#038;R&#146;s and any modification or
amendments thereof. Tenant shall comply with all duly adopted rules, regulations and restrictions
as may be adopted from time to time by any committee established pursuant to the CC&#038;Rs
(&#147;Association&#148;). Any periodic or special dues or Outside Area assessments of the Association shall
be included within the definition of Operating Expenses pursuant to Paragraph&nbsp;15.B. and Tenant
shall pay Tenant&#146;s Property Percentage of such amounts over the Base Year amounts as further set
forth in Paragraph&nbsp;15. Tenant shall defend, indemnify and hold Landlord, and Landlord&#146;s Agents
free and harmless from and against any claim, loss, liability, expense or damage, including
attorneys&#146; fees and costs, arising out of the actual or asserted failure of Tenant to perform or
comply with the CC&#038;R&#146;s. Tenant shall not permit or make any use of the Premises which will
increase the existing rate of insurance upon the Project, or cause the cancellation of any
insurance policy covering the Project, or any part thereof. If the existing rate of insurance
shall be increased or any insurance policy covering the Project canceled as a result of Tenant&#146;s or
Tenant&#146;s Agent&#146;s acts or omissions, then Landlord, in addition to such remedies as Landlord may
have under this Lease or pursuant to law or equity, shall be entitled to reimbursement from Tenant
upon written demand therefor for the entire amount of said increase or any additional amount which
must be paid for a new insurance policy.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Compliance</B></U><B>. </B>Tenant shall not use the Project or suffer or permit Tenant&#146;s Agents
to do anything in or about the Project in conflict with any law, statute, zoning restriction,
ordinance or governmental law, rule, regulation or requirement of duly constituted public
authorities now in force or which may hereafter be in force, or the requirements of the Board of
Fire Underwriters or other similar body now or hereafter constituted relating to or affecting the
condition, use or occupancy of
the Project. Tenant shall continuously and uninterruptedly conduct its business in the
Premises during the Term and shall not vacate or abandon the Premises. Tenant shall not commit any
public or private nuisance or any other act or practice which might or would disturb the quiet
enjoyment of any other tenant of Landlord or any occupant of nearby properties. Tenant shall place
no loads upon the floors,

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

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    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">walls or ceilings in excess of the maximum designed load determined by
Landlord or which endanger the structure; nor place any harmful liquids in the drainage systems;
nor dump or store waste materials or refuse or allow such to remain outside the Building proper,
except in the enclosed trash areas provided. Tenant shall not store or permit to be stored or
otherwise placed any material of any nature whatsoever outside the Building. If as a result of any
use or change in use of the Premises by Tenant or any Alteration made to the Premises by or on
behalf of Tenant, any alterations are required to the Premises, the Building or the Project
(including, but not limited to, the Americans with Disabilities Act, and any state or local
building, fire or safety codes, ordinances or regulations), Tenant shall be responsible for the
same (or at the election of Landlord, for reimbursing Landlord for the cost of performing the
same).



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Toxic Material</B></U><B>. </B>Tenant, at its sole cost, shall comply with and cause Tenant&#146;s
Agents to comply with all laws relating to the storage, use and disposal of hazardous, toxic or
radioactive matter, including those materials identified in Sections&nbsp;66680 through 66685 of Title
22 of the California Administrative Code, Division 4, Chapter&nbsp;30 (&#147;Title 22&#148;) as they may be
amended from time to time (collectively, &#147;Toxic Materials&#148;). If Tenant or Tenant&#146;s Agents desire
to store, use or dispose of any Toxic Materials in, on or about the Premises (other than the
storage and use of reasonable quantities of customary office supplies), Tenant shall first request
and obtain Landlord&#146;s approval to such proposed storage, use or disposal in writing, which request
must be made at least ten (10)&nbsp;days prior to the storage, use or disposal thereof in, on or about
the Premises. Whether or not Landlord is aware or approves of the storage, use or disposal of any
Toxic Material by Tenant or Tenant&#146;s Agents, Tenant shall be solely responsible for and shall
defend, indemnify and hold Landlord and Landlord&#146;s Agents harmless from and against all claims,
costs and liabilities, including attorneys&#146; fees and costs, arising out of or in connection with
the storage, use, generation, transportation, disposal or release of Toxic Materials by Tenant or
Tenant&#146;s Agents, including without limitation, any such claims, costs, damages and liabilities
(including attorneys&#146; fees and costs) arising out of or in connection with any investigation,
testing, remediation, removal, clean-up and/or restoration services, work, materials and equipment
necessary to return the Premises and any other property of whatever nature to their condition
existing prior to the storage, use, generation, transportation, disposal or release of Toxic
Materials by Tenant or Tenant&#146;s Agents in, on or about the Premises or the Project, and to
otherwise satisfactorily investigate and remediate the contamination arising therefrom to the
satisfaction of Landlord and all governmental authorities. If at any time during or after the term
of this Lease, as it may be extended, Tenant becomes aware of any injury, investigation,
administrative proceeding, or judicial proceeding regarding the storage, use or disposition of any
Toxic Materials by Tenant or Tenant&#146;s Agents on or about the Premises or the Project, Tenant shall
within five (5)&nbsp;days after first learning of such injury, investigation or proceeding give Landlord
written notice advising Landlord of same.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Transportation Systems Management</B></U><B>. </B>Tenant shall comply with the requirements of
the City or County mandated parking or transportation systems management ordinances.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Rules and Regulations</B></U><B>. </B>The Rules and Regulations for the Project in effect as of
the Effective Date are attached hereto as <U>EXHIBIT E</U>. Landlord reserves the right to adopt
or amend the Rules and Regulations from time to time in its reasonable discretion. Tenant agrees
that Tenant, its employees and agents and, to the extent Tenant can require the same, its invitees
and others over whom Tenant can reasonably be expected to exercise control, shall observe and
perform the Rules and Regulations as they may be amended or adopted. A breach of the Rules and
Regulations by Tenant or such persons shall constitute a default under this Lease as if the Rules
or Regulations were contained in this Lease as covenants of the Tenant. Tenant acknowledges that
Landlord has no obligation to enforce, and shall have no liability for non-enforcement of, the
Rules and Regulations. The Rules and Regulations shall be consistent with the terms of the Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12.&nbsp;<U><B>Quiet Enjoyment</B></U><B>. </B>Landlord covenants that Tenant, upon performing the terms,
covenants and conditions of this Lease, shall have quiet and peaceful possession of the Premises
as against any person claiming the same by, through or under Landlord.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;13.&nbsp;<U><B>Alterations</B></U><B>. </B>Tenant shall not make or permit any Alterations in, on or about the
Premises without the prior written consent of Landlord, and according to plans and specifications
approved in writing by Landlord, which consent shall not be unreasonably withheld. Landlord, at
its sole option, may, however, require as a condition to the granting of any such consent, that
Tenant provide to
Landlord, at Tenant&#146;s sole cost and expense, a lien and completion bond in an amount equal to
one and one-half (1<FONT style="font-size: 70%"><SUP>1</SUP></FONT>/<FONT style="font-size: 60%">2</FONT>) times any and all estimated costs of any intended improvements to the
Premises, to insure Landlord against any liability for mechanics&#146; and materialmen&#146;s liens and to
insure completion of the work. Tenant shall, at its sole cost and expense, obtain all necessary
permits and governmental


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

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    <TD width="7%">&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">inspections and approvals required in connection with any Alterations.
All Alterations shall be installed at Tenant&#146;s sole expense, in compliance with all applicable laws
(including, but not limited to, The Americans With Disabilities Act, and any state or local
building, fire or safety codes, ordinances or regulations), the Rules and Regulations and the
CC&#038;R&#146;s, by a licensed contractor reasonably acceptable to Landlord, shall be done in a good and
workmanlike manner conforming in quality and design with the Premises existing as of the
Commencement Date, and shall not diminish the value of the Project. In the event that any
Alteration made by Tenant necessitates the making of other alterations to the interior or exterior
of the Building, the Outside Area or elsewhere within the Project for purposes of complying with
applicable laws (including, but not limited to, The Americans With Disabilities Act, and any state
or local building, fire or safety codes, ordinances or regulations), Tenant shall undertake such
additional alterations at its sole cost and expense or shall, at Landlord&#146;s option, reimburse
Landlord for the cost and expenses incurred with respect to such additional alterations required
for purposes of complying with applicable law as a result of Tenant&#146;s Alterations. All Alterations
made by Tenant shall be and become the property of Landlord upon installation and shall not be
deemed Tenant&#146;s Personal Property; provided, however, that Landlord may, at its option, require
that Tenant, at Tenant&#146;s expense, remove any or all Alterations installed by Tenant and return the
Premises to their condition as of the Commencement Date of this Lease, normal wear and tear
excepted and subject to the provisions of Paragraph&nbsp;25. Notwithstanding any other provisions of
this Lease, Tenant shall be solely responsible for the maintenance and repair of any and all
Alterations made by it to the Premises. Tenant shall give Landlord written notice of Tenant&#146;s
intention to perform any work on the Premises at least twenty (20)&nbsp;days prior to the commencement
of such work to enable Landlord to post and record an appropriate Notice of Nonresponsibility or
other notice deemed proper before the commencement of any such work.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;14.&nbsp;<U><B>Surrender of the Premises</B></U><B>. </B>Upon the expiration or earlier termination of the
Term, Tenant shall surrender the Premises to Landlord in its condition existing as of the
Commencement Date, normal wear and tear and fire or other insured casualty for which Tenant is not
otherwise obligated under the provisions of Paragraph&nbsp;18. to repair excepted, with all interior
areas cleaned. Tenant shall prior to the expiration or termination of the Term remove from the
Premises all of Tenant&#146;s Alterations required to be removed pursuant to Paragraph&nbsp;13., and all
Tenant&#146;s Personal Property and repair any damage and perform any restoration work caused or
necessitated by any such removal. If Tenant fails to remove such Alterations and Tenant&#146;s Personal
Property, and such failure continues after the termination of this Lease, Landlord may retain such
property and all rights of Tenant with respect to it shall cease, or Landlord may place all or any
portion of such property in public storage for Tenant&#146;s account. Tenant shall be liable to
Landlord for costs of removal of any such Alterations and Tenant&#146;s Personal Property and storage
and transportation costs of same, and the cost of repairing and restoring the Premises, together
with interest at the Interest Rate from the date of expenditure by Landlord until paid.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;15.&nbsp;<U><B>Operating Expenses</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Payment by Tenant</B></U><B>. </B>During the term of this Lease, Tenant shall pay to Landlord, as
rent on a monthly basis as set forth in Paragraph&nbsp;5.A., one-twelfth (1/12) of Tenant&#146;s Property
Percentage of the amount by which Landlord&#146;s estimate of the Operating Expenses for each calendar
year during the Term (after the Base Year) are estimated by Landlord to exceed the Operating
Expenses incurred by Landlord for the Base Year, as such Base Year is specified at C.8. of the
Information Sheet (&#147;Base Year Operating Expenses&#148;).



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Operating Expenses</B></U><B>. </B>The term &#147;Operating Expenses&#148; shall mean all expenses, costs
and disbursements (but not capital investment items except as otherwise expressly provided below,
or specific costs especially billed to and paid by specific tenants) of every kind and nature which
Landlord shall pay or become obligated to pay because of or in connection with the ownership,
maintenance, repair or operation of the Project and such additional building or Outside Area
facilities in subsequent years as may be determined by Landlord to be necessary or appropriate.
Operating Expenses shall include, but not be limited to, the following:



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;Wages and salaries of all employees engaged in the operation, maintenance and security of
the Project, including taxes, insurance and benefits relating thereto; and the rental cost and
overhead of any office and storage space used to provide such services;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;All supplies and materials used in operation, repair and maintenance of the Project;

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

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    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;Cost of all utilities, including surcharges, for the Project, including the cost of
water, sewer, gas, power, heating, lighting, air conditioning and ventilating for the Project;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv)&nbsp;Cost of all maintenance and service agreements for the Project and the equipment thereon,
including but not limited to, security and energy management services, window cleaning, floor
waxing, elevator maintenance, janitorial service, engineers, gardeners, and trash removal services;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v)&nbsp;Cost of all insurance which Landlord or Landlord&#146;s lender deems necessary or appropriate
for the Project such as the cost of &#147;All-Risk&#148; property insurance including, at Landlord&#146;s option,
earthquake and flood coverage, insurance against loss of rents on an &#147;All-Risk&#148; basis, and a
lender&#146;s loss payable endorsement in favor of any lenders with respect to the Project, and naming
Landlord and such lenders as insureds; and casualty and liability insurance applicable to the
Building, Property and Outside Area and Landlord&#146;s personal property used in connection therewith,
naming Landlord and Landlord&#146;s Agents as named or additional insureds;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vi)&nbsp;Cost of repairs and general maintenance (excluding repairs and general maintenance to the
extent then paid by proceeds of insurance or other third parties);


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(vii)&nbsp;A five percent (5%) management fee for the management of the Project (which management
may be provided either by Landlord, affiliates of Landlord and/or by third parties) (the
&#147;Management Fee&#148;);


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(viii)&nbsp;The costs of any additional services not provided to the Project at the Commencement
Date but thereafter provided by Landlord in its management of the Building, Property or Outside
Area;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ix)&nbsp;The cost of any capital improvements (including interest) made to the Project after
September&nbsp;1, 1997 that are intended to reduce other Operating Expenses or are required under any
governmental law or regulation, or which enhance in any material respect the general appearance or
use of the Project or any portion thereof, such cost thereof to be amortized with interest at a
reasonable rate over the period Landlord reasonably determines to be the useful life of the capital
improvement, consistent with applicable governmental requirements and generally accepted accounting
principles;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(x)&nbsp;Real property taxes, as that term is defined in Paragraph&nbsp;16;


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(xi)&nbsp;Assessments, dues and other amounts payable pursuant to the CC&#038;R&#146;s, including any and all
assessments and dues of the Association; provided, however, that Landlord may elect that Tenant pay
directly any such assessments or dues relating to any particular uses of the Project made by Tenant
or arising out of any actions of Tenant or Tenant&#146;s Agents; and


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(xii)&nbsp;Maintenance and repair costs for interbuilding network cabling.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The cost of additional or extraordinary services provided to Tenant and not paid or payable by
Tenant pursuant to other provisions of this Lease shall be payable by Tenant and may be included by
Landlord as part of the Operating Expenses payable by Tenant on a monthly basis or may be billed to
Tenant separately, in a lump sum, as Landlord shall elect.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating Expenses shall not include:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;the cost of any additional or extraordinary services provided to other tenants of the
Building;



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;costs paid for directly by Tenant;



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;principal and interest payments on loans secured by deeds of trust recorded against the
Project;



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;real estate sales or leasing brokerage commissions; or

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

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    <TD width="7%">&nbsp;</TD>
</TR>

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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initials:</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>

    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;executive salaries of off-site personnel employed by Landlord except for the charge (or
pro rata share) of the manager of the Project (which manager&#146;s salary is not included within the
Management Fee).



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Adjustment</B></U>.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;<U><B>Projected Increases</B></U><B>. </B>Prior to or at any time after the commencement of each
calendar year during the Term following the Base Year, Landlord may provide Tenant with notice of
Landlord&#146;s estimate of the amount by which the then current year&#146;s Operating Expenses are
projected, if at all, to exceed the Base Year Operating Expenses (the &#147;Projected Increase in
Operating Expenses&#148;). Tenant shall thereafter during such year pay adjusted Monthly Rent which
shall include as the Monthly Operating Expense Reimbursement an amount equal to one-twelfth (1/12)
of Tenant&#146;s Property Percentage multiplied by any Projected Increase in Operating Expenses.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;<U><B>Accounting</B></U><B>. </B>Within ninety (90)&nbsp;days (or as soon thereafter as possible) after
the close of each calendar year after the Base Year, Landlord shall provide Tenant a statement of
(a)&nbsp;such year&#146;s actual Operating Expenses, (b)&nbsp;the Base Year Operating Expenses, (c)&nbsp;the amount, if
any, by which the actual Operating Expenses exceed the Base Year Operating Expenses (the &#147;Actual
Increase in Operating Expenses&#148;), (d)&nbsp;the amount equating to Tenant&#146;s Property Percentage of any
Actual Increase in Operating Expenses and (e)&nbsp;the sum of any amounts theretofore paid by Tenant as
Monthly Operating Expense Reimbursements pursuant to Paragraph&nbsp;5.A. with respect to such year. If
the amount set forth in clause (d)&nbsp;above exceeds the amount set forth in clause (e)&nbsp;above, Tenant
shall pay the amount of such excess to Landlord within ten (10)&nbsp;days of receipt of such statement,
which obligation shall survive the expiration or earlier termination of its Term of the Lease. If
the amount set forth in clause (e)&nbsp;above exceeds the amount set forth in clause (d)&nbsp;above, Landlord
shall credit the amount of such excess against the next accruing payment(s) of Monthly Operating
Expense Reimbursements or reimburse Tenant for same if this Lease has terminated prior to the date
such determination is made.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;<U><B>Proration</B></U><B>. </B>Tenant&#146;s liability to pay Tenant&#146;s Property Percentage of Operating
Expenses in excess of Base Year Operating Expenses shall be prorated on the basis of a 365-day year
to account for any fractional portion of a year included at the commencement or expiration of the
term of this Lease.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv)&nbsp;<U><B>Not Fully Occupied</B></U><B>. </B>Notwithstanding any other provision to the contrary, it is
agreed that if the Building, in total, is less than ninety-five percent (95%) occupied during all
or any portion of any calendar year, an adjustment shall be made in calculating the Operating
Expenses for the Project for such year so that Tenant&#146;s Percentage of Operating Expenses in excess
of the Base Year Operating Expenses shall be equivalent to the Operating Expenses calculated as
though the Building, in total, had been ninety-five percent (95%) occupied during the entirety of
such year.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v)&nbsp;<U><B>Survival</B></U><B>. </B>Landlord and Tenant&#146;s obligation to pay for or credit any increase or
decrease in payments pursuant to this Paragraph shall survive the expiration or termination of the
Term of this Lease.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Failure to Pay</B></U><B>. </B>Failure of Tenant to pay any of the charges required to be paid
under this Paragraph&nbsp;15. shall constitute a breach of this Lease and Landlord&#146;s remedies shall be
as specified in Paragraph&nbsp;28.B.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;16.&nbsp;<U><B>Taxes and Assessments</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Payment by Tenant</B></U><B>. </B>Except as provided for in Paragraph&nbsp;16.C., Real Property Taxes
for the Project shall be included within Operating Expenses pursuant to Paragraph&nbsp;15.B.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Annual Assessments</B></U><B>. </B>With respect to any taxes or assessments which may be levied
against or upon the Project, or which under the laws then in force may be evidenced by improvement
or other bonds or may be paid in annual installments, only the amount of such annual installment
(with appropriate proration for any partial year) and interest due thereon shall be included within
the computation of the annual taxes and assessments levied against the Project.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Taxes Levied Against Tenant&#146;s Alterations and Personal Property</B></U><B>. </B>In addition to
Tenant&#146;s obligation to pay its Property Percentage of Operating Expenses over Base Year Operating
Expenses as provided in Paragraphs 15. and 16.A., (i)&nbsp;Tenant shall be responsible for and shall

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

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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">pay to the taxing authority prior to delinquency to the extent Tenant is billed directly, all
Real Property Taxes assessed with respect to or against Tenant, or any Alterations, improvements,
fixtures, equipment, facilities, furniture or other Personal Property owned by Tenant or placed,
installed or located within, upon or about the Premises by Tenant or at Tenant&#146;s direction
(collectively &#147;Personal Property Taxes&#148;), and (ii)&nbsp;to the extent any Personal Property Taxes are
billed to Landlord and Landlord elects not to include such Personal Property Taxes in Operating
Expenses, Tenant shall be responsible for and shall pay to Landlord within ten (10)&nbsp;days after
notice from Landlord, the amount of such Personal Property Taxes so billed to Landlord. Tenant
shall provide Landlord with evidence of Tenant&#146;s payment of the same upon Landlord&#146;s request.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Failure to Pay</B></U><B>. </B>Failure of Tenant to pay any of the charges required to be paid
under this Paragraph&nbsp;16. shall constitute a breach of this Lease and Landlord&#146;s remedies shall be
as specified in Paragraph&nbsp;28.B.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;17.&nbsp;<U><B>Utilities and Services</B></U><B>. </B>Landlord agrees to provide the utilities and services to
the Premises on the terms more specifically set forth in <U>EXHIBIT F</U>. Landlord shall not be
liable in damages or otherwise for any failure or interruption of any utility service or other
service furnished to the Premises. Tenant shall be responsible for payment of all utility and
other services provided during other than normal business hours for the Building, as reasonably
determined by Landlord.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;18.&nbsp;<U><B>Repair and Maintenance</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Premises, Building and Outside Area</B></U>.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;<U><B>Maintenance and Repair</B></U>. Except as provided in this subparagraph (i), Tenant, at
all times during the Term and at Tenant&#146;s sole cost and expense, shall keep the Premises and every
part thereof (including all fixtures and equipment located therein or exclusively servicing the
Premises) in good condition and repair, normal wear and tear and damage for which Landlord is
otherwise required to repair pursuant to Paragraph&nbsp;25 of this Lease excepted. Landlord shall be
responsible for maintaining and repairing (a)&nbsp;the structural parts of the Building, which
structural parts include only the foundation, roof and subflooring of the Premises, the basic
plumbing, heating, ventilating, air conditioning and electrical systems installed or furnished by
Landlord, and (b)&nbsp;the Outside Area, except for any damage to Premises, Building or Outside Area
caused by the negligence or willful acts or omissions of Tenant or of Tenant&#146;s Agents, or by reason
of the failure of Tenant to perform or comply with any terms, conditions or covenants in this
Lease, or caused by Alterations made by Tenant or by Tenant&#146;s Agents, which shall be Tenant&#146;s
responsibility. Except as otherwise provided in Paragraph&nbsp;15.B., all costs of repair and
maintenance of the Project shall be included in Operating Expenses.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;<U><B>Notice of Repairs Needed</B></U><B>. </B>Landlord shall not be liable for any failure to make
any of the repairs or to perform any maintenance unless the failure shall persist for an
unreasonable time after written notice of the need of the repairs or maintenance is given to
Landlord by Tenant.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;<U><B>No Abatement</B></U><B>. </B>There shall be no abatement of rent and no liability of Landlord
by reason of any injury to or interference with Tenant&#146;s business arising from the making of any
repairs, alterations or improvements in or to, or maintenance of, any portion of the Project, or
any fixtures, appurtenances and equipment therein.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Control and Reconfiguration</B></U><B>. </B>Landlord shall at all times have exclusive control of
the Building (other than the Premises) and the Outside Area and may at any time temporarily close
any part thereof and exclude and restrain anyone from any part thereof, and may change the design
configuration or location of the Building or the Outside Area. In exercising any such rights,
Landlord shall make a reasonable effort to minimize any disruption of Tenant&#146;s business. Landlord
shall have the right to reconfigure the parking area and ingress to and egress from the parking
area, and to modify the directional flow of traffic in the parking area. Landlord shall further
have the right to enter upon the Premises, upon the giving of the notice provided in Paragraph&nbsp;21.,
for the purpose of installing, maintaining, repairing, adjusting and making connections to any
utilities (including but not limited to plumbing, HVAC, electrical, telephone, cable TV, and
computer wiring) serving the Premises or other spaces in the Building or for gaining access to the
structural portions of the Building and making alterations thereto for the benefit of Tenant,
Landlord or other occupants of the Building.

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

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    <TD align="left" valign="top">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
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</DIV></TD>
    <TD>&nbsp;</TD>
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</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Waiver</B></U><B>. </B>Tenant waives the provisions of all laws, statutes or ordinances,
including Sections&nbsp;1932(1), 1932(2), 1933(4), 1941 and 1942 of the California Civil Code and any
similar or successor law, which might now or at any time hereafter otherwise afford Tenant any
right to make repairs and deduct the expenses of such repairs from the Rent due under this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Compliance with Governmental Regulations</B></U><B>. </B>Tenant shall, at its cost comply with,
including the making by Tenant of any Alteration to the Premises, all present and future
regulations, rules, laws, ordinances, and requirements of all governmental authorities (including,
state municipal, county and federal governments and their departments, bureaus, boards and
officials) arising from the use or occupancy of, or applicable to, the Project or privileges
appurtenant thereto (including, but not limited to, The Americans With Disabilities Act, and any
state or local building, fire or safety codes, ordinances or regulations).



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Repair Where Tenant at Fault</B></U><B>. </B>If all or part of the Project or the Premises
requires repair or becomes damaged or destroyed through any act or omission of Tenant or Tenant&#146;s
Agents, Landlord may effect the necessary alterations, replacements or repairs at Tenant&#146;s cost.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;19.&nbsp;<U><B>Fixtures</B></U>. Tenant shall, at its own expense, provide, install and maintain in good
condition all trade fixtures and equipment required in the conduct of its business in the Premises.
All fixtures and improvements, other than Tenant&#146;s trade fixtures and equipment, which are
installed or constructed upon or attached to the Premises by either Landlord or Tenant shall become
a part of the realty and belong to Landlord. If Tenant is not then in default, Tenant may, at the
termination of this Lease, or at any other time, remove from the Premises all trade fixtures,
equipment and other personal property not permanently affixed to the Premises. Upon removal,
Tenant shall restore the Premises to its original condition at the time of occupancy, normal wear
and tear excepted. Tenant shall place a floor mat of sufficient strength under each desk chair to
protect the carpeting and shall be responsible for any damage to the carpet for failure to do so.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;20.&nbsp;<U><B>Liens</B></U><B>. </B>Tenant shall keep the Project free from any liens arising out of any work
performed, materials furnished or obligations incurred by or on behalf of Tenant and shall defend,
indemnify and hold the Project, Landlord and Landlord&#146;s Agents free and harmless from and against
any lien, claim, cause of action, loss, liability, damage or expense, including attorneys&#146; fees and
costs, in connection with or arising out of any such lien or claim of lien. Tenant shall cause any
such lien imposed to be released of record by payment or posting of a proper bond acceptable to
Landlord within ten (10)&nbsp;days after written request by Landlord. If Tenant fails to so remove any
such lien within the prescribed ten (10)&nbsp;day period, then Landlord may do so and Tenant shall
reimburse Landlord upon demand. Such reimbursement shall include all sums incurred by Landlord
including Landlord&#146;s reasonable attorneys&#146; fees, with interest thereon at the Interest Rate.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;21.&nbsp;<U><B>Landlord&#146;s Right to Enter the Premises</B></U><B>. </B>Tenant shall permit Landlord and its
Agents to enter the Premises at all reasonable times to inspect the Premises, to post Notices of
Nonresponsibility and similar notices, &#147;For Sale&#148; signs, to show the Premises to interested parties
such as prospective lenders and purchasers, to make repairs or alterations to the Premises or the
Building and any utility system located therein, to discharge Tenant&#146;s obligations hereunder when
Tenant has failed to do so within a reasonable time after written notice from Landlord, and at any
reasonable time within one hundred eighty (180)&nbsp;days prior to the expiration of the Term, to place
upon the Premises ordinary &#147;For Lease&#148; signs and to show the Premises to prospective tenants. The
above rights are subject to reasonable security regulations of Tenant, and to the fact that
Landlord shall seek to exercise its rights in a manner so as to minimize interference with Tenant&#146;s
business.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;22.&nbsp;<U><B>Signs</B></U><B>. </B>Subject to receipt of the necessary approvals of the City, Landlord shall
provide for Tenant a listing (to a maximum of four (4)&nbsp;lines) in the Building directory and a sign
adjacent to the main entrance of the Premises within the Building. Except as provided in
<U>EXHIBIT C</U> hereto, Tenant shall have no right to maintain Tenant identification signs in any
other location in, on or about the Project and shall not display or erect any other Tenant
identification sign, display or other advertising material that is visible from the exterior of
the Building without Landlord&#146;s prior written consent which may be withheld in Landlord&#146;s sole
discretion; all signage displayed, installed or erected by or on behalf of Tenant shall conform to
all signage criteria, from time to time, adopted by Landlord.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;23.&nbsp;<U><B>Insurance</B></U><B>.</B>


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

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    <TD width="7%">&nbsp;</TD>
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    <TD align="left" valign="top">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
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    <TD align="left" valign="top">&nbsp;</TD>
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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Indemnification</B></U><B>. </B>Tenant shall protect, defend, indemnify and hold Landlord and
Landlord&#146;s Agents free and harmless from and against any and all damage, loss, liability or expense
including, without limitation, attorneys&#146; fees, expert witness fees and legal costs suffered
directly or by reason of any claim, cause of action, suit or judgment brought by or in favor of any
person or persons for damage, loss or expense due to, but not limited to, bodily injury and
property damage sustained by such person or persons which arises out of, is occasioned by or in any
way attributable to (i)&nbsp;injury or damage occurring upon the Premises, (ii)&nbsp;the use or occupancy of
the Project or any part thereof and adjacent areas by the Tenant, (iii)&nbsp;the acts or omissions of
the Tenant, its agents or employees or any contractors brought onto the Project by Tenant, except
to the extent caused solely by the gross negligence or willful misconduct of Landlord or Landlord&#146;s
Agents. Tenant agrees that the indemnity obligations assumed herein and in other provisions of
this Lease shall survive the expiration or earlier termination of the Term of this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Tenant&#146;s Insurance</B></U><B>. </B>Tenant shall maintain in full force and effect at all times
during the Term (including any extension(s)), at its own expense, for the protection of Tenant and
Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or
carriers, acceptable to Landlord, which afford the following coverages:



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;Worker&#146;s Compensation &#151; In accordance with state law.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;Commercial general liability insurance in an amount not less than Two Million and
no/100ths Dollars ($2,000,000.00) combined single limit for both bodily injury and property damage
which includes blanket contractual liability, broad form property damage, personal injury,
completed operations, and products liability naming Landlord as an additional insured.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;&#147;All Risk&#148; property insurance (including, without limitation, vandalism, malicious
mischief, inflation endorsement, and sprinkler leakage endorsement) on Tenant&#146;s Personal Property
located on or in the Premises together with any improvement or Alteration for which Landlord is not
obligated to repair pursuant to Paragraph&nbsp;25.D. Such insurance shall be in the full amount of the
replacement cost, as the same may from time to time increase as a result of inflation or otherwise.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>All-Risk Insurance</B></U><B>. </B>During the Term Landlord shall maintain &#147;All Risk&#148; property
insurance (including, at Landlord&#146;s option, inflation endorsement, sprinkler leakage endorsement,
and earthquake and flood coverage) on the Project, excluding coverage of all Tenant&#146;s Personal
Property located on or in the Premises, but including the Tenant Improvements. At Landlord&#146;s
option, the coverage shall also include insurance against loss of rents on an &#147;All Risk&#148; basis,
including flood, in an amount equal to the Monthly Rent, and any other sums payable under the
Lease, for a period of at least twelve (12)&nbsp;months commencing on the date of loss. Such insurance
shall name Landlord as a named insured and may at Landlord&#146;s option include Landlord&#146;s Agents as
named insureds and lender&#146;s loss payable endorsement(s) in favor of lenders with respect to the
Property. The insurance premiums, including the premiums resulting from increases in the valuation
of the Project shall be included in Operating Expenses.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Evidence of Insurance</B></U><B>. </B>Tenant shall deliver to Landlord, at least thirty (30)&nbsp;days
prior to the time the insurance first is required to be carried by Tenant, written evidence of the
insurance for the coverage specified in Paragraph&nbsp;23.B., with the limits not less than those
specified therein. The written evidence shall include a statement providing for written
notification to Landlord by the insurer not less than thirty (30)&nbsp;days prior to cancellation or
reduction of any required coverage.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Co-Insurer</B></U><B>. </B>If, on account of the failure of Tenant to comply with the foregoing
provisions, Landlord is adjudged a co-insurer by its insurance carrier, then, any loss or damage
Landlord shall sustain by reason thereof, including attorneys&#146; fees and costs, shall be borne by
Tenant and shall be immediately paid by Tenant upon receipt of a bill therefor and evidence of such
loss.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F. <U><B>Insurance Requirements</B></U><B>. </B>All insurance shall be in a form satisfactory to Landlord.
All policies required by Paragraph&nbsp;23.B. shall be carried with companies that have a general
policy holder&#146;s rating of not less than &#147;A&#148; and a financial rating of not less than Class &#147;X&#148; in
the most current edition of <I>Best&#146;s Insurance Reports</I>. All policies required by Paragraph&nbsp;23.B.
shall provide that the policies shall not be subject to material alteration or cancellation except
after at least thirty (30)&nbsp;days&#146; prior written notice to Landlord, and they shall be primary as to
Landlord. If Tenant fails to procure and maintain the insurance required hereunder, Landlord may,
but shall not be required to, order such insurance at Tenant&#146;s expense and Tenant shall reimburse
Landlord. Such reimbursement shall include

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

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
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<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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 style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

</DIV>

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

<P align="left" style="font-size: 10pt">all sums incurred by Landlord, including reasonable attorneys&#146; fees, with interest thereon at
the Interest Rate.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;G. <U><B>No Limitation of Liability</B></U><B>. </B>Landlord makes no representation that the limits of
liability specified to be carried by Tenant under the terms of this Lease are adequate to protect
Tenant or Landlord, and in the event Tenant believes that any such insurance coverage called for
under this Lease is insufficient, Tenant shall provide, at its own expense, such additional
insurance as Tenant deems adequate.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;H. <U><B>Landlord&#146;s Disclaimer</B></U><B>. </B>Landlord and Landlord&#146;s Agents shall not be liable for any
loss or damage to persons or property resulting from fire, explosion, falling plaster, glass, tile
or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Project,
or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or
whatsoever, unless caused by or due to the gross negligence or willful misconduct of Landlord.
Landlord and Landlord&#146;s Agents shall not be liable for interference with the light, air, or any
latent defect in the Project. In no event whatsoever shall Landlord be liable for losses
attributable to interruption of telephone services. Tenant shall give prompt written notice to
Landlord in the case of a casualty, accident or repair needed in the Project.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I. <U><B>Increased Coverage</B></U><B>. </B>Upon demand, Tenant shall provide Landlord, at Tenant&#146;s
expense, with such increased amount of existing insurance, and such other insurance as Landlord or
Landlord&#146;s lender may reasonably require, to afford Landlord and Landlord&#146;s lender adequate
protection.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;24.&nbsp;<U><B>Waiver of Subrogation</B></U><B>. </B>Landlord and Tenant each hereby waive all rights of
recovery against the other on account of loss and damage occasioned to such waiving party for its
property or the property of others under its control to the extent that such loss or damage is
insured against under any insurance policies which may be in force at the time of such loss or
damage. Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give
notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in
this Lease and Tenant and Landlord shall cause each insurance policy obtained by such party to
provide that the insurance company waives all right of recovery by way of subrogation against
either Landlord or Tenant in connection with any damage covered by such policy.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;25.&nbsp;<U><B>Damage or Destruction</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Partial Damage &#151; Insured</B></U><B>. </B>If the Premises are damaged by any casualty which is
covered under the &#147;All-Risk&#148; insurance carried by Landlord pursuant to Paragraph&nbsp;23.C., then
Landlord shall restore the damage, provided insurance proceeds are available to pay the cost of
restoration and provided such restoration can be completed within one hundred twenty (120)&nbsp;days
after the commencement of the work in the opinion of Landlord. In such event this Lease shall
continue in full force and effect, except that Tenant shall be entitled to a proportionate
reduction of Monthly Rent while such restoration for which Landlord is obligated hereunder takes
place, such proportionate reduction to be based upon the extent to which the damage and restoration
efforts interfere with Tenant&#146;s use of the Premises.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Partial Damage &#151; Uninsured</B></U><B>. </B>If the Premises or the Building is damaged by a risk
not covered by Landlord&#146;s insurance, or the available proceeds of insurance are less than the cost
of restoration, or if the restoration cannot be completed within one hundred twenty (120)&nbsp;days
after the commencement of work, in the opinion of Landlord, then Landlord shall have the option
either to: (i)&nbsp;repair or restore such damage, this Lease continuing in full force and effect, but
the Monthly Rent to be proportionately abated as provided in Paragraph&nbsp;25.A.; or (ii)&nbsp;give notice
to Tenant at any time within thirty (30)&nbsp;days after such damage terminating this Lease as of a date
to be specified in such notice, which date shall be not less than thirty (30)&nbsp;nor more than sixty
(60)&nbsp;days after giving such notice. If notice of termination is given, this Lease shall expire and
all interest of Tenant in the Premises shall terminate on the date specified in the notice and the
Monthly Rent shall be reduced in proportion to the extent, if any, to which the damage interferes
with the use of the Premises by Tenant. All insurance proceeds for the Premises shall be payable
solely to Landlord, and Tenant shall have no interest in the proceeds.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Total Destruction</B></U><B>. </B>If the Premises or the Building is totally destroyed or the
Premises or Building, as the case may be, cannot be restored as required herein under applicable
laws and regulations or due to the presence of hazardous factors such as earthquake faults,
chemical waste and



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

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
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<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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 style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

</DIV>

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




<P align="left" style="font-size: 10pt">similar dangers, notwithstanding the availability of insurance proceeds, this Lease shall be
terminated effective the date of the damage.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Landlord&#146;s Obligations</B></U><B>. </B>Landlord shall not be required to insure against or repair
any injury or damage by fire or other cause, or to make any restoration or replacement of any
paneling, decorations, partitions, railings, floor coverings, office fixtures or other items which
are Alterations or Personal Property installed in the Premises by Tenant or at the direct or
indirect expense of Tenant. Tenant shall be required at Tenant&#146;s sole cost and expense, separately
to insure the same and promptly to restore or replace same in the event of damage. Except for any
abatement of Monthly Rent relating to the plan of restoration of damage for which Landlord is
obligated to repair hereunder, Tenant shall have no claim against Landlord for any damage suffered
by reason of any such damage, destruction, repair or restoration; nor shall Tenant have the right
to terminate this Lease as the result of any statutory provision now or hereafter in effect
pertaining to the damage and destruction of the Premises, except as expressly provided herein.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Damage Near End of Term</B></U><B>. </B>Anything herein to the contrary notwithstanding, if the
Premises or the Building is destroyed or damaged during the last twelve (12)&nbsp;months of the Term,
then Landlord may, at its option, cancel and terminate this Lease as of the date of the occurrence
of the damage. If Landlord does not elect to terminate this Lease, the repair of the damage shall
be governed by the other provisions of this Paragraph&nbsp;25. If this Lease is terminated, Landlord
may keep all the insurance proceeds resulting from the damage, except for the proceeds which
specifically insured Tenant&#146;s Personal Property.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;26.&nbsp;<U><B>Condemnation</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Total Taking &#151; Termination</B></U><B>. </B>If title to all of the Premises or so much thereof is
taken or appropriated for any public or quasi-public use under any statute or by right of eminent
domain so that reconstruction of the Premises will not, in Landlord&#146;s and Tenant&#146;s mutual opinion,
result in the Premises being reasonably suitable for Tenant&#146;s continued occupancy for the uses and
purposes permitted by this Lease, this Lease shall terminate as of the date that possession of the
Premises or part thereof be taken. A sale by Landlord to any authority having the power of eminent
domain, either under threat of condemnation or while condemnation proceedings are pending, shall be
deemed a taking under the power of eminent domain for all purposes of this Paragraph.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Partial Taking</B></U><B>. </B>If any part of the Premises or the Building is taken and the
remaining part is reasonably suitable for Tenant&#146;s continued occupancy for the purposes and uses
permitted by this Lease, this Lease shall, as to the part so taken, terminate as of the date that
possession of such part of the Premises or Building is taken. If the Premises is so partially
taken the Rent and other sums payable hereunder shall be reduced in the same proportion that
Tenant&#146;s use and occupancy is reduced.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>No Apportionment of Award</B></U><B>. </B>No award for any partial or entire taking shall be
apportioned. Tenant assigns to Landlord its interest in any award which may be made in such taking
or condemnation, together with any and all rights of Tenant arising in or to the same or any part
thereof. Nothing contained herein shall be deemed to give Landlord any interest in or require
Tenant to assign to Landlord any separate award made to Tenant for the: taking of Tenant&#146;s
Personal Property, for the interruption to Tenant&#146;s business, or its moving costs, or for the loss
of its good will.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Temporary Taking</B></U><B>. </B>No temporary taking of the Premises shall terminate this Lease
or give Tenant any right to any abatement of Rent. Any award made to Tenant by reason of such
temporary taking shall belong entirely to Tenant and Landlord shall not be entitled to share
therein. Each party agrees to execute and deliver to the other all instruments that may be
required to effectuate the provisions of this Paragraph.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;27.&nbsp;<U><B>Assignment and Subletting</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Landlord&#146;s Consent</B></U><B>. </B>Tenant shall not enter into a Sublet without Landlord&#146;s prior
written consent, which consent shall not be unreasonably withheld. Any attempted or purported
Sublet without Landlord&#146;s prior written consent shall be void and confer no rights upon any third
person and, at Landlord&#146;s election, shall terminate this Lease. Each Subtenant shall agree in
writing, for the benefit of Landlord, to assume, to be bound by, and to perform and observe the
terms, covenants and conditions of this Lease to be performed and observed by Tenant. Every Sublet
shall recite that it is and



<P align="center" style="font-size: 10pt">14

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
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<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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 style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

</DIV>

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




<P align="left" style="font-size: 10pt">shall be subject and subordinate to the provisions of this Lease, and that the termination of
this Lease shall constitute a termination (at the option of the Landlord) of every such Sublet.
Notwithstanding anything contained herein, (i)&nbsp;Tenant shall not be released from personal liability
for the performance of any of the terms, covenants and conditions of this Lease by reason of
Landlord&#146;s consent to a Sublet unless Landlord specifically grants such release in writing, and
(ii)&nbsp;the parties agree that it shall be reasonable for Landlord to withhold its consent to any
proposed Sublet when the proposed Subtenant is an occupant of the Property or is a third party
which is already involved in negotiations with Landlord to lease space in the Project.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Information to be Furnished</B></U><B>. </B>If Tenant desires at any time to Sublet the Premises
or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in
writing to Landlord: (i)&nbsp;the name of the proposed Subtenant; (ii)&nbsp;the nature of the proposed
Subtenant&#146;s business to be carried on in the Premises; (iii)&nbsp;the terms and provisions of the
proposed Sublet and a copy of the proposed Sublet form containing a description of the subject
premises; and (iv)&nbsp;such financial information, including financial statements, as Landlord may
reasonably request concerning the proposed Subtenant. If Tenant requests Landlord&#146;s consent to a
proposed Sublet, Tenant shall pay to Landlord, whether or not consent is ultimately given,
Landlord&#146;s reasonable attorneys&#146; fees incurred in connection with such request.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Landlord&#146;s Alternatives</B></U><B>. </B>At any time within thirty (30)&nbsp;days after Landlord&#146;s
receipt of all the information specified in Paragraph&nbsp;27.B., Landlord may, by written notice to
Tenant, elect: (i)&nbsp;to lease for its own account the Premises or the portion thereof so proposed to
be Sublet by Tenant, upon the same terms as those offered to the proposed Subtenant but on a form
acceptable to Landlord; (ii)&nbsp;to terminate this Lease as it relates to the Premises or the portion
thereof so proposed to be Sublet by Tenant as of the later of (x)&nbsp;the proposed effective date of
such Sublet or (y)&nbsp;thirty (30)&nbsp;days after the date Landlord is in receipt of the information
specified in Paragraph&nbsp;27.B.; (iii)&nbsp;to consent to the Sublet by Tenant; or (iv)&nbsp;to refuse its
consent to the Sublet.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If Landlord consents to the Sublet, Tenant may thereafter enter a valid Sublet of the Premises
or portion thereof, upon the terms and conditions and with the proposed Subtenant set forth in the
information furnished by Tenant to Landlord pursuant to Paragraph&nbsp;27.B., subject, however, to the
condition that any excess of the Subrent over the Rent required to be paid by Tenant hereunder
shall be split evenly between Landlord and Tenant as and when received by Tenant.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Proration</B></U><B>. </B>If a portion of the Premises is Sublet, the pro rata share of the Rent
attributable to such partial area of the Premises shall be determined by Landlord by dividing the
Rent payable by Tenant hereunder by the total square footage of the Premises and multiplying the
resulting quotient (the per square foot rent) by the number of square feet of the Premises which
are Sublet.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Executed Counterpart</B></U><B>. </B>No Sublet shall be valid nor shall any Subtenant take
possession of the Premises until an executed counterpart of the Sublet agreement has been delivered
to Landlord.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F. <U><B>Surrender of Lease</B></U><B>. </B>The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord,
terminate all or any existing Sublets, or may, at the option of Landlord, operate as an assignment
to it of any or all such Sublets.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;G. <U><B>No Mortgages</B></U><B>. </B>Tenant shall not pledge, hypothecate or encumber this Lease or
Tenant&#146;s interest herein or in the Premises in any manner, including without limitation, by means
of any mortgage, deed of trust, security interest or assignment for security purposes, and any such
attempted pledge, hypothecation or encumbrance shall be void and constitute a default under this
Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;H. <U><B>Effect of Default</B></U><B>. </B>Notwithstanding any provision of this Paragraph&nbsp;27 to the
contrary, in the event of the occurrence of any uncured default by Tenant in the performance of any
term or condition of this Lease, any right of Tenant at such time to seek to Sublet this Lease
pursuant to this Paragraph&nbsp;27 and any obligations of Landlord to review any proposed Sublet or
exercise its rights under Paragraph&nbsp;27.C above shall be suspended, and any applicable period for
review or action by Landlord shall be tolled, until such default is cured of no force or effect.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I. <U><B>Permitted Transfers</B></U><B>. </B>Notwithstanding anything to the contrary contained in this
Lease, Tenant, without Landlord&#146;s prior written consent, may sublet the Premises or assign this



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

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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 style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

</DIV>

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




<P align="left" style="font-size: 10pt">Lease to: (i)&nbsp;a subsidiary, affiliate, division or corporation controlling, controlled by or
under common control with Tenant; (ii)&nbsp;a successor corporation related to Tenant by merger,
consolidation, nonbankruptcy reorganization or government action; or (iii)&nbsp;a purchaser of
substantially all of Tenant&#146;s assets located at the Premises (collectively &#147;Permitted
Transferees&#148;); provided Tenant enters into such a transaction in good faith and not for the purpose
of indirectly entering into a sublet or assignment of this Lease with a person or entity other than
a Permitted Transferee through a step transaction or otherwise. For purposes of this Lease, a sale
of Tenant&#146;s capital stock through any public exchange shall not be deemed an assignment, subletting
or other transfer of this Lease or the Premises requiring Landlord&#146;s consent. Tenant shall not be
required to obtain Landlord&#146;s consent thereof, nor shall provisions of (ii)&nbsp;or (iv)&nbsp;of Paragraph
27.C hereof apply (but all other provisions of said Paragraph, including the second full
grammatical paragraph thereof, shall apply); in no event shall such assignment or sublease release
Tenant from any liability for the performance of the obligations under this Lease, unless Landlord
shall have released Tenant in writing. Further, the requirements contained in the third and fourth
sentences of Paragraph&nbsp;27.A shall apply to all such transfers.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;28.&nbsp;<U><B>Default</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Tenant&#146;s Default</B></U><B>. </B>A default under this Lease by Tenant shall exist if any of the
following events shall occur:



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;If Tenant fails to pay Rent or any other sum required to be paid hereunder within five (5)
days after the date when the same is due; or


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;If Tenant fails to perform any term, covenant or condition of this Lease except those
requiring the payment of money, and Tenant shall have failed to cure such breach within twenty (20)
days after written notice from Landlord; provided, however, that when such failure could not
reasonably be cured within the twenty (20)&nbsp;day period, then Tenant shall not be in default if
Tenant promptly commences the performance of such cure within the twenty (20)&nbsp;day period and
diligently thereafter prosecutes the same to completion; or


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;If Tenant shall have failed to continuously and uninterruptedly conduct its business in
the Premises, or shall have abandoned or vacated the Premise; or


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv)&nbsp;In the event of a general assignment by Tenant for the benefit of creditors; the filing
of any voluntary petition in bankruptcy by Tenant or the filing of an involuntary petition by
Tenant&#146;s creditors, which involuntary petition remains undischarged for thirty (30)&nbsp;days; the
employment of a receiver to take possession of substantially all of Tenant&#146;s assets or any part of
the Premises, if such receivership remains undissolved for ten business days after creation
thereof; the attachment, execution or other judicial seizure of all or substantially all of
Tenant&#146;s assets or any part of the Premises, if such attachment or other seizure remains
undismissed or undischarged for ten business days after the levy thereof; the admission by Tenant
in writing of its inability to pay its debts as they become due; the filing by Tenant of a petition
seeking any reorganization or arrangement, composition, readjustment, liquidation, dissolution or
similar relief under any present or future statute, law or regulation; the filing by Tenant of an
answer admitting or failing timely to contest a material allegation of a petition filed against
Tenant in any such proceeding; or, if within thirty (30)&nbsp;days after the commencement of any
proceeding against Tenant seeking any reorganization or arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute, law or regulation,
such proceeding shall not have been dismissed.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Remedies</B></U><B>. </B>Upon a default, Landlord shall have the following remedies, in addition
to all other rights and remedies provided by law or otherwise provided in this Lease, to which
Landlord may resort cumulatively or in the alternative:



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;Landlord may continue this Lease in full force and effect, and this Lease shall continue
in full force and effect as long as Landlord does not terminate this Lease, and Landlord shall have
the right to collect Rent when due. During the period Tenant is in default, Landlord may enter the
Premises and relet it, or any part of it, to third parties for Tenant&#146;s account, provided that any
rent in excess of the Monthly Rent due hereunder shall be payable to Landlord. Tenant shall be
liable immediately to Landlord for all costs Landlord incurs in reletting the Premises or any part
thereof, including, without limitation, broker&#146;s commissions, expenses of cleaning and redecorating
the Premises required by the reletting and like costs. Reletting may be for a period shorter or
longer than the


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    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
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<TR style="font-size: 1px">
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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="left" style="font-size: 10pt">remaining Term of this Lease. No act by Landlord other than giving written notice to Tenant
shall terminate this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;Landlord may by written notice terminate Tenant&#146;s right to possession of the Premises at
any time and relet the Premises or any part thereof. Acts of maintenance, efforts to relet the
Premises or the appointment of a receiver on Landlord&#146;s initiative to protect Landlord&#146;s interest
under this Lease shall not constitute a termination of Tenant&#146;s right to possession. On
termination, Landlord has the right to remove all Tenant&#146;s Personal Property and store same at
Tenant&#146;s cost and to recover from Tenant:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;the worth at the time of award of the unpaid Rent which had been earned at the time of
termination including interest at the Interest Rate;



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;the worth at the time of award of the amount by which the unpaid Rent which would have
been earned after termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided, including interest at the Interest Rate;



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;the worth at the time of award of the amount by which unpaid Rent for the balance of the
term after the time of award exceeds the amount of such rental loss for the same period that Tenant
proves could be reasonably avoided, discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%);



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;any other amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant&#146;s failure to perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including without limitation the following: (i)&nbsp;all
expenses for repairing or restoring the Premises, (ii)&nbsp;all brokers&#146; fees, advertising costs and
other expenses of repairing or restoring the Premises, (iii)&nbsp;all expenses in retaking possession of
the Premises, and (iv)&nbsp;reasonable attorneys&#146; fees, expert witness fees and court costs; and



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;as used in subparagraphs (a)&nbsp;through (c)&nbsp;above, the term &#147;time of award&#148; shall mean the
date of entry of a judgment or award against Tenant in an action or proceeding arising out of
Tenant&#146;s breach of this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure
Sections&nbsp;1174 and 1179, or under any other present or future law, in the event Tenant is evicted or
Landlord takes possession of the Premises by reason of any default of Tenant hereunder.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;Landlord may, with or without terminating this Lease, re-enter the Premises and remove
all persons and property from the Premises; such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking
possession of the Premises by Landlord pursuant to this Paragraph shall be construed as an election
to terminate this Lease unless a written notice of such intention is given to Tenant.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Landlord&#146;s Default</B></U><B>. </B>Landlord shall not be deemed to be in default in the
performance of any obligation required to be performed by it hereunder unless and until it has
failed to perform such obligation within twenty (20)&nbsp;days after receipt of written notice by Tenant
to Landlord specifying the nature of such default; provided, however, that if the nature of
Landlord&#146;s obligation is such that more than twenty (20)&nbsp;days are required for its performance,
then Landlord shall not be deemed to be in default if it shall commence such performance within
such twenty (20)&nbsp;day period and thereafter diligently prosecute the same to completion.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;29.&nbsp;<U><B>Subordination</B></U><B>. </B>This Lease is and shall automatically be subject and subordinate
to all ground and underlying leases, mortgages, and deeds of trust (collectively, &#147;Encumbrance&#148;)
which may now or hereafter affect the Premises, to the CC&#038;R&#146;s and to all renewals, modifications,
consolidations, replacements and extensions thereof; provided, however, if the holder or holders of
any such Encumbrance (&#147;Holder&#148;) shall require that this Lease be prior and superior thereto, then
upon written notice from Holder to Tenant this Lease shall be automatically prior and superior to
the lien of such Encumbrance without regard to the sequence of recordation. Within ten (10)&nbsp;days
after Landlord or Holder&#146;s written request, Tenant shall execute any and all documents requested by
Landlord or Holder to further effectuate and evidence such subordination of this Lease to any lien
of the Encumbrance or to evidence the Holder&#146;s election that this Lease be prior and senior to the
Encumbrance. Notwithstanding anything to the contrary set forth in this Paragraph, Tenant hereby
attorns and agrees to attorn to the


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

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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
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    <TD align="left" valign="top">&nbsp;</TD>
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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="left" style="font-size: 10pt">Holder and any person purchasing or otherwise acquiring the Premises at any sale or other
proceeding or pursuant to the exercise of any other rights, powers or remedies under such
Encumbrance, which obligation to attorn shall survive any foreclosure of any Encumbrance; and
Tenant agrees within ten (10)&nbsp;days of request of Holder or any such other person to execute an
attornment agreement recognizing Holder or such other person as Landlord under this Lease and
acknowledging that this Lease is and shall remain in full force and effect and binding upon Tenant
notwithstanding any foreclosure of such Encumbrance.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;30.&nbsp;<U><B>Notices</B></U><B>. </B>Every notice to be given by any party to any other party with respect
hereto, shall be in writing and shall not be effective for any purpose unless the same shall be
delivered to the addressee personally, by a reputable express delivery service, a recognized
overnight air courier service, or United States certified mail, return receipt requested, addressed
to the respective parties at the addresses set forth at C.11. of the Information Sheet, or to such
other address as either party may from time to time designate by notice to the other given in
accordance with this Paragraph. All notices shall be effective (i)&nbsp;when delivered locally by hand
or by a reputable express delivery service (ii)&nbsp;one business day after deposit with a recognized
overnight air courier service or (iii)&nbsp;five business days after having been sent by certified mail,
return receipt requested.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;31.&nbsp;<U><B>Attorneys&#146; Fees</B></U><B>. </B>In the event Landlord engages an attorney to pursue the recovery
of any Rent owed by Tenant hereunder (whether or not any action or legal proceeding is ultimately
filed) or if either party brings any action or legal proceeding for damages for an alleged breach
of any provision of this Lease, to recover Rent or other sums due, to terminate the tenancy of the
Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right
of either party, the prevailing party shall be entitled to recover as a part of such action or
proceedings, or in a separate action brought for that purpose, reasonable attorneys&#146; fees and
costs, including expert witness fees (and without regard to whether or not such action or
proceedings are pursued to judgment).


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;32.&nbsp;<U><B>Estoppel Certificates</B></U><B>. </B>Tenant shall within ten (10)&nbsp;days following written
request by Landlord:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;Execute and deliver to Landlord any documents, including estoppel certificates, in the
form prepared by Landlord (a)&nbsp;certifying the date of commencement of this Lease, (b)&nbsp;certifying
that this Lease is unmodified and in full force and effect or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full force and effect, (c)
stating the dates to which Rent and any other amounts payable hereunder have been paid and the
amount of any unforfeited security deposit then held by Landlord, and (d)&nbsp;acknowledging that there
are not, to Tenant&#146;s knowledge, any uncured defaults on the part of Landlord, or, if there are
uncured defaults on the part of the Landlord, stating the nature of such uncured defaults, (e)
acknowledging that Tenant does not have any claim or right of offset against Landlord (or if Tenant
does have any such claim or right of offset, the nature of such claim or right of offset), and (f)
setting forth such other matters as may reasonably be requested by Landlord. Tenant&#146;s failure to
deliver an estoppel certificate within ten (10)&nbsp;days after delivery of Landlord&#146;s written request
therefor shall be conclusive upon Tenant (a)&nbsp;that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (b)&nbsp;that there are now no uncured defaults
in Landlord&#146;s performance and (c)&nbsp;that no Rent has been paid in advance and no security deposit is
held by Landlord, (d)&nbsp;that Tenant has no claims or rights of offset against Landlord and (e)&nbsp;that
such other matters as were set forth in such estoppel certificate as prepared by Landlord are true
and correct; provided, further, that such failure shall constitute a breach of this Lease and
Landlord&#146;s remedies shall be as specified in Paragraph&nbsp;28.B.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;Deliver to Landlord the current financial statements of Tenant, and financial statements
of the two (2)&nbsp;years prior to the current financial statements year, with an opinion of a certified
public accountant, including a balance sheet and profit and loss statement for the most recent
prior year, all prepared in accordance with generally accepted accounting principles consistently
applied.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;33.&nbsp;<U><B>Transfer of the Project by Landlord</B></U><B>. </B>In the event of any conveyance of the
Project or the Building and assignment by Landlord of this Lease, Landlord shall be and is hereby
entirely released from all liability under any and all of its covenants and obligations contained
in or derived from this Lease occurring or accruing after the date of the conveyance and
assignment, and Tenant agrees to attorn to such transferee.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;34.&nbsp;<U><B>Landlord&#146;s Right to Perform Tenant&#146;s Covenants</B></U><B>. </B>If Tenant fails to make any
payment or perform any other act on its part to be made or performed under this Lease, Landlord
after


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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
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    <TD align="left" valign="top">&nbsp;</TD>
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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
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</DIV>

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

<P align="left" style="font-size: 10pt">fifteen (15)&nbsp;days&#146; written notice may, but shall not be obligated to, and without waiving or
releasing Tenant from any obligation of Tenant under this Lease, make such payment or perform such
other act to the extent Landlord may deem desirable, and in connection therewith, pay expenses and
employ counsel. All sums so paid by Landlord and all penalties, interest and costs in connection
therewith shall be due and payable by Tenant on the next day after any such payment by Landlord,
together with interest thereon at the Interest Rate from such date to the date of payment by Tenant
to Landlord, plus collection costs and attorneys&#146; fees. Landlord shall have the same rights and
remedies for the nonpayment thereof as in the case of default in the payment of Rent.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;35.&nbsp;<U><B>Tenant&#146;s Remedy</B></U><B>. </B>The obligations of Landlord under this Lease do not and shall
not constitute personal obligations of Landlord or any of Landlord&#146;s Agents, and Tenant agrees that
it shall look solely to the real estate that is the subject of this Lease and to no other assets of
Landlord or Landlord&#146;s Agents for satisfaction of any liability that may now or hereafter arise in
respect of this Lease and will not seek recourse against Landlord or Landlord&#146;s Agents or any of
their personal assets for such satisfaction.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;36.&nbsp;<U><B>Mortgagee Protection</B></U><B>. </B>If Landlord defaults under this Lease, Tenant shall, if
earlier requested by Landlord or any lender with respect to the Project, notify by registered or
certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the
Premises and offer such beneficiary or mortgagee a reasonable opportunity to cure the default,
including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if
such should prove necessary to effect a cure.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;37.&nbsp;<U><B>Brokers</B></U><B>. </B>Tenant warrants and represents that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this Lease, except for the broker(s)
specified at C.10. of the Information Sheet, and that it knows of no real estate broker or agent
who is or might be entitled to a commission in connection with this Lease. Tenant agrees to
defend, indemnify and hold Landlord and Landlord&#146;s Agents free and harmless from and against any
and all liabilities or expenses, including attorneys&#146; fees and costs, arising out of or in
connection with claims made by any broker or individual for commissions or fees resulting from
Tenant&#146;s execution of this Lease.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;38.&nbsp;<U><B>Acceptance</B></U><B>. </B>Delivery of this Lease, duly executed by Tenant, constitutes an offer
to lease the Premises, and under no circumstances shall such delivery be deemed to create an option
or reservation to lease the Premises for the benefit of Tenant. This Lease shall only become
effective and binding upon full execution hereof by Landlord and delivery of a signed copy to
Tenant.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;39.&nbsp;<U><B>Recording</B></U><B>. </B>Neither party shall record this Lease nor a short form memorandum
thereof.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;40.&nbsp;<U><B>Modifications for Lender</B></U><B>. </B>If, in connection with obtaining financing for the
Project, or any portion thereof, Landlord&#146;s lender shall request reasonable modifications to this
Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its
consent thereto, provided such modifications do not materially adversely affect Tenant&#146;s rights
hereunder.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;41.&nbsp;<U><B>Parking</B></U><B>. </B>Tenant shall have the right to park in the Project&#146;s parking facilities
in common with other tenants of the Building upon terms and conditions, as may from time to time be
established by Landlord and in accordance with any parking control or monitoring devices from time
to time installed or implemented by Landlord. Tenant shall not overburden the parking facilities
and shall not use more than one (1)&nbsp;parking space per three hundred thirty-three (333)&nbsp;rentable
square feet of the Premises. Tenant also agrees to cooperate with Landlord and other tenants in
the use of the parking facilities. Landlord reserves the right, in its discretion, to allocate and
assign parking spaces among Tenant and the other tenants or to restrict the use of certain parking
spaces for certain tenants and to install or otherwise implement parking control or monitoring
devices for the parking facilities. In the event that parking control or monitoring devices for
the parking facilities are installed, Landlord reserves the right to charge a reasonable fee for
use of the parking facilities. Tenant shall establish and maintain during the Term hereof a
program to encourage maximum use of public transportation by personnel of Tenant employed on the
Premises, including without limitation, the distribution to such employees of written materials
explaining the convenience and availability of public transportation facilities adjacent or
proximate to the Building, staggering working hours of employees, and encouraging use of such
facilities, all at Tenant&#146;s sole reasonable cost and expense. Tenant agrees to comply with any
lawful regulation or ordinance of the City of San Jose or the County of Santa Clara respecting
transportation management in those jurisdictions, related to the conduct of Tenant&#146;s business
within the Premises.


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

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<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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 style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;42.&nbsp;<U><B>Use of &#147;San Jose Gateway&#148; Prohibited</B></U><B>. </B>Tenant shall not employ the term &#147;San Jose
Gateway&#148; in the name or title of its business or occupation without Landlord&#146;s prior written
consent.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;43.&nbsp;<U><B>Interest</B></U><B>. </B>Any rent or other amount not paid by Tenant to Landlord when due
hereunder shall bear interest at the lesser of (i)&nbsp;the rate of twelve percent (12%) per annum or
(ii)&nbsp;the maximum rate permitted by applicable law (with such rate of interest sometimes referred to
herein as the &#147;Interest Rate&#148;) from the date due until paid.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;44.&nbsp;<U><B>Quitclaim</B></U><B>. </B>Upon any termination of this Lease, Tenant, at Landlord&#146;s request,
shall execute, have acknowledged and deliver to Landlord a quitclaim deed for all Tenant&#146;s interest
in the Project.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;45.&nbsp;<U><B>Relocation</B></U><B>. </B>Landlord shall have the right, upon ninety (90)&nbsp;days&#146; prior written
notice to Tenant, at any time and from time to time during the Term, to relocate Tenant from the
Premises to any other premises (&#147;Relocation Premises&#148;) in the Project provided that the total
rentable square footage of the Relocation Premises is reasonably comparable, as determined in
Landlord&#146;s sole discretion, to the total rentable square footage of the Premises. If, as a result
of any such relocation, the total rentable square footage of Tenant&#146;s premises is reduced, there
shall be an appropriate adjustment in monthly Base Rent and an appropriate concomitant adjustment
in Tenant&#146;s Property Percentage. Landlord shall also provide tenant improvements in the Relocation
Premises which are comparable to the then existing tenant improvements in the Premises. Except as
provided in this Paragraph&nbsp;45, none of the other terms of this Lease shall change in the event of
any relocation of Tenant made pursuant to this Paragraph&nbsp;45. Following any such relocation, the
term &#147;Premises&#148; as used in this Lease shall mean the Relocation Premises. Any relocation will be at
Landlord&#146;s sole cost.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;46.&nbsp;<U><B>General</B></U><B>.</B>


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A. <U><B>Captions</B></U><B>. </B>The captions and headings used in this Lease are for the purpose of
convenience only and shall not be construed to limit or extend the meaning of any part of this
Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;B. <U><B>Executed Copy</B></U><B>. </B>Any fully executed copy of this Lease shall be deemed an original
for all purposes.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;C. <U><B>Time</B></U><B>. </B>Time is of the essence for the performance and observance of each term,
covenant and condition of this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;D. <U><B>Severability</B></U><B>. </B>If one or more of the provisions contained herein, except for the
payment of Rent, is for any reason held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any other provision of this
Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had
not been contained herein.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;E. <U><B>Choice of Law</B></U><B>. </B>This Lease shall be construed and enforced in accordance with the
laws of the State of California. The language in all parts of this Lease shall in all cases be
construed as a whole according to its fair meaning and not strictly for or against either Landlord
or Tenant.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;F. <U><B>Interpretation</B></U><B>. </B>When the context of this Lease requires, the neuter gender
includes the masculine, the feminine, a partnership or corporation or joint venture, and the
singular includes the plural. The term &#147;including&#148; shall be deemed to mean &#147;including, but not by
way of limitation&#148; and the term &#147;or&#148; has the inclusive meaning represented by the term &#147;and/or.&#148;



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;G. <U><B>Effect of Remeasurement</B></U><B>. </B>The total rentable square feet of the Premises and of the
Building is subject to remeasurement, at Landlord&#146;s discretion, by an architect selected by
Landlord using the standard of the Building Owners and Managers Association ANSI/BOMA-Z65.1-1996 or
such other standard as then in effect and generally used by the Building Owners and Managers
Association for such purposes. In the event the actual square footage for the Premises and/or the
Building as determined by a remeasurement by Landlord differs from the square footage set forth in
this Lease, there shall be an appropriate adjustment in monthly Base Rent and an appropriate
concomitant adjustment in Tenant&#146;s Property Percentage based on the square footage as determined by
the remeasurement.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;H. <U><B>Binding Effect</B></U><B>. </B>The covenants and agreement contained in this Lease shall be
binding on the parties hereto and on their respective successors and assigns to the extent this
Lease is assignable.



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

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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 style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I. <U><B>Waiver</B></U><B>. </B>The waiver by Landlord of any breach of any term, covenant or condition of
this Lease shall not be deemed to be a waiver of such provision or any subsequent breach of the
same or any other term, covenant or condition of this Lease. The subsequent acceptance of Rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach at the time of
acceptance of such payment. No term, covenant or condition of this Lease shall be deemed to have
been waived by Landlord unless the waiver is in writing signed by Landlord.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;J. <U><B>Entire Agreement</B></U><B>. </B>This Lease, including the Information Sheet, is the entire
agreement between the parties, and there are no agreements or representations between the parties
except as expressed herein. Except as otherwise provided herein, no subsequent change or addition
to this Lease shall be binding unless in writing and signed by the parties hereto.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;K. <U><B>Authority</B></U><B>. </B>If Tenant is a corporation or a partnership, each individual executing
this Lease on behalf of the corporation or partnership, as the case may be, represents and warrants
that he is duly authorized to execute and deliver this Lease on behalf of the entity in accordance
with its corporate bylaws, statement of partnership or certificate of limited partnership, as the
case may be, and that this Lease is binding upon the entity in accordance with its terms.
Landlord, at its option, may require a copy of such written authorization to enter this Lease. The
failure of Tenant to deliver the same to Landlord within fifteen (15)&nbsp;days of Landlord&#146;s request
therefor shall be deemed a default under this Lease.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;L. <U><B>Exhibits</B></U><B>. </B>All exhibits, amendments, riders and addenda attached hereto are hereby
incorporated herein and made a part hereof.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;M. <U><B>Counterparts</B></U><B>. </B>This Lease may be executed in counterparts, each of which shall be
an original, but all counterparts shall constitute one (1)&nbsp;instrument.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>THIS LEASE</B>, executed as of the date(s) set forth below, is effective as of the Effective Date
set forth in B. of the Information Sheet.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">Dated <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>, 2004</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">TENANT:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><U>Spatializer Audio
Laboratories, Inc.</U><BR>
<U>a Delaware corporation</U></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <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">By:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <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">Its:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">Dated <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>, 2004</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">LANDLORD:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">C.M. STRATPLAN, INC.,<BR>
a California corporation</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <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">By:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <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">Its:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <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">By:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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>
    <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">Its:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">21

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Initials:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <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 style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&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">Landlord
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Tenant</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">



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



<P align="center" style="font-size: 10pt">&#091;to be attached when available&#093;




<P align="center" style="font-size: 10pt">1
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

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




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



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



<P align="left" style="font-size: 10pt">The Property is located in the City of San Jose, County of Santa Clara, State of California:



<P align="left" style="font-size: 10pt">All of Parcel C, as shown upon that certain Map entitled, &#147;Parcel Map Being a Portion of Pueblo
Tract No.&nbsp;1&#148;, which Map was filed for record in the office of the Recorder of the County of Santa
Clara, State of California, on April&nbsp;28, 1972 in Book 300 of Maps, at page 19.<BR>



<P align="center" style="font-size: 10pt">1
</DIV>

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



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



<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="left">1.&nbsp;&nbsp;</TD>
    <TD>Landlord shall furnish and install within the Premises the tenant improvements described in
the Space Plans attached hereto as <U>EXHIBIT C-1</U> (&#147;Tenant Improvements&#148;) in accordance
with the working drawings (&#147;Working Drawings&#148;) approved as provided in Section&nbsp;3 below. Any
additional work (&#147;Tenant Extra Improvements&#148;) requested by Tenant shall be subject to
Landlord&#146;s approval, and if approved shall be at Tenant&#146;s expense.</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="left">2.&nbsp;&nbsp;</TD>
    <TD>Tenant shall bear all costs of Tenant Extra Improvements. Any modifications requested by
Tenant to Tenant Improvements shall constitute Tenant Extra Improvements as used herein.</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="left">3.&nbsp;&nbsp;</TD>
    <TD>Landlord and Tenant will supply the information necessary for construction of Tenant
Improvements pursuant to the following schedule:</TD>
</TR>

</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="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">A.&nbsp;&nbsp;</TD>
    <TD>Tenant hereby approves the Space Plan (attached hereto as <U>EXHIBIT C-1</U>);</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">B.&nbsp;&nbsp;</TD>
    <TD>Tenant shall sign off on approved finishes, built-in furniture plans,
mechanical and electrical information and any then approved Tenant Extra Improvements
prior to October&nbsp;1, 2004;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">C.&nbsp;&nbsp;</TD>
    <TD>Tenant shall sign off on the Working Drawings for the Tenant Improvements and
any approved Tenant Extra Improvements and the estimated cost thereof within two (2)
days of receipt;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="4%" nowrap align="left">D.&nbsp;&nbsp;</TD>
    <TD>Landlord shall exercise due diligence to cause the Tenant Improvements and any
Tenant Extra Improvements approved by Landlord and Tenant in accordance with the terms
hereof to be substantially completed on or before the Early Occupancy Date, which is
November&nbsp;15, 2004, provided that Tenant has not made changes in the scope of work or
Working Drawings and has not requested special materials not available when needed for
construction in accordance with the schedule. Any delays occasioned by the same or any
delays occasioned by the construction of any Tenant Extra Improvements shall be deemed
delays attributable to Tenant, and the provisions in Paragraph&nbsp;4.D. of the Lease shall
apply to such instances.</TD>
</TR>

</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="4%" nowrap align="left">4.&nbsp;&nbsp;</TD>
    <TD>If any changes are made by agreement of Landlord and Tenant in the Space Plan presently
attached as <U>EXHIBIT C-1</U>, the revised Space Plan shall replace the present Space Plan.</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="left">5.&nbsp;&nbsp;</TD>
    <TD>Landlord and Tenant shall diligently pursue the preparation of all Working Drawings for the
Tenant Improvements and any approved Tenant Extra Improvements.</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="left">6.&nbsp;&nbsp;</TD>
    <TD>After receipt and approval of the Working Drawings, Landlord shall cause the Tenant
Improvements and any approved Tenant Extra Improvements to be constructed substantially in
accordance with the Working Drawings, subject to any changes that may be required by any
approving authority to comply with applicable law or relevant site conditions. In no event
shall Landlord be required to install any Tenant Improvements or Tenant Extra Improvements
which do not conform to the plans and specifications for the Project, or do not conform to any
applicable regulations, laws, ordinances, codes and rules. Tenant shall not unreasonably
withhold its approval of any changes to the Working Drawings required in order to obtain the
necessary governmental approvals and permits.</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="left">7.&nbsp;&nbsp;</TD>
    <TD>Tenant shall pay Landlord within ten (10)&nbsp;days of receipt any invoice for expenses related to
making any Tenant Extra Improvements.</TD>
</TR>

</TABLE>



<P align="center" style="font-size: 10pt">1
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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="center" style="font-size: 10pt"><U><B>EXHIBIT C-1</B></U>



<P align="center" style="font-size: 10pt"><U><B>APPROVED PLANS AND SPECIFICATIONS</B></U>



<P align="center" style="font-size: 10pt">&#091;to be attached when available&#093;




<P align="center" style="font-size: 10pt">1
</DIV>

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



<P align="center" style="font-size: 10pt"><U><B>COMMENCEMENT DATE MEMORANDUM</B></U>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="15%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="83%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">LANDLORD:</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">C.M Stratplan, 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">a California corporation</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">TENANT:
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Spatializer Audio Laboratories, 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">A Delaware corporation</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">LEASE DATE:
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><U>September&nbsp;14, 2004</U></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">PREMISES:
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></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">2025 Gateway Place</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">Suite&nbsp;365</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">San Jose, California 95110</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 10pt">Pursuant to Paragraph&nbsp;4.C. of the above-referenced Lease, the Commencement Date is hereby
established as&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;, 200_


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="46%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">LANDLORD:</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">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">C.M. STRATPLAN, INC.,
a California corporation</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">By:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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>
    <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">Its:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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>
    <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">By:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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>
    <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">Its:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">TENANT:</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">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Spatializer Audio Laboratories, Inc.
a Delaware corporation</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">By:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&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>
    <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">Its:</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <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" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">1
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<DIV style="font-family: 'Times New Roman',Times,serif">


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



<P align="center" style="font-size: 10pt"><U><B>RULES AND REGULATIONS</B></U>



<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="left">1.&nbsp;&nbsp;</TD>
    <TD>No sign, placard, picture, advertisement, name or notice shall be installed or displayed on
any part of the outside or the inside of the Building without the prior written consent of
Landlord. Landlord shall have the right to remove, at Tenant&#146;s expense and without notice,
any sign installed or displayed in violation of this rule. All approved signs or lettering on
doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a
person chosen by Landlord.</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="left">2.&nbsp;&nbsp;</TD>
    <TD>The directory of the Building will be provided exclusively for the display of the name and
location of tenants, and Landlord reserves the right to exclude any other names therefrom.
Tenant shall pay Landlord&#146;s standard charge for Tenant&#146;s listing thereon and for any changes
by Tenant.</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="left">3.&nbsp;&nbsp;</TD>
    <TD>Except as consented to in writing by Landlord or in accordance with Building standard
improvements, no draperies, curtains, blinds, shades, screens or other devices shall be hung
at or used in connection with any window or exterior door or doors of the Premises. No awning
shall be permitted on any part of the Premises. Tenant shall not place anything against or
near glass partitions or doors or windows which may appear unsightly from outside the
Premises.</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="left">4.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not obstruct any sidewalks, halls, lobbies, passages, exits, entrances,
elevators or stairways of the Building. No tenant and no employee or invitee of any tenant
shall go upon the roof of the Building or make any roof or terrace penetrations. Tenant shall
not allow anything to be placed on the outside terraces or balconies without the prior written
consent of Landlord.</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="left">5.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not have any right to enter into any telephone closet or room located in the
Building, including, without limitation, any telephone closet or room serving the Premises,
even if located within the Premises, except upon the prior written consent of Landlord.
Tenant shall have no right to make any alterations to interbuilding network cabling.</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="left">6.&nbsp;&nbsp;</TD>
    <TD>All cleaning and janitorial services for the Building shall be provided exclusively through
Landlord, and, except with the written consent of Landlord, no person or persons other than
those approved by Landlord shall be employed by Tenant or permitted to enter the Building for
the purpose of cleaning. Tenant shall not cause any unnecessary labor by carelessness or
indifference to the good order and cleanliness of the Premises. Landlord shall not in any way
be responsible to any Tenant for any loss of property on the Premises, however occurring, or
for any damage to any Tenant&#146;s property by the janitor or any other employee or person.</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="left">7.&nbsp;&nbsp;</TD>
    <TD>Landlord will furnish Tenant, free of charge, with two keys to Tenant&#146;s suite entrance.
Landlord may make a reasonable charge for any additional keys and for having any locks
changed. Tenant shall not make or have made additional keys without Landlord&#146;s prior written
consent, and Tenant shall not alter any lock or install a new additional lock or bolt on any
door of its Premises without Landlord&#146;s prior written consent. Tenant shall deliver to
Landlord, upon the termination of its tenancy, the keys to all locks for doors on the
Premises, and in the event of loss of any keys furnished by Landlord, shall pay Landlord
therefor.</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="left">8.&nbsp;&nbsp;</TD>
    <TD>If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first
obtain, and comply with, Landlord&#146;s instructions for their installation.</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="left">9.&nbsp;&nbsp;</TD>
    <TD>The elevators shall be available for use by all tenants in the Building, subject to
reasonable scheduling as Landlord in its discretion shall deem appropriate. No equipment,
materials, furniture, packages, supplies, merchandise or other property will be received in
the Building or carried in the elevators except between the hours, and in the manner and in
the elevators as may be designated by Landlord.</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="left">10.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not place a load upon any floor of the Premises which exceeds the maximum load
per square foot which the floor was designed to carry and which is allowed by law. Tenant&#146;s
business machines and mechanical equipment which cause noise or vibration which may be
transmitted to the structure of the Building or to any space therein, and which is
objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by
Tenant, at Tenant&#146;s expense, on vibration eliminators or other devices sufficient to eliminate
noise or vibration.</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="left">11.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not use or keep on the Premises any toxic or hazardous materials or any
kerosene, gasoline or inflammable or combustible fluid or material other than those limited
quantities necessary for the operation or maintenance of office equipment. Tenant shall not
use or permit</TD>
</TR>

</TABLE>

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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" nowrap align="left">&nbsp;&nbsp;&nbsp;</TD>
    <TD>to be used in the Premises any foul or noxious gas or substance, or permit or allow the
Premises to be occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors or vibrations. No animal, except seeing
eye dogs when in the company of their master, may be brought into or kept in the Building.</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="left">12.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not use any method of heating or air-conditioning other than that supplied by
Landlord, unless Tenant receives the prior written consent of Landlord.</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="left">13.&nbsp;&nbsp;</TD>
    <TD>Tenant shall cooperate fully with Landlord to assure the most effective operation of the
Building&#146;s heating and air-conditioning and to comply with any governmental energy-saving
rules, laws or regulations of which Tenant has actual notice. Tenant shall refrain from
attempting to adjust controls other than room thermostats installed for Tenant&#146;s use. Tenant
shall keep corridor doors and sliding glass doors closed, and shall close window coverings at
the end of each business day.</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="left">14.&nbsp;&nbsp;</TD>
    <TD>Landlord reserves the right, exercisable without notice and without liability to Tenant, to
change the name and street address of the Building.</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="left">15.&nbsp;&nbsp;</TD>
    <TD>Landlord reserves the right to exclude any person from the Building between the hours of 6
p.m. and 7 a.m. the following day, or any other hours as may be established from time to time
by Landlord, and on Saturdays, Sundays and legal holidays, unless that person is known to the
person or employee in charge of the Building and has a pass or is properly identified. Tenant
shall be responsible for all persons for whom it requests passes and shall be liable to
Landlord for all acts of those persons. Landlord shall not be liable for damages for any
error in admitting or excluding any person from the Building. Landlord reserves the right to
prevent access to the Building by closing the doors or by other appropriate action in case of
invasion, mob, riot, public excitement or other commotion.</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="left">16.&nbsp;&nbsp;</TD>
    <TD>Tenant shall close and lock the doors of its Premises, shut off all water faucets or other
water apparatus and turn off all lights and other equipment which is not required to be
continuously run. Tenant shall be responsible for any damage or injuries sustained by other
tenants or occupants of the Building or Landlord for noncompliance with this Rule.</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="left">17.&nbsp;&nbsp;</TD>
    <TD>The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any
purpose other than that for which they were constructed, and no foreign substance of any kind
whatsoever shall be placed therein. The expense of any breakage, stoppage or damage resulting
from any violation of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused it.</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="left">18.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not install any radio or television antenna, loudspeaker or other device on the
roof or exterior walls of the Building. Tenant shall not interfere with radio or television
broadcasting or reception from or in the Building or elsewhere.</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="left">19.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not cut or bore holes for wires in the partitions, woodwork or plaster of the
Premises. Tenant shall not affix any floor covering to the floor of the Premises in any
manner except as approved by Landlord. Tenant shall repair, or be responsible for the cost of
repair of any damage resulting from noncompliance with this Rule.</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="left">20.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not install, maintain or operate upon the Premises any vending machine without
the prior written consent of Landlord.</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="left">21.&nbsp;&nbsp;</TD>
    <TD>Canvassing, soliciting and distributing handbills or any other written material and peddling
in the Building are prohibited, and each tenant shall cooperate to prevent these activities.</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="left">22.&nbsp;&nbsp;</TD>
    <TD>Landlord reserves the right to exclude or expel from the Building any person who, in
Landlord&#146;s judgment, is intoxicated or under the influence of liquor or drugs or who is in
violation of any of the Rules and Regulations of the Building.</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="left">23.&nbsp;&nbsp;</TD>
    <TD>Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in
any trash box or receptacle any material which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal within the Building. All garbage and refuse
disposal shall be made in accordance with directions issued from time to time by Landlord.</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="left">24.&nbsp;&nbsp;</TD>
    <TD>Use by Tenant of Underwriters&#146; Laboratory approved equipment for brewing coffee, tea, hot
chocolate and similar beverages and microwaving food shall be permitted, provided that the
equipment and use is in accordance with all applicable federal, state, county and city laws,
codes, ordinances, rules and regulations.</TD>
</TR>

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<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" nowrap align="left">25.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not use the name of the Building in connection with or in promoting or
advertising the business of Tenant, except as Tenant&#146;s address, without the written consent of
Landlord.</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="left">26.&nbsp;&nbsp;</TD>
    <TD>Tenant shall comply with all safety, fire protection and evacuation procedures and
regulations established by Landlord or any governmental agency. Tenant shall be responsible
for any increased insurance premiums attributable to Tenant&#146;s use of the Premises, Building or
Property.</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="left">27.&nbsp;&nbsp;</TD>
    <TD>Tenant assumes any and all responsibility for protecting its Premises from theft and robbery,
which responsibility includes keeping doors locked and other means of entry to the Premises
closed.</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="left">28.&nbsp;&nbsp;</TD>
    <TD>Tenant shall not use the Premises, or suffer or permit anything to be done on, in or about
the Premises, which may result in an increase to Landlord in the cost of insurance maintained
by Landlord on the Project.</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="left">29.&nbsp;&nbsp;</TD>
    <TD>Tenant&#146;s requests for assistance will be attended to only upon appropriate application to the
office of the Building by an authorized individual. Employees of Landlord shall not perform
any work or do anything outside of their regular duties unless under special instructions from
Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any
office without specific instructions from Landlord.</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="left">30.&nbsp;&nbsp;</TD>
    <TD>Tenant shall comply with all parking monitoring controls or devices from time to time
installed or otherwise implemented by Landlord. Tenant shall not park its vehicles in any
parking areas designated by Landlord as areas for parking by visitors to the Building or other
reserved parking spaces. Tenant shall not leave vehicles in the Building parking areas
overnight without the prior written consent of Landlord&#146;s manager for the Property, nor park
any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven
or non-motor driven bicycles or four-wheeled trucks. Tenant, its agents, employees and
invitees shall not park any one (1)&nbsp;vehicle in more than one (1)&nbsp;parking space.</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="left">31.&nbsp;&nbsp;</TD>
    <TD>The scheduling and manner of all Tenant move-ins and move-outs shall be subject to the
discretion and approval of Landlord, and move-ins and move-outs shall take place only after 6
p.m. on weekdays, on weekends or at other times as Landlord may designate. Landlord shall
have the right to approve or disapprove the movers or moving company employed by Tenant, and
Tenant shall cause the movers to use only the entry doors and elevators designated by
Landlord. If Tenant&#146;s movers damage the elevator or any other part of the Property, Tenant
shall pay to Landlord the amounts required to repair the damage.</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="left">32.&nbsp;&nbsp;</TD>
    <TD>Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant
or any other tenant, but no waiver by Landlord shall be construed as a waiver of the Rules and
Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter
enforcing the Rules and Regulations against any or all of the tenants of the Building.</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="left">33.&nbsp;&nbsp;</TD>
    <TD>These Rules and Regulations are in addition to, and shall not be construed to in any way
modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any
lease of premises in the Building.</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="left">34.&nbsp;&nbsp;</TD>
    <TD>Landlord reserves the right to make other reasonable Rules and Regulations as, in its
judgment, may from time to time be needed for safety and security, for care and cleanliness of
the Building and for the preservation of good order therein. Tenant agrees to abide by all
Rules and Regulations hereinabove stated and any additional rules and regulations which are
adopted.</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="left">35.&nbsp;&nbsp;</TD>
    <TD>Tenant shall be responsible for the observance of all of the foregoing rules by Tenant&#146;s
employees, agents, clients, customers, invitees and guests.</TD>
</TR>


</TABLE>

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



<P align="center" style="font-size: 10pt"><U><B>UTILITIES AND SERVICES</B></U>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The standards set forth below for Utilities and Services are in effect. Landlord reserves the
right to adopt nondiscriminatory modifications and additions hereto, which do not materially affect
Tenant&#146;s rights. Landlord shall give notice to Tenant, in accordance with provisions of the Lease,
of material modification and additions.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;<U><B>Provision by Landlord</B></U><B>. </B>As long as Tenant is not in default under any of the terms
of this Lease, Landlord shall:


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a. <U><B>Elevator</B></U><B>. </B>Provide unattended automatic elevator facilities Monday through Friday,
except holidays, from 7:00 a.m. to 6:00 p.m., and have at least one elevator available at all other
times.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b. <U><B>Ventilation</B></U><B>. </B>Ventilate the Premises and furnish air-conditioning or heating Monday
through Friday, except holidays, from 7:00 a.m. to 6:00 p.m. (and at other times for the additional
charges described in Paragraph&nbsp;2) to the extent required for the comfortable occupancy of the
Premises, subject to governmental regulation. The air-conditioning system achieves maximum cooling
when the window coverings and sliding glass doors are closed. Landlord shall not be responsible
for room temperatures if Tenant does not keep all sliding glass doors in the Premises closed
whenever the system is in operation. Tenant shall cooperate to the best of its ability at all
times with Landlord and shall abide by all reasonable regulations and requirements which Landlord
may prescribe for the proper functioning and protection of the air-conditioning system. Tenant
shall not connect any apparatus, device, conduit or pipe to the Building&#146;s chilled and hot water
air-conditioning supply lines. Tenant and Tenant&#146; servants, employees, agents, visitors, licensees
or contractors shall not enter at any time the mechanical installations or facilities of the
Building, or adjust, tamper with, touch or otherwise in any manner affect the installations or
facilities. If any installation of partitions, equipment or fixtures by Tenant necessitates the
rebalancing of the climate control equipment in the Premises, the rebalancing shall be performed by
Landlord at Tenant&#146;s expense.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c. <U><B>Electricity</B></U><B>. </B>Subject to government regulations (including, without limitation,
applicable energy conservation requirements existing or enacted under any governmental regulation)
and the provisions of Paragraph&nbsp;2, furnish to the Premises electric current as required by the
Building standard office lighting and fractional horsepower office business machines in the amount
of approximately two and one-half (2.5) watts per square foot. If Tenant&#146;s electrical installation
or electrical consumption is in excess of the quantity described above, or extends beyond normal
business hours, Tenant shall reimburse Landlord monthly for the measured consumption. Tenant shall
not connect any apparatus or device with wires, conduits or pipes, or other means by which the
services are supplied, for the purpose of using additional or unusual amounts of the services
without the prior written consent of Landlord. At all times Tenant&#146;s use of electric current shall
not exceed the capacity of the feeders to the Building or the risers or wiring installation, except
as provided in working drawings approved by Landlord.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d. <U><B>Water</B></U><B>. </B>Make water available in public areas for drinking and lavatory purposes
only.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;e. <U><B>Janitorial Service</B></U><B>. </B>Provide building standard janitorial service to the Premises,
provided the Premises are used exclusively as offices, and are kept reasonably in order by Tenant.
Tenant shall pay to Landlord any cost incurred by Landlord for janitorial services in excess of
those generally provided for other tenants in the Building. Tenant shall pay to Landlord the cost
of removal of any of Tenant&#146;s refuse and rubbish.



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;<U><B>Additional Charges</B></U><B>. </B>Landlord may impose a reasonable charge for any utilities and
services, including air-conditioning, electric current, water and janitorial service, required to
be provided by Landlord by reason of (i)&nbsp;any use of the Premises at any time other than between the
hours of 7:00 a.m. and 6:00 p.m. Monday through Friday, except holidays; (ii)&nbsp;any use beyond what
Landlord agrees to furnish as described above; or (iii)&nbsp;special electrical, cooling and ventilating
needs created in certain areas by hybrid telephone equipment, computers and other similar equipment
or uses.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;<U><B>Rules and Regulations</B></U><B>. </B>Tenant agrees to cooperate at all times with Landlord and
to abide by all reasonable regulations and requirements which Landlord may prescribe for the use of
the utilities and services. Any failure to pay any excess costs as described above with the next
installment of Rent due after receipt of a statement for such services shall constitute a breach of
the obligation to pay Rent under this Lease and shall entitle Landlord to the rights granted in
this Lease for a breach.


<P align="center" style="font-size: 10pt">1
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<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;<U><B>Stopping of Service</B></U><B>. </B>Landlord reserves the right to stop services of the elevator,
plumbing, ventilation, air-conditioning and electric systems when necessary by reason of accident
or emergency, or for repairs, alterations or improvements, in the judgment of Landlord desirable or
necessary to be made, until the repairs, alterations or improvements have been completed. Landlord
shall have no responsibility or liability for failure to supply elevator facilities, plumbing,
ventilating, air-conditioning or electric service when prevented by strike or accident or by any
cause beyond Landlord&#146;s reasonable control, or by laws, rules, orders, ordinances, directions,
regulations or requirements of any federal, state, county or municipal authority or failure of gas,
oil or other suitable fuel supply or inability by exercise of reasonable diligence to obtain gas,
oil or other suitable fuel. It is expressly understood and agreed that any covenants on Landlord&#146;s
part to furnish any service pursuant to any of the terms, covenants, conditions, provisions or
agreements of this Lease, or to perform any act or thing for the benefit of Tenant, shall not be
deemed breached if Landlord is unable to furnish or perform the same by virtue of a strike or labor
trouble or any other cause whatsoever beyond Landlord&#146;s reasonable control.


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;<U><B>Notice</B></U><B>. </B>To the extent practical, Landlord shall attempt to give Tenant notice of
proposed shutdowns of services.



<P align="center" style="font-size: 10pt">2
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<SEQUENCE>6
<FILENAME>v07167exv21w1.htm
<DESCRIPTION>EXHIBIT 21.1
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<P align="right" style="font-size: 10pt"><B>EXHIBIT 21.1</B>



<P align="center" style="font-size: 10pt"><B>SUBSIDIARY OF THE COMPANY</B>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="30%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top"><DIV style="margin-left:0px; text-indent:-0px">Name of Subsidiary
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Percentage of Ownership
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">State of Incorporation</TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top"><DIV style="margin-left:0px; text-indent:-0px">Desper Products, Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">100%
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">California</TD>
</TR>
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</DIV>


<P align="center" style="font-size: 10pt">44
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<TYPE>EX-23.1
<SEQUENCE>7
<FILENAME>v07167exv23w1.htm
<DESCRIPTION>EXHIBIT 23.1
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<P align="right" style="font-size: 10pt"><B>EXHIBIT 23.1</B>



<P align="center" style="font-size: 10pt"><B>CONSENT OF INDEPENDENT AUDITORS</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>To the Board of Directors Of Spatializer Audio Laboratories, Inc.:</B>


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">We consent to the incorporation by reference in the registration statements on Form&nbsp;S-8 (Nos.
333-27453 and 333-41170) of Spatializer Audio Laboratories, Inc. of our report dated March&nbsp;6, 2004,
related to the consolidated balance sheets of Spatializer Audio Laboratories, Inc. and subsidiaries
as of December&nbsp;31, 2003 and December&nbsp;31, 2002, and the related consolidated statements of income,
stockholders&#146; equity and comprehensive income and cash flows for each of the years in the
three-year period ended December&nbsp;31, 2003, which report appears in the annual report on Form 10-K
of Spatializer Audio Laboratories, Inc. for the year ended December&nbsp;31, 2003.<U> </U>


<P align="left" style="font-size: 10pt">/s/ FARBER &#038; HASS LLP



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



<P align="left" style="font-size: 10pt">March&nbsp;10, 2005



<P align="center" style="font-size: 10pt">45
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<SEQUENCE>8
<FILENAME>v07167exv31w1.htm
<DESCRIPTION>EXHIBIT 31.1
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<DIV style="font-family: 'Times New Roman',Times,serif">




<P align="right" style="font-size: 10pt"><B>EXHIBIT 31.1</B>



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



<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">I, Henry R. Mandell certify that:


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt">1. I have reviewed this annual report on Form 10-K of Spatializer Audio Laboratories, Inc.;


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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: 0%; text-indent: 0%; margin-right: 0%; 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: 0%; text-indent: 0%; margin-right: 0%; 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: 0%; text-indent: 0%; margin-right: 0%; 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="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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: 0%; text-indent: 0%; margin-right: 0%; 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: 0%; text-indent: 0%; margin-right: 0%; 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.

<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="15%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="46%">&nbsp;</TD>
</TR>
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<!-- Begin Table Body -->
<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">Date: March&nbsp;22, 2005</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">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">Chief Executive Officer and Chief Financial Officer</TD>
</TR>
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</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">46
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<TYPE>EX-32.1
<SEQUENCE>9
<FILENAME>v07167exv32w1.htm
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
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<TITLE>exv32w1</TITLE>
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

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


<P align="right" style="font-size: 10pt"><B>EXHIBIT 32.1</B>



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


<P align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; 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 Annual Report on Form
10-K of the Company for the year ended December&nbsp;31, 2003 as filed with the Securities and
Exchange Commission (the &#147;Report&#148;) that to his knowledge:


<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%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">1)&nbsp;&nbsp;</TD>
    <TD>The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934; and</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">2)&nbsp;&nbsp;</TD>
    <TD>The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.</TD>
</TR>

</TABLE>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="15%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="46%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Date: March&nbsp;22, 2005</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">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">Chief Executive Officer and Chief Financial Officer</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">47
</DIV>


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