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<SEC-DOCUMENT>0000950124-06-006906.txt : 20061114
<SEC-HEADER>0000950124-06-006906.hdr.sgml : 20061114
<ACCEPTANCE-DATETIME>20061114162242
ACCESSION NUMBER:		0000950124-06-006906
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20060930
FILED AS OF DATE:		20061114
DATE AS OF CHANGE:		20061114

FILER:

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

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-26460
		FILM NUMBER:		061215473

	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-Q
<SEQUENCE>1
<FILENAME>v25172e10vq.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML>
<HEAD>
<TITLE>e10vq</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<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>




<DIV align="center" style="font-size: 14pt; margin-top: 12pt"><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

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


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

</DIV>
<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B>FORM 10-Q</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT style="font-variant: SMALL-CAPS"> <B>(Mark One)</B></FONT>

</DIV>
<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#254;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>Quarterly report pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B>For the period ended: <B>September&nbsp;30, 2006</B>
</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>Transition report pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Commission File Number: 000-26460</B></DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 12pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.</B>
</DIV>

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


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="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"><FONT style="font-variant: SMALL-CAPS"><B>Delaware</B></FONT>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>95-4484725</B></TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top">(State or other jurisdiction of
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">(IRS Employer</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top">incorporation or organization)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Identification No.)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><FONT style="font-variant: SMALL-CAPS"><B>2025 Gateway Place, Suite&nbsp;365</B></FONT><BR>
<FONT style="font-variant: SMALL-CAPS"><B>San Jose, California 95110</B></FONT>

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">(Address of principal corporate offices)

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><FONT style="font-variant: SMALL-CAPS"><B>Telephone Number: (408)&nbsp;453-4180</B></FONT>

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">(Registrant&#146;s telephone number, including area code)

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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:
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><FONT style="font-variant: SMALL-CAPS"><B>Yes</B></FONT> <FONT face="Wingdings">&#254;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT style="font-variant: SMALL-CAPS"><B>No</B></FONT> <FONT face="Wingdings">&#111;</FONT>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule&nbsp;12b-2 of the Exchange Act. (Check one):
</DIV>

<DIV align="center" style="font-size: 10pt"><FONT style="font-variant: SMALL-CAPS"><B>Large accelerated filer</B></FONT> <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT style="font-variant: SMALL-CAPS"><B>accelerated filer</B></FONT> <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT style="font-variant: SMALL-CAPS"><B>non-accelerated filer</B></FONT> <FONT face="Wingdings">&#254;</FONT></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark whether the registrant is a shell company (as defined in Rule&nbsp;12b-2 of
the Exchange Act):
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><FONT style="font-variant: SMALL-CAPS"><B>Yes</B></FONT> <FONT face="Wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <FONT style="font-variant: SMALL-CAPS"><B>No</B></FONT> <FONT face="Wingdings">&#254;</FONT>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of October&nbsp;26, 2006, there were 48,763,383 shares of the Registrant&#146;s Common Stock
outstanding.
</DIV>


<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"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

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

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




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

<P><CENTER>
<TABLE border="0" width="90%" cellpadding="0" cellspacing="0">
<TR>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="76%"></TD>
</TR>
<TR><TD colspan="9"><A HREF="#000">PART I. FINANCIAL INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#001">ITEM I. FINANCIAL STATEMENTS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#002">Item&nbsp;2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#003">Item&nbsp;3. Quantitative and Qualitative Disclosures About Market Risk</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#004">Item&nbsp;4. Controls and Procedures</A></TD></TR>
<TR><TD colspan="9"><A HREF="#005">PART II. OTHER INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#006">ITEM 1. LEGAL PROCEEDINGS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#007">ITEM 1A. RISK FACTORS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#008">ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#009">ITEM 3. DEFAULTS UPON SENIOR SECURITIES</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#010">ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#011">ITEM 5. OTHER INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#012">ITEM 6. EXHIBITS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#013">SIGNATURES</A></TD></TR>
<TR><TD colspan="9"><A HREF="v25172exv10w9.htm">EXHIBIT 10.9</A></TD></TR>
<TR><TD colspan="9"><A HREF="v25172exv31.htm">EXHIBIT 31</A></TD></TR>
<TR><TD colspan="9"><A HREF="v25172exv32.htm">EXHIBIT 32</A></TD></TR>
</TABLE>
</CENTER>
<!-- /TOC -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>




<!-- link1 "PART I. FINANCIAL INFORMATION" -->
<DIV align="left"><A NAME="000"></A></DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>PART I. FINANCIAL INFORMATION</B>

</DIV>
<!-- link2 "ITEM I. FINANCIAL STATEMENTS" -->
<DIV align="left"><A NAME="001"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>ITEM I. FINANCIAL STATEMENTS</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>CONDENSED CONSOLIDATED BALANCE SHEETS</B>

</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&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>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><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>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" colspan="2">(unaudited)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px"><B>ASSETS</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- 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>
</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">$</TD>
    <TD align="right">272,985</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">550,633</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts Receivable, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,572</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">155,233</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Prepaid Expenses and Deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,937</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,104</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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 Current Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">389,494</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">739,970</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>
</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">6,205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,403</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">136,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">138,548</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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">Total Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">532,532</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">896,921</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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"><!-- 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>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px"><B>LIABILITIES AND SHAREHOLDERS&#146; EQUITY</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- 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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <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">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Note Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,176</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,443</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">18,367</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,195</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">2,341</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,095</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">22,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,000</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">42,202</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,917</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">2,998</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,869</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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 Current Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,519</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>
</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"><!-- 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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shareholders&#146; Equity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Common shares, $.01 par value,
65,000,000 shares
authorized, 46,975,365 shares
issued and outstanding at September
30, 2006 and
December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,772</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Additional Paid-In Capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,430,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,430,030</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated Deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(46,479,854</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(46,182,400</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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 Shareholders&#146; Equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">419,948</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">717,402</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>
</TR>

<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">532,532</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">896,921</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes to consolidated financial statements
</DIV>


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

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

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

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS<BR>
(unaudited)</B>

</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="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>

    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>

    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>

    <TD width="1%">&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" style="border-bottom: 1px solid #000000"><B>For the Three Month Period Ended</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>For the Nine Month Period Ended</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>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>September 30,</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>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</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>
    <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">$</TD>
    <TD align="right">67,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">270,914</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">261,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,031,777</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>
</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">67,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">270,914</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">261,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,031,777</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,774</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,752</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,251</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89,514</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross Profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60,970</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">258,162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">234,849</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">942,263</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <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>
    <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">General and Administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">122,210</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116,539</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">371,343</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457,463</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and Development</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">62,068</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157,740</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">244,717</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and Marketing</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">45,356</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,241</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">140,810</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>
</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">122,210</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">223,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">530,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">842,990</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61,240</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,199</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(295,475</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">99,273</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest and Other Income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,442</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,087</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,992</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest and Other Expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,030</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,266</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,140</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>
</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">(558</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,821</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,852</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>
</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>
    <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">Income (Loss) Before Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61,798</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(292,654</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104,125</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,800</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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>
</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>
    <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 Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(61,798</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">36,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(297,454</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">104,125</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>
</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>
    <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">Basic and Diluted Earnings Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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 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"><!-- 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>
    <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">Weighted Average Shares
Outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</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>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes to consolidated financial statements
</DIV>


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

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

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

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES<BR>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS<BR>
(unaudited)</B>

</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&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>Nine Months Ended</B></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>September 30,</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>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</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>
</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">$</TD>
    <TD align="right">(297,454</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">104,125</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments to reconcile net income (loss)&nbsp;to net cash
provided by (used in) operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation and Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,926</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,789</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; 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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts Receivable and Employee Advances</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85,661</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">138,359</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Prepaid Expenses and Deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,833</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,660</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(46,170</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Wages and Benefits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(45,754</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,506</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Professional Fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,500</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,500</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Commissions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,073</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(37,147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(31,995</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred Revenue</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">(391,395</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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">Net Cash Provided By (Used In) Operating Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(276,368</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(161,560</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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">Cash Flows from Investing Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchase/Disp of Property and Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,277</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Increase in Capitalized Patent and Technology Costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,013</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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">Net Cash Provided By (Used in) Investing Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,013</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,277</TD>
    <TD nowrap>)</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Issuance (Repayment) of Notes Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,733</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,891</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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">Net Cash Provided by Financing Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,733</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,891</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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">Increase (Decrease) in Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(277,648</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(196,728</TD>
    <TD nowrap>)</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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents, Beginning of Period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">550,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">871,155</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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"><!-- 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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents, End of Period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">272,985</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">674,427</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; 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"><!-- 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>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash paid during the period for:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
  <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,266</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,140</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">
Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,800</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:30px; 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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes
to consolidated financial statements</DIV>

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

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

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




<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES<BR>
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS&#146; EQUITY<BR>
(unaudited)</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&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" 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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><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>&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 nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Shareholders'</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>Par value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>paid-in-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, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">469,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,430,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(46,182,400</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">717,402</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 align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(172,667</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(172,667</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">Balance, March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">469,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,430,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(46,355,066</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">544,735</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: 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 (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(62,989</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(62,989</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">Balance, June&nbsp;30, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,430,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(46,418,055</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">481,746</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>
    <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 (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(61,798</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(61,798</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">Balance, September&nbsp;30, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">469,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,430,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(46,479,854</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">419,948</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>
    <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>
<!-- End Table Body -->
</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">See notes to consolidated financial statements
</DIV>


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

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

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




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SPATIALIZER AUDIO LABORATORIES, INC.<BR>
AND SUBSIDIARIES</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">Notes to Consolidated Financial Statements

</DIV>

<DIV style="margin-top: 6pt">
<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"><B>1)</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Sale of All or Substantially All of the Assets of Spatializer Audio Laboratories,
Inc. and Desper Products, Inc. and Dissolution of Spatializer</B></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer has been 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. We were incorporated in the State of Delaware in February&nbsp;1994 and are 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 is located at <FONT style="font-variant: SMALL-CAPS">2025 </FONT>Gateway
Place, Suite&nbsp;365 West Wing<FONT style="font-variant: SMALL-CAPS">, </FONT>San Jose, California <FONT style="font-variant: SMALL-CAPS">95110</FONT>.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company&#146;s wholly-owned subsidiary, Desper Products, Inc. (&#147;DPI&#148;), has been 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. Desper Products is the owner of certain technology which DTS desires to acquire.
Desper Products is a California corporation incorporated in June&nbsp;1986.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">DTS, Inc. is a Delaware corporation and a leading provider of entertainment technology, products
and services to the audio and image entertainment markets worldwide. DTS BVI is a British Virgin
Island corporation and a wholly owned subsidiary of DTS.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Background of the Sale of Assets and Dissolution</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer has been under acute market pressure since 2002. In 2002, a personal computer
account began migrating to a totally new operating system, which did not include any audio
enhancements. The migration was completed in 2003 and the former licensee chose not to include any
audio software enhancements, including those from Spatializer. This account had accounted for
approximately 40% of Spatializer&#146;s annual revenues.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2003, Spatializer experienced declining revenue from three major customers, primarily from
the curtailment or cessation of use of its products by these customers. Two of these cases were in
the DVD player market, where Spatializer historically had been strong. During 2003, the DVD player
market became largely commoditized, resulting in intense pricing pressure and a steep decline in
price and margins. Manufacturers were forced to strip out features, such as those offered by
Spatializer, in order to compete. One of Spatializer&#146;s accounts switched to outside sourcing and
Spatializer was able to expand its relationship with their supplier to recapture most of that
revenue. However, a major new design win Spatializer was projecting for the DVD market was
cancelled due to these cost constraints.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2004, the revenue mix by licensee platform was significantly different compared to
the prior year. The decrease in revenue on the DVD and personal computer accounts
</DIV>


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</DIV>

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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">previously discussed generated approximately 56% of total fiscal 2003 revenue, which was lost in 2004. These
losses were partially offset by three new revenue sources in cellular phones, mobile audio
semiconductors and personal computers and the expansion of an existing license relating to
recordable DVD. Cellular phone, mobile audio and the personal computer markets had been targeted by
Spatializer for replacing the losses in the DVD player category. Nevertheless, market pressures
mounted and Spatializer was forced to substantially reduce overhead in order to remain liquid.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In response to increased market competitiveness and Spatializer&#146;s difficulty competing in this
environment, in November&nbsp;2002, the board of directors created a Special Committee to review certain
strategic opportunities as they arise and to obtain additional information regarding such
opportunities for consideration and evaluation by the board of directors. Through December&nbsp;19,
2005, the Special Committee consisted of Messrs.&nbsp;Mandell, Pace and Segel. Spatializer hired an
entity in late 2002 to provide investment banking services, paying such entity a $75,000 retainer
fee. Over one hundred companies were contacted on Spatializer&#146;s behalf but, after examining the
potential opportunities that resulted therefrom, Spatializer decided that no such opportunities
were viable. Spatializer ended its relationship with such investment banking entity in the second
half of 2003 as a result of the unsuccessful effort, with no future financial obligation to such
entity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August&nbsp;2005, Spatializer and Strategic Equity Group, Inc. (collectively, with its
broker/dealer subsidiary, &#147;SEG&#148;) entered into a confidentiality agreement in connection with a
possible investment banking services relationship.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In October&nbsp;2005, Spatializer and SEG entered into an agreement for investment banking
services. Under the terms of that agreement, Spatializer engaged SEG for a one year period, on an
exclusive basis, to provide Spatializer with services, including the identification of possible
strategic, financial and foreign partners or purchasers. Per the terms of such agreement, SEG
received an upfront payment of a non-refundable retainer in the amount of $25,000 and is entitled
to payment of a &#147;success fee&#148; payable upon consummation of a sale transaction in an amount equal to
the greater of (a) $250,000 or (b)&nbsp;the sum of 5% of the first $2,000,000 of consideration, 4% of
the second $2,000,000, 3% of the third $2,000,000 and 2% of any amount in excess of $6,000,000. SEG
is also entitled to reimbursement for reasonable actual out-of-pocket expenses for travel and other
incidentals in an amount not to exceed $25,000. Spatializer is required to indemnify SEG for
liabilities that SEG may suffer which arise from any breach of any representations or warranties in
the investment banking services agreement, the breach of any covenant of Spatializer in that
agreement or any instrument contemplated by that agreement, any misrepresentations in any statement
or certificate furnished by Spatializer pursuant to that agreement or in connection with any sale
transaction contemplated by that agreement, any claims against, or liabilities or obligations of,
Spatializer and any good faith acts of SEG undertaken in good faith and in furtherance of SEG&#146;s
performance under the agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;19, 2005, at a regularly scheduled board of directors meeting, the board of
directors of Spatializer discussed Spatializer&#146;s current financial outlook. Management indicated
to the board of directors that two customers, the revenues from which accounted for approximately
70% of Spatializer&#146;s income during 2005, would not be sustainable in 2006. Based on management&#146;s
estimates, without new licensing revenue sources, management believed Spatializer would exhaust its
available cash by the fourth quarter of 2006. The
board of directors also discussed various strategic options for Spatializer, including
potential
</DIV>

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</DIV>

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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">suitors and the distribution by SEG of interest books to approximately 55 potential
purchasers, competition in its niche, and other business matters. Following the presentation,
Gilbert Segel and James Pace, two of the three independent directors of Spatializer, decided to
resign from the board of directors in order to allow for other individuals more qualified and
experienced in matters relating to the sale of Spatializer and other strategic alternatives for
Spatializer, including liquidation, to fill the vacancies created. The board was reduced from four
members to three authorized directors leaving one vacancy thereon, which has not been filled to
date. Henry R. Mandell then indicated his desire to resign as an officer of Spatializer, for
personal reasons, effective January&nbsp;6, 2006, which vacancy would result in a significant reduction
in payroll expense, but would stay as a director and Chairman of the Board and Secretary of
Spatializer. Mr.&nbsp;Mandell offered to become a consultant to Spatializer on terms to be negotiated
with Carlo Civelli, the remaining member of the Board. The board of directors then discussed plans
for the future of Spatializer and measures for scaling back operations, while continuing to pursue
a potential buyer through SEG, with a view to maximizing stockholder value.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On January&nbsp;6, 2006, Henry R. Mandell&#146;s resignation as the Chief Executive Officer and Chief
Financial Officer became effective. Effective as of that date, Spatializer and Mr.&nbsp;Mandell entered
into an agreement to continue his employment with Spatializer as Chairman and Secretary. In that
agreement, Mr.&nbsp;Mandell agreed to continue to provide certain specified services to Spatializer,
including supervising the preparation of Spatializer&#146;s financial statements and records, reviewing
and authorizing day to day disbursements, supervising all of Spatializer&#146;s licensing and business
activities, handling stockholder communications and serving as the contact person with SEG. He was
permitted to accept other employment during the term of that agreement. As an incentive for Mr.
Mandell to continue in Spatializer&#146;s employ during the term of that agreement, and in consideration
for the foregoing of certain severance pay to which he otherwise may have been entitled,
Spatializer paid him a lump sum payment of $35,733.33, which amount was paid concurrently with the
execution of that agreement. That agreement also provided for a monthly salary of $5,000, a bonus
of $10,000 for Mr.&nbsp;Mandell&#146;s assistance in the preparation of Spatializer&#146;s Form 10-K for the
fiscal year ended December&nbsp;31, 2005 and a separate bonus of $5,000 each for his assistance on each
Form 10-Q upon which he assists for any quarterly period ending after December&nbsp;31, 2005 and each
proxy. Additionally, if Spatializer is sold or enters into certain specified extraordinary
transactions during the term of that agreement, Mr.&nbsp;Mandell may be entitled to an additional bonus
in an amount equal to 3.5% of the total consideration, not to exceed $150,000. During the term of
that agreement, he is entitled to employee benefits and reimbursement of reasonable, actual and
necessary business expenses. That agreement contains certain non-competition, non-solicitation and
confidentiality provisions. That agreement terminated certain provisions of Mr.&nbsp;Mandell&#146;s then
existing employment agreement (including without limitation the compensation and severance pay
obligations thereunder) but continued certain other provisions thereof (such as the proprietary
information, confidentiality and other similar provisions thereunder). While that agreement was to
expire on the earlier of (a)&nbsp;the consummation of certain extraordinary transactions, (b)&nbsp;the
expiration, termination or non-renewal of the directors&#146; and officers&#146; insurance policy of
Spatializer under which Mr.&nbsp;Mandell is covered as a director and officer of Spatializer and (c)
June&nbsp;30, 2006, that agreement was extended for a period ending on the earlier of June&nbsp;30, 2007 or
the date of dissolution of Spatializer. Spatializer may terminate Mr.&nbsp;Mandell&#146;s employment at any
time during the term and Mr.&nbsp;Mandell may voluntarily resign his employment at any time during such
term.
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On January&nbsp;10, 2006, Spatializer issued a press release regarding a potential auction, open to
pre-qualified buyers, of the assets of Spatializer or the sale of an unlimited number of perpetual
licenses of certain technology of Spatializer, all of which transactions would be subject to
stockholder approval. Under the contemplated open auction process, potential buyers were invited to
bid for the assets of Spatializer at a minimum bid of $2,000,000, such assets to be sold on an
&#147;as-is/where is&#148; basis. Simultaneously, Spatializer offered all interested parties the opportunity
to acquire non-exclusive, royalty-free, irrevocable, perpetual licenses for a one-time fee of
$750,000 each, which licenses would be absent of any representations, warranties, or ongoing
support by Spatializer. Bids were due by 11:59&nbsp;P.M. Pacific Standard Time on February&nbsp;15, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During a period commencing on or about January&nbsp;12, 2006 through February&nbsp;15, 2006, SEG sent
out to more than 160 potential buyers materials relating to the announced auction. SEG followed
up, or attempted to follow up, with such potential buyers through the close of the auction period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At a meeting held on February&nbsp;16, 2006, the board of directors of Spatializer discussed a
proposed term sheet for the acquisition of Spatializer&#146;s assets that had been delivered by DTS and
feedback that SEG had received from certain of the potential buyers that had been contacted during
the auction period. As DTS&#146;s offer did not specify a precise purchase price, such offer was deemed
non-conforming to the guidelines established for the initial auction. Certain of the potential
buyers had requested an extension of the auction period to perform additional due diligence. The
board of directors again discussed what alternatives were available to Spatializer. The board of
directors elected to extend the auction period until 11:59&nbsp;P.M., Pacific Standard Time, on March
15, 2006 to provide bidders and other interested parties additional time to clarify their offers
and perform further due diligence, as well as to permit Spatializer time to solicit additional
offers. The board of directors, based on feedback received in the auction process, determined to
simplify the auction process and eliminated the minimum bid requirements but reserved the right to
reject any offers or bids in their discretion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the period from February&nbsp;15, 2006 through March&nbsp;15, 2006, SEG continued to follow up,
or attempted to follow up, with the potential buyers to whom auction materials had been provided.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At the close of the extended auction period, Spatializer received a bid from DTS for the
purchase of substantially all of the assets of Spatializer and Desper Products and bids from three
other parties interested in buying a perpetual license. Management of Spatializer determined that
the bids for the perpetual licenses were not sufficient in amount and decided that the bid for the
assets of Spatializer received from DTS was the most attractive offer to pursue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From March&nbsp;16, 2006 through approximately April&nbsp;10, 2006, Spatializer and DTS negotiated the
terms of a non-binding letter of intent. Although Spatializer, in the course of such negotiations,
requested that the transaction be structured as a stock sale or merger transaction, DTS was not
willing to so structure the transaction. The letter of intent, requiring the transaction to be
structured as an asset sale, was executed on April&nbsp;10, 2006. In connection with the execution of
the letter of intent and as required by the terms thereof, DTS deposited $250,000 towards the
purchase price of the assets, which deposit amount is being held in a trust account and will be
disbursed to Spatializer contingent upon, among other things, approval of the transaction by the
stockholders of Spatializer and satisfaction of
the conditions to closing.
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From January&nbsp;25, 2006 through May&nbsp;5, 2006, DTS performed various due diligence examinations
relating to Spatializer. Preliminary discussions were held over the phone between DTS and SEG on
January&nbsp;25, 2006 and February&nbsp;6, 2006. A technology demonstration was held at SEG&#146;s office on
February&nbsp;10, 2006. A due diligence conference call including Spatializer was held on February&nbsp;13,
2006. Counsel to DTS spent February&nbsp;23, 2006, at SEG&#146;s office analyzing contracts and various
other due diligence items. Four due diligence conference calls were held in March&nbsp;2006, three
additional conference calls in April&nbsp;2006, and one in May&nbsp;2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">During the period from May&nbsp;1, 2006 through mid-September&nbsp;2006, legal counsel for DTS and for
Spatializer prepared, and representatives of DTS and Spatializer negotiated, the Asset Purchase
Agreement.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July&nbsp;2006, the board of directors of Spatializer was presented with and carefully
considered a draft of the Asset Purchase Agreement. After due consideration of such draft, the
board of directors of Spatializer approved, by unanimous written consent dated July&nbsp;10, 2006, a
form of the Asset Purchase Agreement. However, subsequent to that date, numerous changes and
refinements were made to that draft based on the negotiations of the parties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July&nbsp;2006, the board of directors of Desper Products was presented with and carefully
considered a draft of the Asset Purchase Agreement. After due consideration of such draft, the
board of directors of Desper Products approved, by a written consent of sole director dated July
10, 2006, a form of the Asset Purchase Agreement. However, subsequent to that date, numerous
changes and refinements were made to that draft based on the negotiations of the parties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August&nbsp;2006, the board of directors of Spatializer was presented with and carefully
considered a draft of the Asset Purchase Agreement. After due consideration of all of the
foregoing, the board of directors of Spatializer, by a unanimous written consent of directors dated
August&nbsp;28, 2006, authorized the execution and delivery on behalf of Spatializer of the Asset
Purchase Agreement providing for the sale to DTS and DTS BVI of all or substantially all of the
assets of each of Spatializer and Desper Products, deemed the sale of all or substantially all of
the assets of Spatializer and Desper Products for $1,000,000 in aggregate cash consideration to be
expedient and for the best interests of Spatializer, and deemed the sale of all or substantially
all of the assets of Spatializer and Desper Products to be advisable and in the best interests of
Spatializer. Furthermore, the board of directors of Spatializer deemed it advisable that, following
the sale of the assets, Spatializer be dissolved. The board of directors also recommended that the
stockholders of Spatializer vote in favor of both the sale of assets transaction and the
dissolution of Spatializer. The board of directors called a meeting of the stockholders of
Spatializer to consider the proposed sale of assets pursuant to the Asset Purchase Agreement and to
take action upon the resolution of the board of directors to dissolve Spatializer. The board of
directors also recommended that the stockholders of Spatializer vote in favor of both the sale of
assets transaction and the dissolution of Spatializer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective August&nbsp;28, 2006, Spatializer, as the sole shareholder of Desper Products, executed a
written consent of sole shareholder approving the principal terms of the sale of the assets of
Desper Products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;18, 2006, the parties executed and delivered the Asset Purchase Agreement. It is
anticipated that a meeting of Stockholders will be held in January, 2007 to vote on the approval of
this Agreement.
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The foregoing interim financial information is unaudited and has been prepared from the books
and records of the Company. The financial information reflects all adjustments necessary for a fair
presentation of the financial condition, results of operations and cash flows of the Company in
conformity with generally accepted accounting principles. All such adjustments were of a normal
recurring nature for interim financial reporting. Operating results for the three months ended
September&nbsp;30, 2006 are not necessarily indicative of the results that may be expected for the year
ending December&nbsp;31, 2006. Accordingly, your attention is directed to footnote disclosures found in
the December&nbsp;31, 2005 Annual Report and particularly to Note 1, which includes a summary of
significant accounting policies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(2)&nbsp;Significant Accounting Policies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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, DPI. All significant
intercompany balances and transactions have been eliminated in consolidation. Corporate
administration expenses are not allocated to subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Revenue Recognition &#151; </B>The Company recognizes royalty revenue upon reporting of such royalties
by licensees. License revenues are recognized when earned, in accordance with the contractual
provisions, typically upon our delivery of contracted services or delivery and contractual
availability of licensed product. Royalty revenues are recognized upon shipment of products
incorporating the related technology by the original equipment manufacturers (OEMs) and foundries,
as reported by quarterly royalty statements. The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin (SAB)&nbsp;104.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Deferred Revenue </B>- The Company receives royalty fee advances from certain
customers in accordance with contract terms. The Company does not require advances from all
customers. Advances are negotiated on a per contract basis. Cash received in advance of revenue
earned from a contract is recorded as deferred revenue until the related contract revenue is earned
under the Company&#146;s revenue recognition policy.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Concentration of Credit Risk &#151; </B>Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents and trade accounts
receivable. The Company places its temporary cash investments in certificates of deposit in excess
of FDIC insurance limits, principally at CitiBank FSB. At September&nbsp;30, 2006 substantially all cash
and cash equivalents were on deposit at two financial institutions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2006, two customers, not presented in the order of importance, Sharp and
Funai, accounted for 57% and 14% respectively of our. accounts receivable. At September&nbsp;30, 2005,
three customers, not presented in the order of importance, Matsushita, Sharp and Funai, accounted
for 42%, 21% and 20% respectively of our. accounts receivable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company does not apply interest charges to past due accounts receivable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Customers Outside of the U.S. &#151; </B>Sales to foreign customers were 100% and 100% of total sales
in the year to date periods ended September&nbsp;30, 2006 and 2005, respectively. Approximately 95% and
5% of sales were generated in Japan and Korea, respectively, in the nine months ended September&nbsp;30,
2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Major Customers &#151; </B>During the quarter ended September&nbsp;30, 2006, two customers, Sharp and Funai,
not presented in order of importance, accounted for 57% and 14% of the Company&#146;s revenue. In the
nine months ended September&nbsp;30, 2006, two customers, Funai, Sharp, not presented in order of
importance, accounted for 41% and 25% of the Company&#146;s revenue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Intangible Assets &#151; </B>Intangible assets consist of patent costs and trademarks which are
amortized on a straight-line basis over the estimated useful lives of the patents which range from
five to twenty years. The weighted average useful life of patents was approximately 11&nbsp;years. All
of our Intangible Assets have finite lives as defined by Statement of Financial Accounting Standard
(SFAS)&nbsp;142.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Earnings Per Share &#151; </B>Basic earnings (loss)&nbsp;per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss)&nbsp;per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of the entity. The
following table presents contingently issuable shares, options and warrants to purchase shares of
common stock that were outstanding during the three month and nine month periods ended September
30, 2006 and 2005 which were not included in the computation of diluted loss per share because the
impact would have been antidilutive or less than $0.01 per share:
</DIV>

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</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2006</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">2005</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">1,750,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,960,000</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 align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD 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">1,750,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,960,000</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Stock Option Plan &#151; </B>On January&nbsp;1, 2006 the Company adopted SFAS 123R &#147;Share Based Payments. No
options were granted in the quarter ended September&nbsp;30, 2006. Options to purchase 250,000 common
shares expired in the quarter ended September&nbsp;30, 2006/
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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;144, <I>Accounting for the Impairment of Long-Lived Assets, </I>on January&nbsp;1, 2002.
This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amounts of the assets exceed the fair value of the
assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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. The Company has only one operating segment, DPI, the Company&#146;s
audio enhancement licensing business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Recent Accounting Pronouncements </B>-
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In May&nbsp;2005 the FASB issued SFAS 154 &#147;Accounting Changes and Error Corrections&#148;. This Statement
replaces APB Opinion No.&nbsp;20, &#147;Accounting Changes&#148;, and FASB Statement No.&nbsp;3, &#147;Reporting Accounting
Changes in Interim Financial Statements&#148;, and changes the requirements for the accounting for and
reporting of a change in accounting principle and also corrections of error in previously issued
financial statements. This Statement harmonizes US accounting standards with existing international
accounting standards by requiring companies to report voluntary changes in accounting principles
via a retrospective application, unless impracticable. Also, the reporting of an error correction
involves adjustments to previously issued financial statements similar to those generally
applicable to
reporting an accounting change retrospectively. The Company adopted this Statement as required on
January&nbsp;1, 2006.
</DIV>

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

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

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company believes the adoption of this pronouncement will not have a material effect on the
Company&#146;s financial position, results from operations or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Use of Estimates </B>- Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><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, 2005 and
September&nbsp;30, 2006 approximated fair value due to their short maturity or nature.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(3)&nbsp;Property and Equipment</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and equipment, as of December&nbsp;31, 2005 and September&nbsp;30, 2006, consists of the
following in accordance with application of SFAS 144:
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&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: 0px solid #000000"><B>September 30,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px 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>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</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">$</TD>
    <TD align="right">337,144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">337,145</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">174,548</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">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Property and Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">630,531</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">637,531</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">624,326</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">619,128</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">$</TD>
    <TD align="right">6,205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,403</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>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(4)&nbsp;Intangible Assets</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Intangible assets, as of December&nbsp;31, 2005 and September&nbsp;30, 2006 consist of the following:
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&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: 0px solid #000000"><B>September</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px 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>30, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</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">$</TD>
    <TD align="right">540,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">525,695</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">403,876</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">387,147</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">$</TD>
    <TD align="right">136,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">138,548</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"><!-- Folio -->14<!-- /Folio -->
</DIV>

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

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Estimated amortization is as follows:
</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="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&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">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">8,351</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right" nowrap>134,059</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0</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="right">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It is anticipated that the intangible assets will be written off upon completion of the sale
of assets, subject to stockholder approval, in January, 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(5)&nbsp;Notes Payable</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is indebted to the Premium Finance, Inc., an unrelated insurance premium finance
company. This note finances the Company&#146;s annual Directors&#146; and Officers&#146; Liability Insurance.
This amount bears interest at a fixed rate of 13% annually, is paid in monthly installments
of $4,835 that commenced on June&nbsp;1, 2006 and continues for eight months until the entire
balance of principal and interest is paid in full.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(6)&nbsp;Shareholders&#146; Equity</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>During the quarter ended September&nbsp;30, 2006, shares were issued, cancelled or converted as
follows:</I>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Options to purchase 250,000 shares of common stock previously granted to one employee, at an
exercise price of $0.05 were cancelled after the resignation of the employee per terms of the
option agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Capitalization</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<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 had a par value of $0.01 and a stated value of
$10.00 per share US and was designated as a liquidation preference. The stock ranked prior to the
Company&#146;s common stock. No dividends were to 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. The Series&nbsp;B-1 Preferred Stock has no voting power. Certain restrictions on trading existed
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 reflected the issuance of 15,384 shares of Series&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. In December&nbsp;2005,
the Company, as stipulated by the related Subscription Agreement, forced the conversion of all
outstanding Series&nbsp;B-1 Preferred Stock into Restricted Common Stock at the minimum conversion price
of $.56 per share. This resulted in the issuance of 1,788,018 Common Stock shares.
</DIV>


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

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(7)&nbsp;Stock Options</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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, 4,876,339
as of September&nbsp;30, 2006. Stock options were granted under the Plan with an exercise price
equal to the stock&#146;s fair market value at the date of grant. Outstanding stock options under the
Plan have five-year terms and vest and become fully exercisable up to three years from the date of
grant. The Plan expired in February&nbsp;2005. To date, the Company has not adopted a new stock option
plan.
</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="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&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 nowrap align="center" colspan="6" style="border-bottom: 0px solid #000000"><B><I>WEIGHTED-AVERAGE</I></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>Exercisable</B></TD>
    <TD>&nbsp;</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, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">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 nowrap align="left">&nbsp;</TD>
    <TD align="right">(600,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.43</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,381,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,635,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.11</TD>
    <TD>&nbsp;</TD>
</TR>
<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">500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</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">(325,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.31</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,726,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,810,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.10</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">Options granted</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">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</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 nowrap align="left">&nbsp;</TD>
    <TD align="right">(976,666</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,060,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at September&nbsp;30, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,750,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,750,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.09</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>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The per share weighted-average fair value of stock options granted during 2005 was
$0.04, on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield 0%, risk-free interest rate of 4.5%, expected
volatility of 100% and an expected life of 5&nbsp;years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2006, the number of options exercisable was 1,750,000 and the
weighted-average exercise price of those options was $0.09.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no warrants outstanding at December&nbsp;31, 2005 or September&nbsp;30, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(8)&nbsp;Commitments and Contingencies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also anticipate that, from time to time, we may be named as a party to legal proceedings
that may arise in the ordinary course of our business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating Lease Commitments</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is obligated under several non-cancelable operating leases. Future minimum rental
payments at September&nbsp;30, 2006 for all operating leases were approximately $7,000 through December
2006. There is no continuing lease obligation after that date. Rent expense amounted to
approximately $9,000 and $8,000 for the quarters ended September&nbsp;30,
2006 and 2005, respectively.
</DIV>

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

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

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(9)&nbsp;Profit Sharing Plan</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>

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

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<DIV style="font-family: 'Times New Roman',Times,serif">
<!-- link2 "Item&nbsp;2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations" -->
<DIV align="left"><A NAME="002"></A></DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Item&nbsp;2</B>. <B><I>Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This information should be read in conjunction with Management&#146;s Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company&#146;s Annual Report on Form&nbsp;10-K
for the year ended December&nbsp;31, 2005, the audited consolidated financial statements and the notes
thereto included in the Form&nbsp;10-K and the unaudited interim consolidated financial statements and
notes thereto included in this report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This report
contains forward-looking statements, within the meaning of the Private Securities
Reform Act of 1995, which are subject to a variety of risks and uncertainties. Our actual results,
performance, or achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Executive Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $68,000 for the quarter ended September&nbsp;30, 2006 compared to $271,000
for the quarter ended September&nbsp;30, 2005, a decrease of 75%. Revenues were comprised of royalties
pertaining to the licensing of Spatializer<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> audio signal processing algorithms and circuit designs.
A key issue discussed is our ability to obtain and maintain revenue traction when traditional
revenue sources are eroding, while being replaced by new revenue sources.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net Loss was $62,000 for the quarter ended September&nbsp;30, 2006; $0.00 basic and diluted per
share, compared to net income of $37,000, ($0.00) per share basic, for the quarter ended September
30, 2005. The increased 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 unsuccessful efforts to
increase revenues while managing overhead and maintaining competitiveness during revenue source
transition to new markets for the Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2006, we had $273,000 in cash and cash equivalents as compared to $551,000 at
December&nbsp;31, 2005. The decrease in cash resulted primarily from the net loss. We had working
capital of $277,000 at September&nbsp;30, 2006 as compared with working capital of $560,000 at December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A key issue is the Company&#146;s ability to generate positive cash flow, or if needed, raise
additional capital to fund its business. We do not believe this is attainable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The business environment in which we operate is very difficult and the industry, we believe,
is unattractive from a competitive strategy perspective. We face substantial risk as a result.
These risks should be studied and understood, as outlined in Risk Factors later in this document.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Approach to MD&#038;A</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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
</DIV>

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

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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:
</DIV>


<DIV style="margin-top: 6pt">
<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"><B>&#149;</B></TD>
    <TD width="1%">&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 style="font-size: 6pt">&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"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to enhance the overall financial disclosure and provide the context within which
financial information should be analyzed; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&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"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to provide information about the quality of, and potential variability of, a
company&#146;s earnings and cash flow, so that investors can ascertain the likelihood and
relationship of past performance being indicative of future performance.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe the best way to achieve this is to give the reader:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>An understanding of our operating environment and its risks</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>An outline of critical accounting policies</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>A review of our corporate governance structure</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>A review of the key components of the financial statements and our cash position and
capital resources</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>A review of the important trends in the financial statements and our cash flow</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Disclosure on our internal controls and procedures</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Operating Environment</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We operate in a very difficult business environment. This environment impacts us in various
ways, some of which are discussed below which such items are further discussed in greater detail in
our Annual Report on Form 10-K for the fiscal year ended December&nbsp;31, 2005.
</DIV>

<DIV style="margin-top: 6pt">
<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"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Our Board of Directors has Determined it is in the Company&#146;s and it&#146;s Stockholders&#146;
Interests to Sell the Company&#146;s Assets</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&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"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We Face Significant Pricing Pressure and Competition that has Resulted in Our
Technology Being Designed Out Within a Short Time Frame, and Impeded Efforts to Secure New
Design Wins</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&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"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>New Customer Product Development Has been Delayed. This Resulted 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 style="font-size: 6pt">&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"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We Rely on the Schedules and Cooperation of Chip Makers or Other Third Parties to</TD>
</TR>

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

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


<DIV style="margin-top: 6pt"><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">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Deliver Our Technology in Consumer Products. These Third parties Have Their Own Priorities
and Alliances that Delayed or Could Thwart our Sales Efforts to Potential Customers.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In December&nbsp;2005 our revenues were stagnant, with those from certain of our major customers winding
down. Revenues from certain of our other customers appear not to be sustainable in the future. In
December&nbsp;2005, two of our three independent directors resigned and the Chairman of the Board, Chief
Executive Officer, Chief Financial Officer and Secretary resigned from all positions held with the
Company other than as a director, Chairman and Secretary. For these and other reasons, and after
exploring other exit strategies and opportunities, our Board of Directors concluded in December
2005 to attempt to sell the Company either through a sale of assets or a sale of multiple,
non-exclusive perpetual licenses with a subsequent sale of the residual assets and engaged
Strategic Equity Group to assist us in this endeavor. Following such transaction, it is
anticipated that the Company would be wound up and dissolved. The consummation of any such
transaction and the determination to wind up and dissolve is subject to stockholder approval.
There is no assurance that the Company will be able to negotiate an agreement for the sale of
assets. There is no assurance that, if such an agreement is successfully negotiated, that such
transaction will be approved by stockholders or consummated. Further, even if such transaction is
consummated, there is no assurance that there will be any funds available for distribution to
stockholders. If such sale and subsequent wind up and dissolution is not approved, the Board of
Directors will be required to explore other alternatives for the Company and its business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have experienced a loss from operations in four of the last five years. We experienced losses in
the last two years. While our objective and full effort has been on managing a profitable business,
due to the market conditions and factors outlined in this Quarterly Report on Form 10-Q and their
impact on fluctuations in operating expenses and revenues, we no longer believe that we will be
able to generate a positive profit position in any given future period, nor do we believe that is
feasible. 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. We cannot, because of market and business conditions, rely on the sale of shares or
on debt financings in the future. Further, we do not believe that debt or equity financing will be
available as required and as such, have decided to try to sell the assets of the Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 have been seeking
commercial acceptance of our products in highly competitive markets. We responded by offering
additional products targeted to each price and quality segment of the market, more aggressively
priced and feature enriched our products and entered new segments, such as cell phones, with
different competitive pressure. Our value proposition that stressed 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, failed to resonate with our targeted
customers in this highly competitive environment. The result was the elimination of features,
including ours, to
</DIV>


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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">reduce cost. There is no assurance that our present or contemplated future products or a
repositioned value proposition will achieve or maintain sufficient commercial acceptance, or if
they do, that functionally equivalent products will not be developed by current or future
competitors or customers who had access to significantly greater resources or which are willing to
&#147;give away&#148; their products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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. Lastly, customer implementation delays
have put off expected cash flow into the future, beyond the time frame of operations based on our
available cash resources.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Therefore, when reviewing the operating results or drawing conclusions with regard to future
performance, these competitive forces and uncertainties must be taken into consideration. Though
there is no absolute long-term visibility, it is likely that our operations would fail if we
attempted to continue long-term in this environment. Hence, the Company&#146;s Board of Directors has
decided to recommend to and seek the approval of stockholders for the sale of the assets of the
Company and liquidate the business.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Critical Accounting Policies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The first critical accounting policy relates to revenue recognition. 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
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The third critical accounting policy relates to our long-lived assets. The Company continually
reviews the recoverability of the carrying value of long-lived assets using the methodology
prescribed in Statement of Financial Accounting Standards (SFAS)&nbsp;144, &#147;Accounting for the
Impairment and Disposal of Long-Lived Assets.&#148; The Company also reviews long-lived assets and the
related intangible assets for impairment whenever events or changes in circumstances indicate that
the carrying value of such assets may not be recoverable. Upon such an occurrence, recoverability
of these assets is determined by comparing the forecasted undiscounted net cash flows to which the
assets relate, to the carrying amount. If the asset is determined to be unable to recover its
carrying value, then intangible assets, if any, are written down first, followed by the other
long-lived assets to fair value. Fair value is determined based on discounted cash flows, appraised
values or management&#146;s estimates, depending on the nature of the 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. Management believes based on the preliminary results of its auction bids that
the net carrying value of its assets exceeds the current carrying value.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Corporate Governance</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Audit Committee</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This committee is directed to review the scope, cost and results of the independent audit of
our books and records, the results of the annual audit with management and the internal auditors
and the adequacy of our accounting, financial, and operating controls; to recommend annually to the
Board of Directors the selection of the independent auditors; to approve proposals made by our
independent auditors for consulting work; and to report to the Board of Directors, when so
requested, on any accounting of financial matters. Gilbert Segel was the only independent director
on this committee. Mr.&nbsp;Segel resigned from our Board of Directors in December&nbsp;2005. Mr.&nbsp;Mandell,
Chairman of the Board and Secretary of the Company, served as ex-officio member of the Audit
Committee during fiscal year 2005. Mr.&nbsp;Mandell resigned as CEO with Company effective January&nbsp;6,
2006, though he remained as Chairman to assist in the search and closing of a sale transaction.
There were no members of the committee upon the resignation of Mr.&nbsp;Segel.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Compensation and Stock Committee</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Compensation and Stock Option Committee (the &#147;Compensation Committee&#148;) consisted of
Messrs.&nbsp;Pace and Segel, each of whom was 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. Messrs.&nbsp;Pace and Segel resigned as
directors in December&nbsp;2005.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our Audit Committee and Compensation and Stock Committee charters are available in print to any
stockholder upon request in writing to our principal corporate office at 2025 Gateway place, Suite
365, San Jose, California 95110.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Key Components of the Financial Statements and Important Trends</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The financial statements, including the Consolidated Balance Sheets, the Consolidated
Statements of Operations, the Consolidated Statements of Cash Flows and the Consolidated Statements
of 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Consolidated 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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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 in the United
States. This is addressed further in MD&#038;A under Revenues and Expenses.
</DIV>



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




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Consolidated Statement of Cash Flows 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, result in a disbursement of cash, but will be
expensed in the Consolidated 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>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Results of Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Revenues</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $68,000 for the quarter ended September&nbsp;30, 2006 compared to
$271,000 for the quarter ended September&nbsp;30, 2005, a decrease of 75%. Revenues were comprised of
royalties pertaining to the licensing of Spatializer audio signal processing algorithms and circuit
designs. Revenues in the nine months ended September&nbsp;30, 2006 were $261,000, compared to revenues
of $1,032,000 in the comparable period last year, a decrease of 75%. Revenues in the three and nine
months ended September&nbsp;30, 2006 decreased due to end of life of a mobile telephone license and the
recognition, earlier in 2005, of deferred revenue on a royalty prepayment received in the third
quarter of 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Gross Profit</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit for the three months ended September&nbsp;30, 2006 was $61,000 (90% of revenue)
compared to gross profit of $258,000 (95% of revenue) in the comparable period last year, a
decrease of 76%. Gross profit for the nine months ended September&nbsp;30, 2006 were $235,000 (90% of
revenue) compared to $942,000 (91% of revenue) in the comparable period last year. Gross profit
in the three and nine-month periods decreased due to decreased revenue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Operating Expenses</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses in the three months ended September&nbsp;30, 2006 were $122,000 (180% of
revenue) compared to operating expenses of 224,000 (83% of revenue) in the comparable period last
year, a decrease of 46%. Operating expenses in the nine months ended September&nbsp;30, 2006 were
$530,000 (203% of revenue) compared to $843,000 (82% of revenue) in the comparable nine-month
period last year. The decrease in operating expenses for the three and nine months ended September
30, 2006 resulted primarily from personnel and operating reductions resulting from the suspension
of day-to-day operations during the asset auction process, with the goal of conserving cash.
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>General and Administrative</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative expenses in the three months ended September&nbsp;30, 2006 were
$122,000 (180% of revenue) compared to general and administrative expenses of $117,000 (43% of
revenue) in the comparable period last year, an increase of 4%. General and administrative
expenses in the nine months ended September&nbsp;30, 2006 were $371,000 (142% of revenue) compared to
$457,000 (44% of revenue) in the comparable nine month period last year. The increase in general
and administrative expense for the three month period results primarily from higher legal
expenses arising from the proposed sale of assets. The decrease in general and administrative
expense for the nine month period resulted primarily from the elimination of the CEO position and
related corporate travel expenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Research and Development</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and Development expenses in the three months ended September&nbsp;30, 2006 were $0 (0%
of revenue) compared to research and development expenses of $62,000 (23% of revenue) in the
comparable period last year, a decrease of 100%. Research and Development expenses for the nine
months ended September&nbsp;30, 2006 were $158,000 (61% of revenue) compared to $245,000 (25% of
revenue) in the comparable nine month period last year. There were no engineering activities in
the third quarter. The decrease in the nine month research and development expenses resulted from
the elimination of an in-house applications engineering position and the resignation of the
principal engineer in May&nbsp;2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Sales and Marketing</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and Marketing expenses in the three months ended September&nbsp;30, 2006 were $0 (0% of
revenue) compared to sales and marketing expenses of $45,000 (17% of revenue) in the comparable
period last year, an decrease of 100%. Sales and Marketing expenses for the nine months ended
September&nbsp;30, 2006 were $1,000 (1% of revenue) compared to $141,000 (14% of revenue) in the
comparable nine month period last year. The decrease in sales and marketing expense in the three
and nine month periods resulted from the suspension of all travel and selling activities, with
the resignation of the CEO who performed this function as among his duties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Net Income (Loss)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net Loss was ($62,000) for the quarter ended September&nbsp;30, 2006, $0.00 basic per share,
compared to net income of $37,000, $0.00 basic and diluted per share, for the quarter ended
September&nbsp;30, 2005. Net loss in the nine months ended September&nbsp;30, 2006 was ($297,000), ($0.01)
basic per share, compared with net income of $104,000, $0.00 basic and diluted per share in the
comparable period last year. The net loss in the three month and nine month periods resulted from
decreased revenues and a general wind down of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2006, we had $273,000 in cash and cash equivalents as compared to $551,000 at
December&nbsp;31, 2005. The decrease in cash resulted primarily from the net loss. We had working
capital of $277,000 at September&nbsp;30, 2006 as compared with working capital of $560,000 at December&nbsp;31, 2005.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2005, the Company, as stipulated by the related Subscription Agreement, forced the
conversion of all outstanding Series&nbsp;B-1 Preferred Stock, into Restricted Common Stock at the
minimum conversion price of $.56 per share. This resulted in the issuance of 1,788,018 Common Stock
shares, worth approximately $100,000 at market value at issuance. This issuance diluted existing
common stockholders by approximately 4%, but eliminated $1.1&nbsp;million in liquidation preference
shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Future payments due under operating lease obligations as of September&nbsp;30, 2006 are described
below:
</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="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19" style="border-bottom: 1px solid #000000"><B>Payment due by period</B></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="3" style="border-bottom: 0px 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 nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>More than</B></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="3" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>1 year</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>1-3 years</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>3-5 years</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>5 years</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating Lease
Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7,000</TD>
    <TD>&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"><!-- 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>
    <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">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7,000</TD>
    <TD>&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>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event the Company is to be wound up and dissolved the Company would attempt to
settle these amounts, negotiate early termination, or pay the remaining obligation if cash
resources permitted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future cash flow will come primarily from the audio signal processing licensing and OEM
royalties until or if our efforts to sell the assets of the company, with stockholders approval,
is consummated and in that case from any net proceeds from the sale of assets or perpetual
licenses. The Board of Directors will, with the approval of the stockholders, decide on the
dispensation of such proceeds.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The fluid, competitive and dynamic nature of the market continues a high degree of uncertainty
to our operations. The operations of our business, and those of our competitors, are also 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. In addition, the commoditization of
many consumer electronics segments, our lack of resources and the departure of key employee and
directors has made it unfeasible to continue to compete.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on current and projected operating levels, we no longer believe that we can maintain our
liquidity position at a consistent level both on a short-term and long-term basis. As such, we do
not 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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On January&nbsp;10, 2006, the Company announced that it would hold an open auction for the
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->26<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">sale of
substantially all of its assets. The Board of Directors of the Company decided that it is in the
best interests of the stockholders to hold an open auction for the acquisition of the assets of the
Company or the granting of an unlimited amount of non-exclusive perpetual licenses for a one-time
fee and a subsequent auction of the residual assets. The consummation of any of such transactions
will be subject to approval by the stockholders of the Company. The Company received
non-conforming bids for such assets on the February&nbsp;15, 2006 deadline. The Board of Directors of
the company, in consultation with their financial and legal advisors, extended the auction period
to March&nbsp;15, 2006, to provide bidders and other interested parties additional time to clarify their
offers and perform due diligence, as well as to solicit additional offers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August&nbsp;2006, the board of directors of Spatializer was presented with and carefully
considered a draft of the Asset Purchase Agreement. After due consideration of all of the
foregoing, the board of directors of Spatializer, by a unanimous written consent of directors dated
August&nbsp;28, 2006, authorized the execution and delivery on behalf of Spatializer of the Asset
Purchase Agreement providing for the sale to DTS and DTS BVI of all or substantially all of the
assets of each of Spatializer and Desper Products, deemed the sale of all or substantially all of
the assets of Spatializer and Desper Products for $1,000,000 in aggregate cash consideration to be
expedient and for the best interests of Spatializer, and deemed the sale of all or substantially
all of the assets of Spatializer and Desper Products to be advisable and in the best interests of
Spatializer. Furthermore, the board of directors of Spatializer deemed it advisable that, following
the sale of the assets, Spatializer be dissolved. The board of directors also recommended that the
stockholders of Spatializer vote in favor of both the sale of assets transaction and the
dissolution of Spatializer. The board of directors called a meeting of the stockholders of
Spatializer to consider the proposed sale of assets pursuant to the Asset Purchase Agreement and to
take action upon the resolution of the board of directors to dissolve Spatializer. The board of
directors also recommended that the stockholders of Spatializer vote in favor of both the sale of
assets transaction and the dissolution of Spatializer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective August&nbsp;28, 2006, Spatializer, as the sole shareholder of Desper Products, executed a
written consent of sole shareholder approving the principal terms of the sale of the assets of
Desper Products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;18, 2006, the parties executed and delivered the Asset Purchase Agreement. It is
anticipated that a meeting of Stockholders will be held in January, 2007 to vote on the approval of
this Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Net Operating Loss Carry forwards</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2005, 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 are subject to
an annual limitation of approximately $1,000,000. Based on the suspension of operations and the
pending sale of assets, these net operating loss carry forwards will not be utilized.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Recently Issued Accounting Pronouncements</B>
</DIV>



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

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




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2004, the Financial Accounting Standards Board (&#147;FASB&#148;) issued SFAS No.&nbsp;123R,
&#147;Share Based Payment&#148;. This Statement is a revision of FASB Statement No.&nbsp;123, &#147;Accounting for
Stock-Based Compensation&#148;. This Statement supersedes APB Opinion No.&nbsp;25, &#147;Accounting for Stock
Issued to Employees&#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;Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.&#148; This Statement does not address
the accounting for employee share ownership plans, which are subject to AICPA Statement of Position
93-6, &#147;Employers&#146; Accounting for Employee Stock Ownership Plans&#148;. The Securities and Exchange
Commission has delayed the adoption requirement of SFAS No.&nbsp;123R until the first annual reporting
period beginning after December&nbsp;15, 2005. We adopted SFAS No.&nbsp;123R as of January&nbsp;1, 2006 as
required.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In May&nbsp;2005 the FASB issued SFAS 154 &#147;Accounting Changes and Error Corrections&#148;. This Statement
replaces APB Opinion No.&nbsp;20, &#147;Accounting Changes&#148;, and FASB Statement No.&nbsp;3, &#147;Reporting Accounting
Changes in Interim Financial Statements&#148;, and changes the requirements for the accounting for and
reporting of a change in accounting principle and also corrections of error in previously issued
financial statements. This Statement harmonizes US accounting standards with existing international
accounting standards by requiring companies to report voluntary changes in accounting principles
via a retrospective application, unless impracticable. Also, the reporting of an error correction
involves adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. This pronouncement is effective for
accounting changes and corrections of errors made in fiscal years beginning after December&nbsp;15, 2005
</DIV>

<!-- link2 "Item&nbsp;3. Quantitative and Qualitative Disclosures About Market Risk" -->
<DIV align="left"><A NAME="003"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;3. </B><B><I>Quantitative and Qualitative Disclosures About Market Risk</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not been exposed to material future earnings or cash flow fluctuations from changes in
interest rates on our short-term investments at September&nbsp;30, 2006. 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.
</DIV>
<!-- link2 "Item&nbsp;4. Controls and Procedures" -->
<DIV align="left"><A NAME="004"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4. </B><B><I>Controls and Procedures</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company carried out an evaluation of the effectiveness of the Company&#146;s disclosure
controls and procedures, as defined in Rules&nbsp;13a-15(e) and 15d-15(e) of the Securities and Exchange
Act of 1934. Based on that evaluation, the Chairman of the Board, in performing the functions of
the principal executive and principal financial officers of the Company,
concluded that the Company&#146;s disclosure controls and procedures as of September&nbsp;30, 2006 were
effective to ensure that information required to be disclosed by the Company in reports
</DIV>

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

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">which it
files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission&#146;s rules and
forms and that such information is accumulated and communicated to management as appropriate to
allow timely decisions regarding required disclosure . There were no changes in the Company&#146;s
internal control over financial reporting that occurred during the quarter ended September&nbsp;30, 2006
that have materially affected, or are reasonably likely to materially affect, the Company&#146;s
internal control over financial reporting.
</DIV>



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

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



<!-- link1 "PART II. OTHER INFORMATION" -->
<DIV align="left"><A NAME="005"></A></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">PART II. OTHER INFORMATION
</DIV>

<!-- link2 "ITEM 1. LEGAL PROCEEDINGS" -->
<DIV align="left"><A NAME="006"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><u><B>ITEM 1. LEGAL PROCEEDINGS</B></u>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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 October&nbsp;29, 2006 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, given the size of our company, there exists the possibility of a
material adverse impact on our results of operations of the period in which the ruling occurs. Our
estimate of the potential impact on our financial position or overall results of operations for new
legal proceedings could change in the future.
</DIV>
<!-- link2 "ITEM 1A. RISK FACTORS" -->
<DIV align="left"><A NAME="007"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U><B>ITEM 1A. RISK FACTORS</B></U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to the other information set forth in this Quarterly Report, stockholders should
carefully consider the factors discussed in Item&nbsp;1A, Risk Factors, of our Annual Report on Form
10-K for the year ended December&nbsp;31, 2005, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K are not the
only risks facing the Company. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.
</DIV>
<!-- link2 "ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS" -->
<DIV align="left"><A NAME="008"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U><B>ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS</B></U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no unregistered sales of equity securities or repurchases during the period covered
by this report.
</DIV>
<!-- link2 "ITEM 3. DEFAULTS UPON SENIOR SECURITIES" -->
<DIV align="left"><A NAME="009"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><u><B>ITEM 3. DEFAULTS UPON SENIOR SECURITIES</B></u>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None

</DIV>
<!-- link2 "ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS" -->
<DIV align="left"><A NAME="010"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><u><B>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B></u>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None

</DIV>
<!-- link2 "ITEM 5. OTHER INFORMATION" -->
<DIV align="left"><A NAME="011"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><u><B>ITEM 5. OTHER INFORMATION</B></u>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None

</DIV>
<!-- link2 "ITEM 6. EXHIBITS" -->
<DIV align="left"><A NAME="012"></A></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><u><B>ITEM 6. EXHIBITS</B></u>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">10.9</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Asset Purchase Agreement, dated as of September&nbsp;18, 2006, by and
among DTS, Inc., a Delaware corporation (&#147;<u>Purchaser</u>&#148;), DTS BVI
Limited, a corporation organized under the laws of the British
Virgin Islands and a subsidiary of Purchaser (&#147;<u>Purchaser
Subsidiary</u>&#148;), Spatializer Audio Laboratories, Inc., a Delaware
corporation (&#147;<u>Seller</u>&#148;), and Desper Products, Inc., a California
corporation which is a wholly</TD>
</TR>


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

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


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&nbsp;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>owned subsidiary of Seller (&#147;<u>Seller Subsidiary</u>&#148;).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">31</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Rule&nbsp;13a-14(a)/15d-14(a) Certification</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">32*</TD>
    <TD width="1%">&nbsp;</TD>
    <TD> Section&nbsp;1350 Certification</TD>
</TR>
</TABLE>
</DIV>
<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%;  border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>
<DIV style="margin-top: 3pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">*</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certification will not be deemed &#147;filed&#148; for purposes of Section&nbsp;18 of the Securities
Exchange Act of 1934.</TD>
</TR>

</TABLE>
</DIV>
<!-- link1 "SIGNATURES " -->
<DIV align="left"><A NAME="013"></A></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SIGNATURES</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Dated: November&nbsp;14, 2006
</DIV>

<DIV align="left">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="90%">
<!-- 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">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>SPATIALIZER AUDIO LABORATORIES, INC.</B></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>(Registrant)</B></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">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ <FONT style="font-variant: SMALL-CAPS">Henry R. Mandell</FONT></TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></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"><B>H</B><FONT style="font-variant: SMALL-CAPS"><B>enry R. Mandell</B></FONT></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"><I>Chairman of the Board and Secretary</I></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"><I>(Principal Executive, Financial and Accounting Officer)</I></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



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

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>2
<FILENAME>v25172exv10w9.htm
<DESCRIPTION>EXHIBIT 10.9
<TEXT>
<HTML>
<HEAD>
<TITLE>exv10w9</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">


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;10.9</B>
</DIV>


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">EXECUTION COPY
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ASSET PURCHASE AGREEMENT
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">by and among

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">DTS, INC.,

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">DTS BVI LIMITED,

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">SPATIALIZER AUDIO LABORATORIES, INC.

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">and

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">DESPER PRODUCTS, INC.

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">dated as of

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">September&nbsp;18, 2006

</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</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" style="font-size: 10pt; margin-top: 18pt"><U><B>TABLE OF CONTENTS</B></U>
</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="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Page(s)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE I PURCHASE AND SALE OF ASSETS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;1.1 Sale and Transfer of Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;1.2 Assumption of Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;1.3 Excluded Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;1.4 The Purchase Price</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;1.5 Allocation of Purchase Price; Tax Filings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE II THE CLOSING</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;2.1 The Closing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;2.2 Deliveries by Seller and Seller Subsidiary</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;2.3 Deliveries by Purchaser</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER AND SELLER SUBSIDIARY</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.1 Authorization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.2 Binding Agreement</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.3 Good Title Conveyed</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.4 Organization; Qualification of Seller</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.5 Subsidiaries and Affiliates</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.6 Consents and Approvals; No Violations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.7 SEC Reports and Financial Statements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.8 Property Held by Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.9 Absence of Certain Changes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.10 Title to Properties; Encumbrances</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.11 Environmental Matters</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.12 Contracts and Commitments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.13 Customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.14 Litigation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.15 Compliance with Laws</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.16 Employee Benefit Plans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.17 Tax Matters</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.18 Intellectual Property</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.19 Solvency</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.20 Brokers or Finders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.21 Full Disclosure</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;3.22 Proxy Statement</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</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="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Page(s)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;4.1 Organization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;4.2 Authorization; Validity of Agreement; Necessary Action</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;4.3 Consents and Approvals; No Violations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;4.4 Brokers or Finders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;4.5 Information Supplied</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE V COVENANTS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.1 Interim Operations of Seller and Seller Subsidiary</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.2 Access; Confidentiality</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.3 Stockholder Meeting</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.4 Proxy Statement</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.5 Efforts and Actions to Cause Closing to Occur</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.6 Notification of Certain Matters</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.7 No Solicitation of Competing Transaction</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.8 No Assumption of Labor Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.9 Subsequent Actions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.10 Publicity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.11 Mail Received After Closing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.12 Access to Books and Records</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.13 Waiver of Bulk Sales Requirement</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.14 Accounts Receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.15 Proxy Solicitation Efforts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;5.16 Post-Closing Assignment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE VI CONDITIONS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;6.1 Conditions to Each Party&#146;s Obligation to Effect the Closing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;6.2 Conditions to Obligations of Purchaser to Effect the Closing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;6.3 Conditions to Obligations of Seller to Effect the Closing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE VII TERMINATION</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;7.1 Termination</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;7.2 Effect of Termination</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE VIII INDEMNIFICATION</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;8.1 Indemnification; Remedies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;8.2 Limitations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;8.3 Notice of Claim; Defense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;8.4 Survival of Indemnification Claims</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;8.5 Tax Effect of Indemnification Payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</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="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Page(s)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;8.6 Survival of Covenants, Representations and Warranties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE IX DEFINITIONS AND INTERPRETATION</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;9.1 Definitions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;9.2 Interpretation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ARTICLE X MISCELLANEOUS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31</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>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.1 Fees and Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.2 Amendment and Modification</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.3 Notices</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.4 Counterparts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.5 Entire Agreement; No Third Party Beneficiaries</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.6 Severability</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.7 Governing Law</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.8 Enforcement; Venue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.9 Time of Essence</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.10 Extension; Waiver</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.11 Election of Remedies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Section&nbsp;10.12 Assignment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U><B>EXHIBITS</B></U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Exhibit&nbsp;A &#150; Form&nbsp;Of Assumption Agreement<BR>
Exhibit&nbsp;B &#150; Purchase Price Allocation<BR>
Exhibit&nbsp;C &#150; Form&nbsp;Of Bill Of Sale And Assignment<BR>
Exhibit&nbsp;D &#150; Schedule&nbsp;Of Liens<BR>
Exhibit&nbsp;E &#150; Assumed Contracts

</DIV>


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</DIV>


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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ASSET PURCHASE AGREEMENT
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Asset Purchase Agreement, dated as of September&nbsp;18, 2006, by and among DTS, Inc., a Delaware
corporation (&#147;<U>Purchaser</U>&#148;), DTS BVI Limited, a corporation organized under the laws of the
British Virgin Islands and a subsidiary of Purchaser (&#147;<U>Purchaser Subsidiary</U>&#148;), Spatializer
Audio Laboratories, Inc., a Delaware corporation (&#147;<U>Seller</U>&#148;), and Desper Products, Inc., a
California corporation which is a wholly owned subsidiary of Seller (&#147;<U>Seller Subsidiary</U>&#148;).
Certain capitalized terms used in this Agreement have the meanings assigned to them in ARTICLE IX.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, the Boards of Directors of each of Purchaser, Purchaser Subsidiary, Seller and Seller
Subsidiary has approved, and deems it advisable and in the best interests of its respective
stockholders to consummate the acquisition of the Purchased Assets by Purchaser, which acquisition
is to be effected by the sale of the Purchased Assets to Purchaser or Purchaser Subsidiary, as
determined by Purchaser, by Seller and Seller Subsidiary, subject to only those liabilities
expressly assumed by Purchaser or Purchaser Subsidiary pursuant hereto, and otherwise upon the
terms and subject to the conditions set forth herein; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, Purchaser and Purchaser Subsidiary intend to co-develop the Purchased Assets and
allocate them among each of them such that all tangible Purchased Assets and all other domestic
Purchased Assets be transferred to Purchaser and all foreign Purchased Assets be transferred to
Purchaser Subsidiary, each at the Closing as contemplated hereby.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOW, THEREFORE, in consideration of the foregoing and the representations, warranties,
covenants and agreements set forth herein, intending to be legally bound hereby, the parties hereto
agree as follows:
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE I
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">PURCHASE AND SALE OF ASSETS

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;1.1 <U>Sale and Transfer of Assets</U>. Subject to the terms and conditions of this
Agreement, at the Closing Seller and Seller Subsidiary shall sell, convey, assign, transfer and
deliver to Purchaser or Purchaser Subsidiary as specified by Purchaser the Purchased Assets, and
Purchaser or Purchaser Subsidiary, as applicable, agrees to purchase and accept from Seller and
Seller Subsidiary the Purchased Assets, free and clear of all Encumbrances, except for the
Encumbrances specifically to be assumed by Purchaser or Purchaser Subsidiary pursuant to the
Assumption Agreement in the form of <U>Exhibit&nbsp;A</U> hereto (the &#147;<U>Assumption Agreement</U>&#148;).
The term &#147;<U>Purchased Assets</U>&#148; means all of Seller&#146;s and Seller Subsidiary&#146;s right, title and
interest in and to all property and assets, real, personal or mixed, tangible or intangible, of
every kind and description, wherever located, used in the conduct of the Business, and shall
include but not be limited to:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;all Seller Intellectual Property;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;all Assumed Contracts;
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;all accounts receivable and royalties originating from the Assumed Contracts, subject to
Purchaser&#146;s obligation pursuant to Section&nbsp;5.14; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;all records, reports and databases related to outbound licenses of Seller Intellectual
Property;
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><U>provided</U>, <U>that</U>, (x)&nbsp;cash and cash equivalents and (y)&nbsp;accounts receivable not
originating from the Assumed Contracts are not Purchased Assets.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;1.2 <U>Assumption of Liabilities</U>. Except for obligations specifically to be
assumed by Purchaser or Purchaser Subsidiary pursuant to the Assumption Agreement, neither
Purchaser nor Purchaser Subsidiary shall assume nor shall be deemed to have assumed or agreed to be
responsible for any Liabilities of Seller, Seller Subsidiary or any of either of their Affiliates,
whether or not arising out of the ownership and operation of the Purchased Assets or the Business.
Upon the terms and subject to the conditions of this Agreement and the Assumption Agreement,
Purchaser or Purchaser Subsidiary, as determined by Purchaser, shall assume on the Closing Date,
effective as of the time of the Closing, and pay, perform and discharge when due all liabilities,
obligations and commitments under the Assumed Contracts, to the extent arising or relating to
performance by Seller or Seller Subsidiary after the Closing Date, other than any Liabilities,
arising due to any breach of any such Assumed Contract by Seller or Seller Subsidiary
(collectively, the &#147;<U>Assumed Liabilities</U>&#148;).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;1.3 <U>Excluded Liabilities</U>. Notwithstanding any provision in this Agreement,
Purchaser or Purchaser Subsidiary, as applicable, is assuming only the Assumed Liabilities and is
not assuming any other Liability of Seller, Seller Subsidiary or any of either of their Affiliates
whether or not arising out of the ownership and operation of the Purchased Assets or the Business
(all Liabilities of Seller, Seller Subsidiary and either of their Affiliates not expressly assumed
by Purchaser or Purchaser Subsidiary shall be retained by Seller, Seller Subsidiary and their
Affiliates and are referred to as the &#147;<U>Excluded Liabilities</U>&#148;). Without limiting the
generality of the preceding sentence, the Excluded Liabilities include:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;all Liabilities relating to the operations of Seller or Seller Subsidiary or the Business,
except as set forth in Section&nbsp;1.2;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;all Liabilities related to any accounts payable or any indebtedness of Seller or Seller
Subsidiary, except those Liabilities first arising after the Effective Time under the Assumed
Contracts;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;all Liabilities relating to any products manufactured or licensed by Seller or Seller
Subsidiary prior to the Effective Time, including warranty obligations and product liabilities and
intellectual property indemnities irrespective of the legal theory asserted;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;all Liabilities related to any Assumed Contract that arise prior to the Effective Time;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;all Liabilities related to any Assumed Contract that arise subsequent to the Effective
Time but that arise out of or relate to any breach that occurred prior to the Effective Time;
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;all Liabilities with respect to Taxes relating to the Business, the Seller or Seller
Subsidiary;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;subject to Purchaser&#146;s limited obligation pursuant to Section&nbsp;10.1, all Liabilities with
respect to Taxes arising out of or relating to the sale of the Purchased Assets or assumption of
the Assumed Liabilities;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)&nbsp;all Liabilities with respect to Taxes relating to the ownership or use of the Purchased
Assets prior to the Effective Time;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;all Liabilities, obligations and commitments relating to any Environmental Claim;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j)&nbsp;all Liabilities relating to any employee benefits or employee plans provided to any
employee or consultant of Seller or Seller Subsidiary;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k)&nbsp;all Liabilities relating to employment, severance or termination agreements with any
employee or consultant of Seller or Seller Subsidiary;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l)&nbsp;all Liabilities relating to any violation of law by Seller or Seller Subsidiary or any
litigation against Seller or Seller Subsidiary; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(m)&nbsp;all Liabilities relating to brokers fees or success fees with respect to the Transaction.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;1.4 <U>The Purchase Price</U>. Subject to the terms and conditions of this
Agreement, in consideration of the aforesaid sale, conveyance, assignment, transfer and delivery to
Purchaser and Purchaser Subsidiary of the Purchased Assets, at the Closing Purchaser shall (i)&nbsp;pay
or cause to be paid to Seller an amount of cash equal to One Million Dollars ($1,000,000) U.S. and
(ii)&nbsp;Purchaser or Purchaser Subsidiary, as determined by Purchaser, shall assume the Assumed
Liabilities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;1.5 <U>Allocation of Purchase Price; Tax Filings</U>. The Purchase Price shall be
allocated among the Purchased Assets as set forth in <U>Exhibit&nbsp;B</U> hereto, which has been
arrived at by arm&#146;s length negotiation, in compliance with Section&nbsp;1060 of the Code and the
regulations promulgated thereunder. Each of Purchaser, Purchaser Subsidiary, Seller and Seller
Subsidiary shall (i)&nbsp;timely file all forms (including Internal Revenue Service Form&nbsp;8594) and Tax
Returns required to be filed in connection with such allocation, (ii)&nbsp;be bound by such allocation
for purposes of determining Taxes, (iii)&nbsp;prepare and file, and cause its Affiliates to prepare and
file, its Tax Returns on a basis consistent with such allocation and (iv)&nbsp;take no position, and
cause its Affiliates to take no position, inconsistent with such allocation on any applicable Tax
Return, in any audit or proceeding before any taxing authority, in any report made for Tax,
financial accounting or any other purposes, or otherwise. In the event that the Allocation set
forth on <U>Exhibit&nbsp;B</U> hereto is disputed by any taxing authority, the party receiving notice
of such dispute shall promptly notify the other party hereto concerning the existence and
resolution of such dispute.
</DIV>

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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE II
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">THE CLOSING

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;2.1 <U>The Closing</U>. The sale and transfer of the Purchased Assets by Seller and
Seller Subsidiary to Purchaser and Purchaser Subsidiary shall take place at the offices of
Purchaser, 5171 Clareton Drive, Agoura Hills, CA 91301, at 10:00&nbsp;a.m., local time, on a day
mutually agreed to by Seller and Purchaser which day shall be not later than ten Business Days
following the satisfaction or waiver of all conditions to closing set forth in ARTICLE VI (other
than conditions which can be satisfied only by the delivery of certificates, opinions or other
documents at the Closing), unless another date or place is agreed in writing by each of the parties
hereto.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;2.2 <U>Deliveries by Seller and Seller Subsidiary</U>. At the Closing, Seller and
Seller Subsidiary shall deliver or cause to be delivered to Purchaser and Purchaser Subsidiary:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;a duly executed Bill of Sale and Assignment in the form annexed hereto as <U>Exhibit
C</U>;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;all documents of title and instruments of conveyance necessary to transfer and record
beneficial and record ownership to Purchaser or Purchaser Subsidiary, as applicable, of all
Purchased Assets;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;assignments of all Patents, Trademarks, trade names, domain names, ideas, assumed names
and Copyrights and all applications and disclosures therefor and all other Intellectual Property
included among the Purchased Assets;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;duly executed copies of all required consents;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;all documents containing or relating to &#147;know-how&#148; to be acquired by Purchaser or
Purchaser Subsidiary pursuant hereto;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;all of the books, records and customer data and reports of Seller or Seller Subsidiary
relating to the Purchased Assets;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;the officers&#146; certificate referred to in Section&nbsp;6.2(c) hereof;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)&nbsp;all such other deeds, endorsements, assignments and other instruments as, in the opinion
of Purchaser&#146;s counsel, are necessary to vest in Purchaser or Purchaser Subsidiary, as applicable,
good and marketable title to the Purchased Assets free and clear of all Encumbrances;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;evidence of the satisfaction of all obligations and release of all liens encumbering the
Purchased Assets, including without limitation those items specified on <U>Exhibit&nbsp;D</U> hereto ;
and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j)&nbsp;all other previously undelivered documents required to be delivered by Seller or Seller
Subsidiary to Purchaser or Purchaser Subsidiary at or prior to the Closing in connection with the
Transactions.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Seller and Seller Subsidiary shall take all actions reasonably requested by Purchaser to
deliver physical possession of the Purchased Assets to Purchaser or Purchaser Subsidiary at the
Closing at such location in southern California as is specified by Purchaser; <U>provided</U>,
<U>that</U>, all out of pocket costs related to delivery of the Purchased Assets that are either
arranged for by Purchaser, or arranged for by Seller with Purchaser&#146;s written pre-approval, shall
be paid or reimbursed, as applicable, by Purchaser.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;2.3 <U>Deliveries by Purchaser</U>. At the Closing, Purchaser shall deliver or cause
to be delivered to Seller:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;immediately available funds in the amount of One Million Dollars ($1,000,000) (U.S.);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;the Assumption Agreement, duly executed by Purchaser or Purchaser Subsidiary, as
applicable;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;the officer&#146;s certificate referred to in Section&nbsp;6.3 hereof; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;such other documents as are required to be delivered by Purchaser or Purchaser Subsidiary
to Seller at or prior to the Closing pursuant to this Agreement.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE III
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">REPRESENTATIONS AND WARRANTIES<BR>
OF SELLER AND SELLER SUBSIDIARY

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except as specifically set forth in the Disclosure Schedule prepared by Seller and delivered
to Purchaser simultaneously with the execution hereof, each of Seller and Seller Subsidiary
represent and warrant to Purchaser and Purchaser Subsidiary that all of the statements contained in
this Article&nbsp;III are true and complete as of the date of this Agreement (or, if made as of a
specified date, as of such date), and will be true and complete in all material respects (without
giving effect to any materiality qualifier therein) as of the Closing Date as though made on the
Closing Date. Each exception set forth in the Disclosure Schedule and each other response to this
Agreement set forth in the Disclosure Schedule is identified by reference to, or has been grouped
under a heading referring to, a specific individual section or subsection, as applicable, of this
Agreement and, relates only to such section or subsection, as applicable and to another section or
subsection of this Agreement only to the extent the applicability of such disclosure thereto is
readily apparent.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.1 <U>Authorization</U>. Each of Seller and Seller Subsidiary has full corporate
power and authority to execute and deliver this Agreement and to consummate the Transactions. The
execution, delivery and performance by Seller and Seller Subsidiary of this Agreement and the
consummation by each of them of the Transactions have been duly authorized by Seller&#146;s and Seller
Subsidiary&#146;s Boards of Directors and by the sole shareholder of Seller Subsidiary, and no other
corporate action on the part of Seller or Seller Subsidiary is necessary to authorize the execution
and delivery by Seller of this Agreement or the consummation by it of the Transactions, subject
only to the approval of this Agreement and the Transactions (including
</DIV>

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</DIV>

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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">without limitation the sale of the Purchased Assets) by the holders of a majority of the
outstanding shares of Seller Common Stock (&#147;<U>Stockholder Approval</U>&#148;).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.2 <U>Binding Agreement</U>. This Agreement has been duly executed and delivered by
each of Seller and Seller Subsidiary and, assuming due and valid authorization, execution and
delivery thereof by Purchaser, this Agreement is a valid and binding obligation of Seller and
Seller Subsidiary enforceable against Seller and Seller Subsidiary in accordance with its terms,
except (i)&nbsp;as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws of general application affecting enforcement of creditors&#146; rights
generally and (ii)&nbsp;the availability of the remedy of specific performance or injunctive or other
forms of equitable relief may be subject to equitable defenses and would be subject to the
discretion of the court before which any proceeding therefor may be brought.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.3 <U>Good Title Conveyed</U>. The bill of sale and the deeds, endorsements,
assignments and other instruments to be executed and delivered by Seller and Seller Subsidiary to
Purchaser and Purchaser Subsidiary at the Closing will be valid and binding obligations of Seller
and Seller Subsidiary, enforceable in accordance with their respective terms, and will effectively
vest in Purchaser or Purchaser Subsidiary, as applicable, good, valid and marketable title to all
the assets to be transferred to Purchaser pursuant to and as contemplated by this Agreement free
and clear of all Encumbrances, except Encumbrances to be assumed by Purchaser or Purchaser
Subsidiary pursuant to the Assumption Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.4 <U>Organization; Qualification of Seller</U>. Each of Seller and Seller
Subsidiary (i)&nbsp;is a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation; (ii)&nbsp;has full corporate power and authority to carry on its
business and to own those Purchased Assets to be transferred by it to Purchaser; and (iii)&nbsp;is duly
qualified or licensed to do business as a foreign corporation in good standing in every
jurisdiction in which the conduct of its business or the character of its assets requires such
qualification, except where the failure to be so qualified or licensed as a foreign corporation
could not, individually or in the aggregate, reasonably be expected to have a material adverse
effect on Seller and Seller Subsidiary, taken as a whole, or on the Purchased Assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.5 <U>Subsidiaries and Affiliates</U>. The Disclosure Schedule sets forth the name,
jurisdiction of incorporation and authorized and outstanding capital of each Subsidiary of Seller.
All the outstanding capital stock of each Subsidiary of Seller is owned directly by Seller, and
there are no outstanding options, rights or agreements of any kind relating to the issuance, sale
or transfer of any capital stock or other equity securities of any such Subsidiary. Seller has
heretofore delivered to Purchaser complete and correct copies of the certificate of incorporation
and by-laws of Seller and Seller Subsidiary, as presently in effect.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.6 <U>Consents and Approvals; No Violations</U>. Except for the filing with the SEC
of (x)&nbsp;a proxy statement relating to the approval by the stockholders of Seller of the principal
terms of this Agreement and the Transactions (the &#147;<U>Proxy Statement</U>&#148;) and (y)&nbsp;such reports
under the Exchange Act as may be required in connection with this Agreement and the Transactions,
none of the execution, delivery or performance of this Agreement by Seller or Seller Subsidiary,
the consummation by Seller or Seller Subsidiary of the Transactions or compliance by Seller or
Seller Subsidiary with any of the provisions hereof will (i)&nbsp;conflict with
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">or result in any breach of any provision of the certificate of incorporation, the by-laws or
similar organizational documents of Seller or Seller Subsidiary, (ii)&nbsp;require any filing with, or
permit, authorization, consent or approval of, any Governmental Entity or other Person (including,
without limitation, consents from parties to loans, contracts, leases, licenses and other
agreements to which Seller or Seller Subsidiary is a party) other than documents to record record
ownership of registered Seller Intellectual Property, (iii)&nbsp;require any consent, approval or notice
under, or result in a violation or breach of, or constitute (with or without due notice or the
passage of time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, any of the terms, conditions or provisions of any agreement to
which Seller or Seller Subsidiary is a party or by which the Purchased Assets are bound, or (iv)
violate any order, writ, injunction, decree, statute, rule or regulation applicable to Seller, the
Purchased Assets, Seller Subsidiary or any of their properties or assets, excluding from the
foregoing clauses (ii), (iii)&nbsp;and (iv)&nbsp;such violations, breaches or defaults could not,
individually or in the aggregate, reasonably be expected to have a material adverse effect on
Seller and Seller Subsidiary, taken as a whole, or on the Purchased Assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.7 <U>SEC Reports and Financial Statements</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;Seller has filed, or furnished, as applicable, with the SEC all forms, reports, schedules,
statements and other documents required to be filed by it since January&nbsp;1, 2004 (together with all
exhibits and schedules thereto and all information incorporated therein by reference, the
&#147;<U>Seller SEC Documents</U>&#148;). The Seller SEC Documents, as of their respective dates or, if
amended, as of the date of the last such amendment, (i)&nbsp;did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they were made, not
misleading and (ii)&nbsp;complied in all material respects with the applicable requirements of the
Exchange Act, Securities Act and the Sarbanes-Oxley Act of 2002 and the rules and regulations
promulgated under such acts and the applicable rules and regulations of the SEC thereunder. No
Subsidiary of Seller is separately required to make any filings with the SEC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;The consolidated financial statements of Seller included or incorporated by reference in
the Seller SEC Documents complied in all material respects with applicable accounting requirements
and with the published rules and regulations of the SEC with respect thereto, were prepared in
accordance with GAAP applied on a consistent basis during the periods indicated (except as may be
indicated in the notes thereto or, in the case of unaudited interim financial statements, as may be
permitted by the SEC on Form 10-Q under the Exchange Act) and fairly presented the consolidated
financial position of Seller and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then ended, except that the
unaudited interim financial statements were or are subject to normal and recurring year-end
adjustments which were not material in amount. Since January&nbsp;1, 2004, there has been no material
change in Seller&#146;s accounting methods or principles that would be required to be disclosed in
Seller&#146;s financial statements in accordance with GAAP, except as required by applicable law and
described in the notes to such financial statements. Except (a)&nbsp;as disclosed in such financial
statements and (b)&nbsp;for liabilities and obligations incurred in the ordinary course of business and
consistent with past practice since the Balance Sheet Date that are immaterial in the aggregate,
neither Seller nor Seller Subsidiary has any Liability that has, or
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">could reasonably be expected to have, a material adverse effect on Seller and Seller
Subsidiary, taken as a whole, or on Purchaser&#146;s ability to exploit the Purchased Assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.8 <U>Property Held by Others</U>. The Disclosure Schedule lists all property owned
by Seller or Seller Subsidiary and included within the Purchased Assets which is not in the
possession of Seller, if any, together, in each case, with the name, address and telephone number
of each Person who holds such property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.9 <U>Absence of Certain Changes</U>. Since the Balance Sheet Date, neither Seller
nor Seller Subsidiary has:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;permitted or allowed any of the Purchased Assets to be subjected to any Encumbrance;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;sold, transferred, licensed or otherwise disposed of any Purchased Asset; or permitted to
lapse any rights to the use of any Seller Intellectual Property, or disposed of or disclosed to any
Person other than representatives of Purchaser any trade secret, formula, process, know-how or
other Intellectual Property not theretofore a matter of public knowledge; or
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;agreed, whether in writing or otherwise, to take any action described in this section.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.10 <U>Title to Properties; Encumbrances</U>. Each of Seller and Seller Subsidiary
has good, valid and marketable title to all the Purchased Assets free and clear of all
Encumbrances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.11 <U>Environmental Matters</U>. Each of Seller and Seller Subsidiary is in
material compliance with all Environmental Laws. There is no Environmental Claim by any Person
that is pending or, to the knowledge of Seller, threatened against Seller, or Seller Subsidiary, or
against any Person whose liability for any Environmental Claim Seller or Seller Subsidiary has
retained or assumed either contractually or by operation of law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.12 <U>Contracts and Commitments</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;The Disclosure Schedule sets forth each outbound license of Seller Intellectual Property.
Except for the outbound licenses of Seller Intellectual Property specified in the Disclosure
Schedule, neither Seller nor Seller Subsidiary has any agreements, contracts, commitments or
restrictions which are material to the Business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Except as set forth in the Disclosure Schedule, neither Seller nor Seller Subsidiary has
any outstanding contracts with agents, consultants, advisors, salesmen, sales representatives,
distributors or dealers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;Neither Seller nor Seller Subsidiary is in default under or in violation of, nor is there
any valid basis for any claim of default under or violation of, any contract required to be set
forth in the Disclosure Schedule pursuant to Section&nbsp;3.12(a) or 3.12(b).
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;Neither Seller nor Seller Subsidiary is restricted by agreement from carrying on its
business anywhere in the world.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;Seller has provided Purchaser with a correct and complete copy of each contract identified
in the Disclosure Schedules and all amendments thereto and waivers thereunder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;Except for the contracts set forth in Section&nbsp;3.12(a) of the Disclosure Schedule for which
Seller has provided Purchaser a correct and complete copy (including all amendments thereto and
waivers thereunder), no Person has been granted a royalty-free license to any Seller Intellectual
Property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;Except for the contracts set forth in Section&nbsp;3.12(a) of the Disclosure Schedule for which
Seller has provided Purchaser a correct and complete copy (including all amendments thereto and
waivers thereunder), no outbound license of Seller Intellectual Property permits the licensee to
sublicense or assign such license.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.13 <U>Customers</U>. To Seller&#146;s knowledge, there has not been any material
adverse change in the business relationship of Seller or Seller Subsidiary with any customer who
accounted for more than 5% of its consolidated sales for the year ended December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.14 <U>Litigation</U>. There is no action, suit, inquiry, proceeding or
investigation by or before any court or governmental or other regulatory or administrative agency
or commission pending or, to the knowledge of Seller, threatened, against or involving the Seller
or Seller Subsidiary, or which questions or challenges the validity of this Agreement or any action
taken or to be taken by Seller or Seller Subsidiary pursuant to this Agreement or in connection
with the Transactions; and there is no valid basis for any such action, proceeding or
investigation. Neither Seller nor Seller Subsidiary is subject to any judgment, order or decree.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.15 <U>Compliance with Laws</U>. Each of Seller and Seller Subsidiary has complied
in all respects with all laws, rules and regulations, ordinances, judgments, decrees, orders, writs
and injunctions of all United States federal, state, local, foreign governments and agencies
thereof that affect their business, properties or assets and no notice, charge, claim, action or
assertion has been received by Seller or Seller Subsidiary or has been filed, commenced or
threatened against Seller or Seller Subsidiary alleging any violation of any of the foregoing, in
each case, except as could not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on Seller and Seller Subsidiary, taken as a whole, or on the Purchased
Assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.16 <U>Employee Benefit Plans</U>. Neither Seller or Seller Subsidiary currently
has or has ever had in place, any Plans or is or has been subject to any multi-employer plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.17 <U>Tax Matters</U>. Seller and Seller Subsidiary has each timely filed, or
caused to be filed (taking into account any valid extensions of due dates), all Tax Returns,
including information returns and returns for estimated taxes, required by any taxing jurisdiction
with respect to Taxes and all Taxes shown on said returns to be due and all other Taxes due and
owing (whether or not shown on any return) have been paid in full or are being contested in good
faith as described in the Disclosure Schedule, which Tax Returns are complete and accurate in all
material respects. Seller and Seller Subsidiary has each withheld all amounts required to be
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">withheld on account of Taxes from amounts paid to employees, former employees, directors,
officers, members, residents and non-residents and has remitted or will remit the same to the
appropriate taxing authorities within the prescribed time periods. None of the Tax Returns filed
by Seller or Seller Subsidiary has been audited by any taxing authority and, to Seller&#146;s knowledge,
there is no such examination currently in progress. No deficiency in the payment of Taxes for any
period has been asserted in writing by any taxing authority and remains unsettled. Neither Seller
nor Seller Subsidiary has entered into any agreement, waiver or other arrangement providing for any
extension of time with respect to the assessment or collection of any Taxes.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.18 <U>Intellectual Property</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;The Disclosure Schedule sets forth a true and complete list of all Patents and Patent
applications, Trademark registrations and applications, service mark registrations and
applications, Software, Copyright registrations and applications, material unregistered Trademarks,
service marks, Copyrights and Internet domain names used or held for use by Seller or Seller
Subsidiary, together with all licenses related to the foregoing, whether Seller or Seller
Subsidiary is the licensee or licensor thereunder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Seller or Seller Subsidiary is the sole and exclusive owner of all Seller Intellectual
Property, free and clear of all Encumbrances, except for that Intellectual Property indicated in
the Disclosure Schedule as being licensed to Seller or Seller Subsidiary, under which Seller or
Seller Subsidiary has a valid license, free and clear of all Encumbrances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;Except as indicated in the Disclosure Schedule, all Patents, registrations and
applications for Intellectual Property that are owned by Seller or Seller Subsidiary (i)&nbsp;are valid,
subsisting, in proper form and enforceable, and have been duly maintained, including the submission
of all necessary filings and fees in accordance with the legal and administrative requirements of
the appropriate jurisdictions and (ii)&nbsp;have not lapsed, expired or been abandoned, and no patent,
registration or application therefor is the subject of any opposition, interference, cancellation
proceeding or other legal or governmental proceeding before any Governmental Entity in any
jurisdiction.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;Seller or Seller Subsidiary owns or has the valid right to use all of the Intellectual
Property used by it or held for use by it in connection with its business. There are no conflicts
with or infringements of any Seller Intellectual Property by any third party. The conduct of the
businesses of Seller and Seller Subsidiary does not conflict with or infringe in any way on any
proprietary right of any third party. There is no claim, suit, action or proceeding pending or, to
the knowledge of Seller, threatened against Seller or Seller Subsidiary (i)&nbsp;alleging any such
conflict or infringement with any third party&#146;s proprietary rights or (ii)&nbsp;challenging the
ownership, use, validity or enforceability of the Seller Intellectual Property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;The Disclosure Schedule lists all algorithms related to the Business. There is no
Software currently or previously, or contemplated to be, licensed, sublicensed or sold to or by
Seller or Seller Subsidiary. &#147;<U>Software</U>&#148; means any and all (i)&nbsp;computer programs, including
any and all software implementations of algorithms, models and methodologies, whether in source
code or object code, (ii)&nbsp;computer databases and computer compilations, including any and all data
and collections of data, whether machine readable or otherwise, (iii)&nbsp;descriptions, flow-
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">charts and other work product used to design, plan, organize and develop any of the foregoing,
(iv)&nbsp;any Domain Names and the technology supporting and content contained on any Internet site(s),
and (v)&nbsp;all documentation, including user manuals and training materials, relating to any of the
foregoing.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;Each item of Software listed in the Disclosure Schedule is either (i)&nbsp;owned by Seller or
Seller Subsidiary, or (ii)&nbsp;currently in the public domain or otherwise available to Seller or
Seller Subsidiary without the license, lease or consent of any third party. With respect to the
Software set forth in the Disclosure Schedule which Seller or Seller Subsidiary purports to own,
such Software was either developed by (x)&nbsp;employees of Seller or Seller Subsidiary within the scope
of their employment; or (y)&nbsp;independent contractors who have assigned their rights to Seller or
Seller Subsidiary and waived any moral rights in favor of Seller or Seller Subsidiary pursuant to
written agreements. The Seller Software generally functions in the manner intended, free of any
significant bugs or programming errors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;Except pursuant to the outbound licenses of Seller Intellectual Property set forth in
Section&nbsp;3.12(a) of the Disclosure Schedule, neither Seller nor Seller Subsidiary has ever
distributed to any third party any of the Seller Software and, except as contemplated hereby, no
such distribution is presently contemplated. Each of Seller and Seller Subsidiary has taken all
actions customary in the software industry to document the Seller Software and its operation, such
that the Seller Software, including the source code and documentation, have been written in a clear
and professional manner so that they may be understood, modified and maintained in an efficient
manner by reasonably competent programmers. The Seller Software is free of any undisclosed program
routine, device, or other feature, including, without limitation, a time bomb, software lock,
drop-dead device, or malicious logic or, as of the time of each delivery, any virus, worm or Trojan
horse, that is designed to delete, disable, deactivate, interfere with, or otherwise harm them (a
&#147;<U>Disabling Code</U>&#148;), and any virus or other intentionally created, undocumented contaminant
(a &#147;<U>Contaminant</U>&#148;), that may, or may be used to, access, modify, delete, damage or disable
any hardware, system or data or that may result in damage thereto. The components obtained from
third party suppliers are free of any Disabling Codes or Contaminants that may, or may be used to,
access, modify, delete, damage or disable any hardware, system or data or that might result in
damage thereto.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)&nbsp;All employees and consultants of Seller or Seller Subsidiary, whether former or current,
have entered into valid and binding agreements with Seller or Seller Subsidiary sufficient to vest
title in Seller or Seller Subsidiary of all rights in any Intellectual Property created by such
employee or consultant in the scope of his or her services or employment for Seller or Seller
Subsidiary, as the case may be.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;Each of Seller and Seller Subsidiary takes and has taken reasonable measures to protect
the confidentiality of its trade secrets, know-how or other confidential information material to
its business as currently operated or planned to be operated (together, &#147;<U>Trade Secrets</U>&#148;).
No material or significant Trade Secret has been disclosed or authorized to be disclosed to any
third party, including any employee, agent, contractor or other person, other than pursuant to a
written non-disclosure agreement (or other written agreement or employment policy imposing
non-disclosure obligations) that adequately protects Seller&#146;s or Seller Subsidiary&#146;s proprietary
interests in and to such Trade Secrets. No party to any non-disclosure
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">agreement relating to any Trade Secrets is in breach thereof. All nonpublic information
provided by or on behalf of Seller or Seller Subsidiary to third parties (other than Purchaser) has
been returned to Seller or destroyed.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j)&nbsp;All consents, filings, and authorizations by or with Governmental Entities or third
parties necessary with respect to the consummation of the Transactions, as they may affect the
Intellectual Property, have been obtained.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(k)&nbsp;Neither Seller nor Seller Subsidiary has entered into any consent, indemnification,
forbearance to sue, settlement agreement or cross-licensing arrangement with any Person relating to
the Seller Intellectual Property or the Intellectual Property of any third party, except as
contained in any license agreements listed in the Disclosure Schedule.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(l)&nbsp;Neither Seller, Seller Subsidiary, nor Purchaser is, nor will be as a result of the
execution and delivery of this Agreement, the other Documents or the performance of its obligations
under this Agreement or the other Documents, in breach of any license, sublicense or other
agreement relating to the Seller Intellectual Property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.19 <U>Solvency</U>. Neither Seller nor Seller Subsidiary is insolvent and will not
be rendered insolvent by the Transactions. As used in this section &#147;insolvent&#148; means that the sum
of the debts and other Liabilities of a party exceeds the present fair saleable value of such
party&#146;s assets. Immediately after giving effect to the Transactions, the cash available to Seller
and Seller Subsidiary, after taking into account all other anticipated uses of the cash, will be
sufficient to pay all Liabilities of Seller and Seller Subsidiary. Neither Seller nor Seller
Subsidiary intends to file for reorganization or liquidation under the bankruptcy or reorganization
laws of any jurisdiction within one year from the Closing Date. Seller has conducted an auction
process with respect to the sale of the Purchased Assets, and based on among other things, the
offers of participants in the process, has concluded that it is receiving reasonably equivalent
value from Purchaser for the Purchased Assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.20 <U>Brokers or Finders</U>. No agent, broker, investment banker, financial
advisor or other firm or Person is or will be entitled to any broker&#146;s or finder&#146;s fee or any other
commission or similar fee in connection with any of the Transactions except for Strategic Equity
Group and its assignee Edgewater Capital, LLC, whose fees and expenses shall be paid by Seller.
True and complete copies of all agreements between Seller and Strategic Equity Group or Edgewater
Capital LLC, including, without limitation, any fee arrangements have been furnished to Purchaser.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.21 <U>Full Disclosure</U>. To the knowledge of Seller, Seller has not failed to
disclose to Purchaser any facts material to the Purchased Assets. No representation or warranty by
Seller or Seller Subsidiary contained in this Agreement and no statement contained in any document
(including, without limitation, financial statements and the Disclosure Schedule), certificate, or
other writing furnished or to be furnished by Seller or Seller Subsidiary to Purchaser or any of
its representatives pursuant to the provisions hereof or in connection with the Transactions,
contains or will contain any untrue statement of material fact or omits or will omit to state any
material fact necessary, in light of the circumstances under which it was made, in order to make
the statements herein or therein not misleading.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;3.22 <U>Proxy Statement</U>. The Proxy Statement will not, at the date it is first
mailed to the stockholders of Seller and at the time of the Stockholders&#146; Meeting, contain any
untrue statement of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the circumstances under
which they are made, not misleading, except that no representation or warranty is made by Seller
with respect to statements made or incorporated by reference therein based on information supplied
by or on behalf of Purchaser specifically for inclusion or incorporation by reference in the Proxy
Statement. The Proxy Statement will comply as to form in all material respects with the
requirements of the Exchange Act.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE IV
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">REPRESENTATIONS AND WARRANTIES

</DIV>
<DIV align="center" style="font-size: 10pt">OF PURCHASER AND PURCHASER SUBSIDIARY</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Purchaser represents and warrants to Seller that:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;4.1 <U>Organization</U>. Each of Purchaser and Purchaser Subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of its jurisdiction of
incorporation and has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority, and governmental
approvals would not have, individually or in the aggregate, a material adverse effect on the
ability of Purchaser or Purchaser Subsidiary to consummate the Transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;4.2 <U>Authorization; Validity of Agreement; Necessary Action</U>. Each of Purchaser
and Purchaser Subsidiary has all requisite corporate power and authority to execute and deliver
this Agreement and to consummate the Transactions. The execution, delivery and performance by
Purchaser and Purchaser Subsidiary of this Agreement and the consummation of the Transactions have
been duly authorized by the Board of Directors of Purchaser and Purchaser Subsidiary, and no other
corporate action on the part of Purchaser or Purchaser Subsidiary is necessary to authorize the
execution and delivery by Purchaser or Purchaser Subsidiary of this Agreement or the consummation
of the Transactions. This Agreement has been duly executed and delivered by Purchaser and
Purchaser Subsidiary, and, assuming due and valid authorization, execution and delivery hereof by
Seller and Seller Subsidiary, is a valid and binding obligation of Purchaser, enforceable against
Purchaser and Purchaser Subsidiary in accordance with its terms except (i)&nbsp;as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws of
general application affecting enforcement of creditors&#146; rights generally and (ii)&nbsp;the availability
of the remedy of specific performance or injunctive or other forms of equitable relief may be
subject to equitable defenses and would be subject to the discretion of the court before which any
proceeding therefor may be brought.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;4.3 <U>Consents and Approvals; No Violations</U>. None of the execution, delivery or
performance of this Agreement by Purchaser or Purchaser Subsidiary, the consummation by Purchaser
or Purchaser Subsidiary of the Transactions or compliance by Purchaser or Purchaser Subsidiary with
any of the provisions hereof will (i)&nbsp;conflict with or result in any breach of any provision of the
certificate of incorporation or by-laws of Purchaser or Purchaser Subsidiary, (ii)
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">require any filing with, or permit, authorization, consent or approval of, any Governmental
Entity, (iii)&nbsp;result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation to which Purchaser
or Purchaser Subsidiary is a party or by which any of its properties or assets may be bound, or
(iv)&nbsp;violate any order, writ, injunction, decree, statute, rule or regulation applicable to
Purchaser or Purchaser Subsidiary or any of their properties or assets, excluding from the
foregoing clauses (ii), (iii)&nbsp;and (iv)&nbsp;such violations, breaches or defaults which would not,
individually or in the aggregate, have a material adverse effect on the ability of Purchaser or
Purchaser Subsidiary to consummate the Transactions.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;4.4 <U>Brokers or Finders</U>. Neither Purchaser nor Purchaser Subsidiary has
entered into any agreement or arrangement entitling any agent, broker, investment banker, financial
advisor or other firm or Person to any broker&#146;s or finder&#146;s fee or any other commission or similar
fee in connection with any of the Transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;4.5 <U>Information Supplied</U>. None of the information to be supplied by or on
behalf of Purchaser or Purchaser Subsidiary in writing specifically for inclusion or incorporation
by reference in the Proxy Statement will, at the date it is first mailed to the stockholders of
Seller and at the time of the Stockholders&#146; Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made, not misleading.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE V
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">COVENANTS

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.1 <U>Interim Operations of Seller and Seller Subsidiary</U>. Each of Seller and
Seller Subsidiary shall procure that, and each of Seller and Seller Subsidiary covenants and agrees
that, after the date hereof and prior to the Closing Date, except (i)&nbsp;as expressly provided in this
Agreement, (ii)&nbsp;as set forth in the Disclosure Schedule or (iii)&nbsp;as may be agreed in writing by
Purchaser in its sole discretion:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;neither Seller nor Seller Subsidiary shall (i)&nbsp;modify, amend or terminate any contract
identified on <U>Schedule </U>E hereto or any material contract or waive, release or assign any
material rights or claims, (ii)&nbsp;enter into, terminate or amend any contract identified on
<U>Schedule&nbsp;E</U> hereto or any material contract, (iii)&nbsp;incur any material liability, (iv)&nbsp;permit
the Purchased Assets to become subject to any Encumbrance or (v)&nbsp;sell, transfer, lease, license or
otherwise dispose of any of the Purchased Assets or Seller Intellectual Property;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;neither Seller nor Seller Subsidiary shall adopt a plan of complete or partial liquidation
or dissolution; <U>provided</U>, <U>that</U>, Seller may adopt a plan of dissolution in
accordance with the DGCL if and only if (x)&nbsp;such plan provides for the consummation of the
Transactions in accordance with the terms of this Agreement; (y)&nbsp;such plan is adopted in accordance
with the DGCL; and (z)&nbsp;Seller does not adopt a plan of distribution or make any distribution on or
prior to the 213<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> day after the Closing Date;
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;neither Seller nor Seller Subsidiary shall adopt a plan of complete or partial merger,
consolidation, restructuring, recapitalization or other reorganization; <U>provided</U>,
<U>that</U>, Seller may adopt a plan of merger for the sole purpose of the sale of Seller as a
corporate shell and without any of the Purchased Assets if and only if such plan includes the
consummation of the Transactions in accordance with the terms of this Agreement and Seller
demonstrates that such plan will not delay either the solicitation of proxies in favor of the
Transactions or the consummation of the Transactions;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;each of Seller and Seller Subsidiary shall file, on a timely basis, with appropriate
taxing authorities all Tax Returns required to be filed prior to the Closing Date and timely pay
all Taxes related thereto;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;neither Seller nor Seller Subsidiary shall take, or agree to or commit to take, any action
that would or is reasonably likely to result in any of the conditions to the Closing set forth in
ARTICLE VI not being satisfied, or would make any representation or warranty of Seller or Seller
Subsidiary contained herein inaccurate in any respect at, or as of any time prior to, the Closing
Date, or that would materially impair the ability of Seller, Purchaser or Seller Subsidiary to
consummate the Closing in accordance with the terms hereof or materially delay such consummation;
and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;neither Seller nor Seller Subsidiary shall enter into any agreement, contract, commitment
or arrangement to do any of the foregoing, or authorize, recommend, propose or announce an
intention to do, any of the foregoing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.2 <U>Access; Confidentiality</U>. Seller and Seller Subsidiary shall use its best
efforts to preserve the organization of their book, records and customer data and reports in the
same manner and format as previously made available to Purchaser. Between the date of this
Agreement and the Closing, Seller and Seller Subsidiary shall (i)&nbsp;afford Purchaser and its
authorized representatives reasonable access to all offices and other facilities and to all books
and records, (ii)&nbsp;permit Purchaser to make such inspections and to make copies of such books and
records as it may reasonably require and (iii)&nbsp;furnish Purchaser with such financial and operating
data and other information as Purchaser may from time to time reasonably request. Purchaser and
its authorized representatives shall conduct all such inspections in a manner that will minimize
disruptions to the business and operations of Seller.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.3 <U>Stockholder Meeting</U>. Seller shall, as promptly as practicable following
the execution of this Agreement, establish a record date for, duly call, give notice of, convene
and hold a meeting of its stockholders to approve the principal terms of this Agreement and the
Transactions (the &#147;<U>Stockholder Meeting</U>&#148;). Seller shall, through its Board of Directors,
recommend to its stockholders approval of the principal terms of this Agreement and the
Transactions and shall include such recommendation in the Proxy Statement. Without limiting the
generality of the foregoing, Seller&#146;s obligations pursuant to the first sentence of this Section
5.3 shall not be affected by the commencement, public proposal, public disclosure or communication
of any Acquisition Proposal. Seller shall not withdraw or modify such approval or recommendation
of this Agreement or the Transactions.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.4 <U>Proxy Statement</U>. As promptly as practicable after the execution of this
Agreement, Seller shall prepare and file with the SEC the Proxy Statement. Seller shall use its
reasonable best efforts to (i)&nbsp;respond to any comments on the Proxy Statement or requests for
additional information from the SEC as soon as practicable after receipt of any such comments or
requests and (ii)&nbsp;cause the Proxy Statement to be mailed to its stockholders as promptly as
practicable. Seller shall promptly (i)&nbsp;notify Purchaser upon the receipt of any such comments or
requests and (ii)&nbsp;provide Purchaser with copies of all correspondence between Seller and its
representatives, on the one hand, and the SEC and its staff, on the other hand, with respect to the
Proxy Statement. Prior to responding to any such comments or requests or the filing or mailing of
the Proxy Statement, (i)&nbsp;Seller shall provide Purchaser with a reasonable opportunity to review and
comment on any drafts of the Proxy Statement and related correspondence and filings, (ii)&nbsp;Seller
shall include in such drafts, correspondence and filings all comments reasonably proposed by
Purchaser and (iii)&nbsp;to the extent practicable, Seller and its outside counsel shall permit
Purchaser and its outside counsel to participate in all communications with the SEC and its staff
(including all meetings and telephone conferences) relating to the Proxy Statement, this Agreement
or any of the Transactions. If at any time prior to the Stockholders Meeting any event shall
occur, or fact or information shall be discovered that should be set forth in an amendment of or a
supplement to the Proxy Statement, Seller shall, in accordance with the foregoing procedures,
prepare and file with the SEC such amendment or supplement as soon thereafter as is reasonably
practicable and to the extent required by applicable law, cause such amendment or supplement to be
distributed to the stockholders of Seller. Each of Purchaser and Purchaser Subsidiary shall
cooperate with Seller in connection with the preparation of the Proxy Statement and shall provide
in a timely fashion all information requested by Seller concerning Purchaser and Purchaser
Subsidiary that is required to be included in the Proxy Statement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.5 <U>Efforts and Actions to Cause Closing to Occur</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;Prior to the Closing, upon the terms and subject to the conditions of this Agreement,
Purchaser, Purchaser Subsidiary, Seller and Seller Subsidiary shall use their respective reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to be done and
cooperate with each other in order to do, all things necessary, proper or advisable (subject to any
applicable laws) to consummate the Closing and the other Transactions as promptly as practicable
including, but not limited to the preparation and filing of all forms, registrations and notices
required to be filed to consummate the Closing and the other Transactions and the taking of such
actions as are necessary to obtain any requisite approvals, authorizations, consents, orders,
licenses, permits, qualifications, exemptions or waivers by any third party or Governmental Entity.
In addition, no party hereto shall take any action after the date hereof that could reasonably be
expected to materially delay the obtaining of, or result in not obtaining, any permission, approval
or consent from any Governmental Entity or other Person required to be obtained prior to Closing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Prior to the Closing, each party shall promptly consult with the other parties hereto with
respect to, provide any necessary information with respect to, and provide the other parties (or
their respective counsel) with copies of, all filings made by such party with any Governmental
Entity or any other information supplied by such party to a Governmental Entity in connection with
this Agreement and the Transactions. Each party hereto shall promptly
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">provide the other parties with copies of any communication received by such party from any
Governmental Entity regarding any of the Transactions.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;Seller shall use its best efforts to obtain the release of the liens and judgments
described in Section&nbsp;3.3 of the Disclosure Schedule (other than tax liens, which shall be
discharged in accordance with (i)&nbsp;below) and otherwise shall obtain, prior to the Closing, (i)&nbsp;the
unconditional release of each Person holding a tax or other lien (other than those liens, excepting
tax liens, and judgments described in Section&nbsp;3.3 of the Disclosure Schedule) on property owned or
leased by Seller or Seller Subsidiary and (ii)&nbsp;the unconditional consent to the Closing and the
other Transactions of each other party to each material contract with Seller or Seller Subsidiary.
All such releases and consents, to the extent obtained, shall be in writing and executed
counterparts thereof shall be delivered to Purchaser at or prior to the Closing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.6 <U>Notification of Certain Matters</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;From time to time prior to the Closing, Seller and Seller Subsidiary shall promptly
supplement or amend the Disclosure Schedule with respect to any matter existing or occurring as of
or prior to the date of this Agreement that was required to be set forth or described in the
Disclosure Schedule in order to make any representation or warranty in the Agreement true and
complete. No supplement or amendment of the Disclosure Schedule made after the execution hereof by
Seller or Seller Subsidiary pursuant to this section 5.6(a) or otherwise shall, except as set forth
in Section&nbsp;5.6(b), be deemed to cure any breach of any representation of or warranty made pursuant
to this Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;From time to time prior to the Closing, Seller and Seller Subsidiary shall promptly
supplement or amend the Disclosure Schedule with respect to any matter arising after the date of
this Agreement that, if existing at, or occurring on, the date of this Agreement, would have been
required to be set forth or described in the Disclosure Schedule in order to make any
representation or warranty in the Agreement true and correct. Should Seller or Seller Subsidiary
supplement the Disclosure Schedule in respect of circumstances set forth in this Section&nbsp;5.6(b),
Purchaser shall have the right in its sole discretion to terminate this Agreement. Should
Purchaser elect not to terminate this Agreement under these circumstances but rather to consummate
the Transactions, then, unless Purchaser and Seller agree otherwise in writing, Purchaser shall be
deemed to have waived the breach to the extent disclosure was required and made pursuant to this
Section&nbsp;5.6(b).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;Seller and Seller Subsidiary shall give notice to Purchaser promptly after becoming aware
of (i)&nbsp;the occurrence or non-occurrence of any event whose occurrence or non-occurrence would be
likely to cause either (A)&nbsp;any representation or warranty contained in this Agreement to be untrue
or inaccurate in any material respect at any time from the date hereof to the Closing Date or (B)
any condition set forth in ARTICLE VI to be unsatisfied in any material respect at any time from
the date hereof to the Closing Date and (ii)&nbsp;any failure of Seller and Seller Subsidiary or any
officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of
any notice pursuant to this section shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.7 <U>No Solicitation of Competing Transaction</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;Neither Seller, Seller Subsidiary nor any Affiliate thereof shall (and Seller shall cause
the officers, directors, employees, representatives and agents of Seller, Seller Subsidiary and
each Affiliate thereof, including investment bankers, attorneys and accountants, not to), directly
or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or
provide any information to, any Person or group (other than Purchaser, any of its Affiliates or
representatives) concerning any Acquisition Proposal. Seller shall not approve or recommend, or
propose to approve or recommend any Acquisition Proposal, or enter into any agreement with respect
to any Acquisition Proposal. Upon execution of this Agreement, Seller and Seller Subsidiary and
their representatives shall immediately cease any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing and Seller and Seller
Subsidiary shall request (or if Seller or Seller Subsidiary has the contractual right to do so,
demand) the return of all documents, analyses, financial statements, projections, descriptions and
other data previous furnished to others in connection with efforts to sell the Purchased Assets,
Seller or Seller Subsidiary. Seller shall immediately notify Purchaser of the existence of any
proposal or inquiry received by Seller, Seller Subsidiary or their representatives and Seller shall
immediately communicate to Purchaser the terms of any proposal or inquiry which may be received
(and shall immediately provide to Purchaser copies of any written materials received by Seller in
connection with such proposal, discussion, negotiation or inquiry) and the identity of the party
making such proposal or inquiry.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Neither Seller&#146;s Board of Directors nor Seller Subsidiary&#146;s Board of Directors shall (i)
withdraw or modify, or propose to withdraw or modify, in a manner adverse to Purchaser, the
approval by such Boards of Directors of this Agreement or the Transactions or recommendation to
their stockholders, (ii)&nbsp;approve or recommend or propose to approve or recommend, any Acquisition
Proposal or (iii)&nbsp;authorize Seller or Seller Subsidiary to enter into any agreement (other than
pursuant to this Agreement) with respect to any Acquisition Proposal.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;Notwithstanding the foregoing clauses (a)&nbsp;and (b), Seller may engage in discussions with
third parties for the sole purpose of the sale of Seller as a corporate shell and without any of
the Purchased Assets if and only if the terms would include the consummation of the Transactions in
accordance with the terms of this Agreement and Seller demonstrates that such transaction will not
delay either the solicitation of proxies in favor of the Transactions or the consummation of the
Transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.8 <U>No Assumption of Labor Liabilities</U>. Neither Purchaser nor Purchaser
Subsidiary shall assume any labor agreements or any liabilities thereunder or the fringe benefit
plans or any other liabilities which Seller or Seller Subsidiary may have with respect to any union
or employees (including former employees) either on the date hereof or the date of the Closing,
including liabilities of Seller or Seller Subsidiary with respect to payment of wages or pensions
which may have accrued, vested or been earned prior to the Closing and liabilities of Seller or
Seller Subsidiary to contribute to pension or other fringe benefit plans with respect to or on
account of service prior to the Closing, and/or any other term or condition of employment.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.9 <U>Subsequent Actions</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;If at any time after the Closing but prior to the dissolution of Seller, Purchaser will
consider or be advised that any deeds, bills of sale, instruments of conveyance, assignments,
assurances or any other actions or things are necessary or desirable to vest, perfect or confirm
ownership (of record or otherwise) in Purchaser or Purchaser Subsidiary, its right, title or
interest in, to or under any or all of the Purchased Assets or otherwise to carry out this
Agreement, Seller and Seller Subsidiary shall execute and deliver all deeds, bills of sale,
instruments of conveyance, powers of attorney, assignments and assurances and take and do all such
other actions and things as may be requested by Purchaser in order to vest, perfect or confirm any
and all right, title and interest in, to and under such rights, properties or assets in Purchaser
or Purchaser Subsidiary or otherwise to carry out this Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;In case at any time after the Closing Date any further action is necessary, proper or
advisable to carry out the purposes of this Agreement, as soon as reasonably practicable, each
party hereto shall take, or cause its proper officers or directors to take, all such necessary,
proper or advisable actions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.10 <U>Publicity</U>. Seller&#146;s and Seller Subsidiary&#146;s initial press release with
respect to the execution of this Agreement shall be subject to Purchaser&#146;s prior review,
opportunity for comment, and approval, which shall not be unreasonably withheld. Thereafter, until
the Closing, or the date the Transactions are terminated or abandoned pursuant to ARTICLE VII,
neither Seller, Seller Subsidiary nor any of their respective Affiliates shall issue or cause the
publication of any press release or other public announcement with respect to this Agreement or the
other Transactions without prior review, opportunity for comment, and approval by Purchaser, which
shall not be unreasonably withheld, except as may be required by law or by any listing agreement.
In the event that Seller or Seller Subsidiary is required by applicable law or listing agreement to
issue or cause the publication of any press release or other public announcement with respect to
this Agreement or the other Transactions, it shall promptly notify Purchaser in advance of any such
disclosure, and provide Purchaser with the text of any disclosure language, statement or
announcement and will reasonably cooperate with Purchaser to the extent it may seek to limit such
disclosure or comment on the form or substance of such disclosure.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.11 <U>Mail Received After Closing</U>. Seller and Seller Subsidiary shall,
promptly upon the Closing, file with the United States Postal Service a change of address
notification to direct all mail sent to Seller or Seller Subsidiary to Purchaser.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.12 <U>Access to Books and Records</U>. On and after the Closing and until
dissolution of Seller, during normal business hours, Seller and Seller Subsidiary will permit
Purchaser and its auditors, through their authorized representatives, to have access to and examine
and make copies of all books and records relating to the Purchased Assets which are not delivered
to Purchaser pursuant hereto.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.13 <U>Waiver of Bulk Sales Requirement</U>. Each of the parties waives compliance
with any applicable bulk sales laws, including without limitation the Uniform Commercial Code Bulk
Transfer provisions. Seller and Seller Subsidiary agree to pay and discharge in due course and
will indemnify and save harmless Purchaser, from and against all
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">claims made by creditors of Seller and Seller Subsidiary, including expenses and attorneys&#146;
fees incurred by Purchaser in defending against such claims.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.14 <U>Accounts Receivable</U>. In its attempt to collect royalties or accounts
receivable, Seller shall not, and shall cause its agents not to, take any action that could
reasonably be expected to negatively affect Purchaser&#146;s relationship with any licensee of Seller
Intellectual Property. Notwithstanding that the accounts receivable are included among the
Purchased Assets, Purchaser shall pay to Seller on or prior to the 70<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> day after the
end of the calendar quarter during which the Closing occurs, the Closing Quarter Royalty Payment.
The &#147;<U>Closing Quarter Royalty Payment</U>&#148; shall be an amount equal to the product of (X)&nbsp;the
total amount of self reported royalties actually received by Purchaser on or prior to the
60<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> day after the end of the calendar quarter during which the Closing occurs earned
under the Assumed Contracts in respect of such quarter multiplied by (Y)&nbsp;a fraction, the numerator
of which is the actual number of days elapsed during such quarter prior to the Closing Date and the
denominator of which is the total number of days in such quarter. Subject to Purchaser&#146;s
obligation in respect of the Closing Quarter Royalty Payment, Seller and Seller Subsidiary shall
promptly remit to Purchaser all royalty payments received in respect of the Assumed Contracts after
the Closing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.15 <U>Proxy Solicitation Efforts</U>. Seller shall (x)&nbsp;engage the services of
Georgeson Shareholder Services or another Person reasonably acceptable to Purchaser to act as a
proxy solicitation agent to solicit proxies voting in favor of the Transactions; (y)&nbsp;make
presentations explaining Seller&#146;s rationale for the Transactions and explaining why the
Transactions are in the best interests of Seller and its stockholders to any Person which will
potentially issue a recommendation as to how Seller&#146;s stockholders should vote at the Stockholders
Meeting; and (z)&nbsp;otherwise use its best efforts to secure Stockholder Approval for the
Transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.16 <U>Post-Closing Assignment</U>. Should Seller or Seller Subsidiary identify
after the Closing Date a contract or License related to the Seller Intellectual Property, it shall
give prompt written notice of such fact to Purchaser and, at the written request of Purchaser,
assign any contract or License relating to the Seller Intellectual Property to Purchaser or
Purchaser Subsidiary as Purchaser may request in its sole discretion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;5.17 <U>Pre-Closing Delivery</U>. Immediately prior to the Closing, Seller shall
make available to Purchaser at Purchaser&#146;s offices the hard drive resident in Phil Brown&#146;s computer
located at 2025 Gateway Place, Suite&nbsp;365, San Jose, California 95110 as of April&nbsp;13, 2006 and the
DVDs containing the source code for the algorithms, development platforms and Software specified in
the Disclosure Schedules together with the passwords and other information necessary to access the
data on such mediums. It shall be a condition precedent to Purchaser&#146;s obligation to effect the
Closing that it is capable of accessing the data on such mediums and is able to confirm that such
data conforms in all material respects to the data thereon examined by Purchaser during its site
visit to Seller&#146;s San Jose offices on April&nbsp;13, 2006.
</DIV>

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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE VI
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">CONDITIONS

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;6.1 <U>Conditions to Each Party&#146;s Obligation to Effect the Closing</U>. The
respective obligation of each party to effect the Closing shall be subject to the satisfaction at
or prior to the Closing Date of each of the following conditions:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;<U>Statutes; Court Orders</U>. No statute, rule or regulation shall have been enacted or
promulgated by any governmental authority which prohibits the consummation of the Closing; and
there shall be no order or injunction of a court of competent jurisdiction in effect precluding
consummation of the Closing; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;<U>Stockholder Approval</U>. Stockholder Approval shall have been obtained.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;6.2 <U>Conditions to Obligations of Purchaser and Purchaser Subsidiary to Effect the
Closing</U>. The obligations of Purchaser and Purchaser Subsidiary to consummate the Closing shall
be subject to the satisfaction on or prior to the Closing Date of each of the following conditions:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;<U>Government Action</U>. There shall not be threatened or pending any suit, action or
proceeding by any Governmental Entity affecting Purchaser&#146;s or Purchaser Subsidiary&#146;s ability to
exploit the Purchased Assets or seeking to preclude consummation of the Transaction;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Intentionally Omitted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;<U>Officer&#146;s Certificate</U>. Seller and Seller Subsidiary shall have delivered to
Purchaser and Purchaser Subsidiary at the Closing a certificate signed by the chief executive
officer of Seller and Seller Subsidiary, dated the Closing Date, in form and substance satisfactory
to Purchaser, to the effect that, as of the Closing Date, (w)&nbsp;all of the representations and
warranties of Seller set forth in this Agreement that are qualified as to materiality are true and
complete, (x)&nbsp;all such representations and warranties that are not so qualified are true and
complete in all material respects, (y)&nbsp;there has not occurred any material adverse change (or any
development that, insofar as reasonably can be foreseen, is reasonably likely to result in any
material adverse change) in the consolidated financial condition, businesses, results of operations
or prospects of Seller and Seller Subsidiary, taken as a whole, or on the Purchased Assets and (z)
Seller and Seller Subsidiary have performed all obligations required under this Agreement to be
performed by it at or prior to the Closing;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;<U>Consents Obtained</U>. All consents and approvals of any Person necessary to the
consummation of the Closing and the other Transactions, including consents and approvals from
parties to loans, contracts, leases, licenses or other agreements and consents and approvals from
governmental agencies, whether federal, state or local shall have been obtained, and a copy of each
such consent or approval shall have been provided to Purchaser at or prior to the Closing;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e) <U>Material Adverse Change</U>. There shall not have occurred any material adverse
change (or any development that, insofar as reasonably can be foreseen, is reasonably likely to
result in any material adverse change) in the consolidated financial condition, businesses, results
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">of operations or prospects of Seller and Seller Subsidiary taken as a whole or on Purchaser&#146;s
or Purchaser Subsidiary&#146;s ability to exploit the Purchased Assets;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;Intentionally Omitted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;<U>Material Liabilities</U>. No facts or circumstances shall exist which, in the good
faith but sole and exclusive judgment of Purchaser, could result in Purchaser or Purchaser
Subsidiary becoming liable for any Liabilities of Seller or Seller Subsidiary other than those to
be assumed pursuant to the Assumption Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)&nbsp;<U>Representations and Warranties</U>. All of the representations and warranties of
Seller set forth in this Agreement that are qualified as to materiality shall be true and complete
in all respects and any such representations and warranties that are not so qualified shall be true
and complete in all material respects, in each case as of the date of this Agreement and as of the
Closing Date;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;<U>Confirming Inspection</U>. Seller shall have made available to Purchaser at
Purchaser&#146;s offices, immediately prior to the Closing the hard drive resident in Phil Brown&#146;s
computer located at 2025 Gateway Place, Suite&nbsp;365, San Jose, California 95110 as of April&nbsp;13, 2006
and the DVDs containing the source code for the algorithms, development platforms and Software
specified in the Disclosure Schedules together with the passwords and other information necessary
to access the data on such mediums and Purchaser shall be capable of accessing the data on such
mediums and be able to confirm that such data conforms in all material respects to the data thereon
examined by Purchaser during its site visit to Seller&#146;s San Jose offices on April&nbsp;13, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(j)&nbsp;<U>Breach</U>. Neither Seller nor Seller Subsidiary shall have failed to perform in any
material respect any material obligation or to comply in any material respect with any agreement or
covenant of Seller or Seller Subsidiary to be performed or complied with by it under this
Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The foregoing conditions are for the sole benefit of Purchaser and may be waived by Purchaser,
in whole or in part, at any time and from time to time in the sole discretion of Purchaser.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;6.3 <U>Conditions to Obligations of Seller to Effect the Closing</U>. The
obligations of Seller to consummate the Closing shall be subject to the satisfaction on or prior to
the Closing Date of each of the following conditions:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;<U>Representations and Warranties</U>. All of the representations and warranties of
Purchaser set forth in this Agreement that are qualified as to materiality shall be true and
complete in all respects and any such representations and warranties that are not so qualified
shall be true and complete in all material respects, in each case as of the date of this Agreement
and as of the Closing Date;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;<U>Breach</U>. Purchaser shall not have failed to perform in any material respect any
material obligation or to comply in any material respect with any agreement or covenant of
Purchaser to be performed or complied with by it under this Agreement; and
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;<U>Officer&#146;s Certificate</U>. Purchaser shall have delivered to Seller at the Closing a
certificate signed by the chief executive officer of Purchaser, dated the Closing Date, in form and
substance satisfactory to Seller, to the effect that, as of the Closing Date, (x)&nbsp;all of the
representations and warranties of Purchaser set forth in this Agreement that are qualified as to
materiality are true and complete, (y)&nbsp;all such representations and warranties that are not so
qualified are true and complete in all material respects, and (z)&nbsp;Purchaser has performed all
obligations required under this Agreement to be performed by it at or prior to the Closing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The foregoing conditions are for the sole benefit of Seller and may be waived by Seller, in
whole or in part, at any time and from time to time in the sole discretion of Seller.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE VII
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">TERMINATION

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;7.1 <U>Termination</U>. The Transactions may be terminated or abandoned at any time
prior to the Closing Date:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;By the mutual written consent of Purchaser and Seller;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;By either Purchaser or Seller if any Governmental Entity shall have issued an order,
decree or ruling or taken any other action (which order, decree, ruling or other action the parties
hereto shall use their reasonable efforts to lift), which permanently restrains, enjoins or
otherwise prohibits the Transactions and such order, decree, ruling or other action shall have
become final and non-appealable;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;By Seller:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;if Purchaser or Purchaser Subsidiary shall have breached in any material respect any of its
representations, warranties, covenants or other agreements contained in this Agreement, which
breach cannot be or has not been cured within 30&nbsp;days after the giving of written notice by Seller
to Purchaser specifying such breach; or
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;on or after June&nbsp;30, 2007, if the Closing shall not have theretofore occurred and if the
failure of the Closing to occur is not the result of a breach of a representation, warranty or
covenant by Seller or Seller Subsidiary;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;By Purchaser:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;if Seller or Seller Subsidiary shall have breached any representation, warranty, covenant or
other agreement contained in this Agreement, which breach cannot be or has not been cured within 30
days after the giving of written notice by Purchaser to Seller specifying such breach; or
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;on or after June&nbsp;30, 2007, if the Closing shall not have theretofore occurred and if the
failure of the Closing to occur is not the result of a breach of a representation, warranty or
covenant by Purchaser.
</DIV>


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




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;7.2 <U>Effect of Termination</U>. In the event of the termination or abandonment of
the Transactions by any party hereto pursuant to the terms of this Agreement, written notice
thereof shall forthwith be given to the other party or parties specifying the provision hereof
pursuant to which such termination or abandonment of the Transactions is made, and there shall be
no liability or obligation thereafter on the part of Purchaser, Purchaser Subsidiary, Seller or
Seller Subsidiary except (A)&nbsp;for fraud, (B)&nbsp;for breach of this Agreement prior to such termination
or abandonment of the Transactions and (C)&nbsp;as set forth in Section&nbsp;10.1; <U>provided</U>,
<U>that</U>, if this Agreement is terminated subsequent to the Stockholders Meeting and
Stockholder Approval is not obtained thereat, then, unless Seller shall have complied in all
respects with its obligations pursuant to Section&nbsp;5.15, Seller shall reimburse Purchaser for all
out-of-pocket expenses incurred by Purchaser in connection with the Transactions.
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE VIII
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">INDEMNIFICATION

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;8.1 <U>Indemnification; Remedies</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;Seller and Seller Subsidiary shall jointly and severally indemnify, defend and hold
harmless the Purchaser Indemnified Persons from and against and in respect of all Losses that arise
out of any breach by Seller or Seller Subsidiary of its representations and warranties contained in
or made pursuant to this Agreement; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Seller and Seller Subsidiary shall jointly and severally indemnify, defend and hold
harmless the Purchaser Indemnified Persons from and against and in respect of all Losses that arise
out of any breach by Seller or Seller Subsidiary of its covenants or agreements contained in or
made pursuant to this Agreement;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;Seller and Seller Subsidiary shall jointly and severally indemnify, defend and hold
harmless the Purchaser Indemnified Persons from and against and in respect of all Losses related to
Excluded Liabilities; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;Seller and Seller Subsidiary shall jointly and severally indemnify, defend and hold
harmless the Purchaser Indemnified Persons from and against and in respect of all Losses that arise
from the failure to obtain any required consent (with respect to the assignment of the Assumed
Contracts) in connection with the Transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;8.2 <U>Limitations</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;No claim for the recovery of any Losses pursuant to section 8.1(a) may be asserted by any
Purchaser Indemnified Person more than 183&nbsp;days after the Closing Date; <U>provided</U>,
<U>however</U>, that claims first asserted in writing by any Purchaser Indemnified Person with
reasonable specificity prior to such date shall not thereafter be barred by the expiration of such
indemnification period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Seller shall have no liability for indemnification until the total of all Losses exceeds
$50,000 U.S., but once such amount has been exceeded, Seller shall be liable for all Losses in
excess of the first $15,000 U.S. of Losses.
</DIV>


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</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;8.3 <U>Notice of Claim; Defense</U><B>. </B>Purchaser shall give Seller prompt (and in any
event within 183&nbsp;days after the Closing Date for a claim made pursuant to Section&nbsp;8.1(a) above)
notice of any third-party claim that may give rise to any indemnification obligation under this
Article&nbsp;VIII, together with the estimated amount of such claim, and Seller shall, with the approval
of Purchaser which shall not be unreasonably withheld, have the right to assume the defense at
Seller&#146;s expense of any such claim through counsel of Seller&#146; own choosing by so notifying
Purchaser within 30&nbsp;days of the first receipt by Seller of such notice from Purchaser;
<U>provided</U>, <U>however</U>, that any such counsel shall be reasonably satisfactory to
Purchaser. Failure to give such notice shall not affect the indemnification obligations hereunder
in the absence of, and then only to the extent of, actual and material prejudice. If, under
applicable standards of professional conduct, a conflict with respect to any significant issue
between any Purchaser Indemnified Person and Seller exists in respect of such third-party claim,
Seller shall pay the reasonable fees and expenses of such additional counsel as may be required to
be retained in order to eliminate such conflict. Seller shall be liable for the fees and expenses
of counsel employed by Purchaser for any period during which Seller has not assumed the defense of
any such third-party claim (other than during any period in which Purchaser will have failed to
give notice of the third-party claim as provided above). If Seller assumes such defense, Purchaser
shall have the right to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by Seller, it being understood that Seller shall
control such defense. If Seller chooses to defend or prosecute any third-party claim, Purchaser
shall agree to any reasonable settlement, compromise or discharge of such third-party claim that
Seller may recommend and that, by its terms, discharges Purchaser and the Purchaser Indemnified
Persons from the full amount of liability in connection with such third-party claim; provided,
however, that, Seller shall not consent to, and Purchaser shall not be required to agree to, the
entry of any judgment or enter into any settlement that (i)&nbsp;provides for injunctive or other
non-monetary relief affecting Purchaser or any Affiliate of Purchaser or (ii)&nbsp;does not include as
an unconditional term thereof the giving of a release from all liability with respect to such claim
by each claimant or plaintiff to each Purchaser Indemnified Person that is the subject of such
third-party claim.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;8.4 <U>Survival of Indemnification Claims</U>. The indemnification obligations set
forth in this Article&nbsp;VIII shall survive the Closing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;8.5 <U>Tax Effect of Indemnification Payments</U>. All indemnity payments made by
Seller or Seller Subsidiary to Purchaser Indemnified Persons pursuant to this Agreement shall be
treated for all Tax purposes as adjustments to the Purchase Price.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;8.6 <U>Survival of Covenants, Representations and Warranties</U>. Each of the
covenants, representations and warranties of Seller in this Agreement or in any schedule,
instrument or other document delivered pursuant to this Agreement shall survive the Closing Date
and shall continue in force thereafter except as limited by Section&nbsp;8.2(a); provided, that, the
covenants in Section&nbsp;5.9, Section&nbsp;5.12 and Section&nbsp;5.16 shall terminate on the 275<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> day
following the Closing Date; and provided further, that, notwithstanding the termination of any
covenant, Seller and Seller Subsidiary shall remain liable for any breach thereof that occurred
prior to such termination.
</DIV>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE IX
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">DEFINITIONS AND INTERPRETATION

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;9.1 <U>Definitions</U>. For all purposes of this Agreement, except as otherwise
expressly provided or unless the context clearly requires otherwise:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Acquisition Proposal</U>&#148; shall mean any proposal or offer made by any Person other than
Purchaser to acquire all or any portion of the Purchased Assets or any capital stock of Seller or
Seller Subsidiary, whether by merger, tender offer, exchange offer, sale of assets, license or
similar transactions involving the Seller or Seller Subsidiary.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Affiliate</U>&#148; shall have the meaning set forth in Rule&nbsp;12b-2 promulgated under the
Exchange Act.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Agreement</U>&#148; or &#147;<U>this Agreement</U>&#148; shall mean this Asset Purchase Agreement,
together with the Exhibits hereto and the Disclosure Schedule.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Associate</U>&#148; shall have the meaning set forth in Rule&nbsp;12b-2 promulgated under the
Exchange Act.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Assumed Contracts</U>&#148; shall mean (x)&nbsp;all contracts, Licenses and other agreements of
Seller or Seller Subsidiary set forth on <U>Exhibit&nbsp;E</U> (as may be supplemented from time to
time by Purchaser in its sole discretion prior to the Closing solely to add additional contracts,
Licenses and other agreements), (y)&nbsp;such additional contracts or licenses of Seller or Seller
Subsidiary as are selected by Purchaser by written notice to Seller and (z)&nbsp;such additional
contracts, Licenses and other agreements as are assigned to Purchaser pursuant to Section&nbsp;5.16.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Assumed Liabilities</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;1.2.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Assumption Agreement</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;1.1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Balance Sheet</U>&#148; shall mean the most recent audited balance sheet of the Seller and
Seller Subsidiary in the Seller SEC Documents.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Balance Sheet Date</U>&#148; shall mean December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Business</U>&#148; shall mean the research, development, marketing, sale, service and
licensing of audio and optical disc technologies, products and services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Closing</U>&#148; shall mean the closing referred to in Section&nbsp;2.1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Closing Date</U>&#148; shall mean the date on which the Closing occurs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Closing Quarter Royalty Payment</U>&#148; shall have the meaning ascribed thereto in Section
5.14.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Code</U>&#148; shall mean the Internal Revenue Code of 1986, as amended.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Copyrights</U>&#148; shall mean U.S. and foreign registered and unregistered copyrights
(including those in computer software and databases), rights of publicity and all registrations and
applications to register the same.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>DGCL</U>&#148; shall mean the Delaware General Corporation Law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Disclosure Schedule</U>&#148; shall mean the disclosure schedule of even date herewith
prepared and signed by the Seller and delivered to Purchaser simultaneously with the execution
hereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Effective Time</U>&#148; shall mean 10:00&nbsp;a.m. local time on the Closing Date.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Encumbrances</U>&#148; shall mean any and all liens, charges, security interests, options,
claims, mortgages, pledges, proxies, voting trusts or agreements, obligations, understandings or
arrangements or other restrictions on title, transfer or use of any nature whatsoever other than
liens for taxes, assessments or other governmental charges which were incurred in the ordinary
course of business and are not due and payable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Environmental Claim</U>&#148; shall mean any claim, action, cause of action, investigation or
notice (written or oral) by any Person alleging actual or potential liability for investigatory,
cleanup or governmental response costs, or natural resources or property damages, or personal
injuries, attorney&#146;s fees or penalties relating to (i)&nbsp;the presence, or release into the
environment, of any Materials of Environmental Concern at any location owned or operated by the
Seller or Seller Subsidiary, now or in the past, or (ii)&nbsp;circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Environmental Law</U>&#148; shall mean each federal, state, local and foreign law and
regulation relating to pollution, protection or preservation of human health or the environment
including ambient air, surface water, ground water, land surface or subsurface strata, and natural
resources, and including each law and regulation relating to emissions, discharges, releases or
threatened releases of Materials of Environmental Concern, or otherwise relating to the
manufacturing, processing, distribution, use, treatment, generation, storage, containment (whether
above ground or underground), disposal, transport or handling of Materials of Environmental
Concern, or the preservation of the environment or mitigation of adverse effects thereon and each
law and regulation with regard to record keeping, notification, disclosure and reporting
requirements respecting Materials of Environmental Concern.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>ERISA</U>&#148; shall mean the Employee Retirement Income Security Act of 1974, as amended.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Exchange Act</U>&#148; shall mean the Securities Exchange Act of 1934, as amended.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Excluded Liabilities</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;1.3.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>GAAP</U>&#148; shall mean United States generally accepted accounting principles.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Governmental Entity</U>&#148; shall mean a court, arbitral tribunal, administrative agency or
commission or other governmental or other regulatory authority or agency.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Intellectual Property</U>&#148; shall mean all of the following: Trademarks, Patents, ideas,
Copyrights, domain names, Trade Secrets, know-how and Licenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Liabilities</U>&#148; shall mean all liabilities and obligations, secured or unsecured,
whether absolute, accrued, contingent, fixed or otherwise, whether known or unknown and whether or
not due.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Licenses</U>&#148; shall mean all licenses and agreements pursuant to which Seller or Seller
Subsidiary has acquired rights in or to any Trademarks, Patents or Copyrights used by or for the
benefit of Seller or Seller Subsidiary, or licenses and agreements pursuant to which Seller or
Seller Subsidiary has licensed or transferred the right to use any Trademark, Patent or Copyright.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Losses</U>&#148; shall mean any and all losses, Liabilities, claims, diminution of value,
damages, judgments, settlements and expenses (including interest and penalties recovered by a third
party with respect thereto and reasonable attorneys&#146; fees and expenses and reasonable accountants&#146;
fees and expenses incurred in the investigation or defense of any of the same or in asserting,
preserving or enforcing any of the rights of Purchaser arising under ARTICLE VIII) incurred by any
of the Purchaser Indemnified Persons.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Materials of Environmental Concern</U>&#148; shall mean chemicals; pollutants; contaminants;
wastes; toxic or hazardous substances, materials and wastes; petroleum and petroleum products;
asbestos and asbestos-containing materials; polychlorinated biphenyls; lead and lead-based paints
and materials; and radon.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Patents</U>&#148; shall mean issued U.S. and foreign patents and pending patent applications,
patent disclosures, and any and all divisions, continuations, continuations-in-part, reissues,
reexaminations, and extension thereof, any counterparts claiming priority there from, utility
models, patents of importation/confirmation, certificates of invention and like statutory rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Person</U>&#148; shall mean a natural person, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association, joint venture,
Governmental Entity or other entity or organization.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Plan</U>&#148; shall have the meaning set forth in ERISA Section&nbsp;3(3).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Proxy Statement</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;3.6.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Purchased Assets</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;1.1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Purchaser</U>&#148; shall have the meaning ascribed thereto in the Preamble.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Purchaser Subsidiary</U>&#148; shall have the meaning ascribed thereto in the Preamble.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Purchaser Indemnified Persons</U>&#148; shall mean Purchaser, Purchaser Subsidiary, each of
their Affiliates and each of their officers, directors, employees, agents and representatives.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Securities Act</U>&#148; shall mean the Securities Act of 1933, as amended.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>SEC</U>&#148; shall mean the United States Securities and Exchange Commission.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Seller</U>&#148; shall have the meaning ascribed thereto in the Preamble.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Seller Common Stock</U>&#148; shall mean the common stock of Seller.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Seller Intellectual Property</U>&#148; shall mean all Intellectual Property of Seller or
Seller Subsidiary or used in connection with the Business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Seller Software</U>&#148; means all material computer programs and computer databases, other
than off-the-shelf applications, which are owned or otherwise used by Seller or Seller Subsidiary.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Seller SEC Documents</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;3.7.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Seller Subsidiary</U>&#148; shall have the meaning ascribed thereto in the Preamble.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Stockholder Approval</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;3.1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Subsidiary</U>&#148; shall mean, with respect to any Person, any corporation or other
organization, whether incorporated or unincorporated, of which (a)&nbsp;at least a majority of the
securities or other interests having by their terms ordinary voting power to elect a majority of
the Board of Directors or others performing similar functions with respect to such corporation or
other organization is directly or indirectly owned or controlled by such Person or by any one or
more of its Subsidiaries, or by such Person and one or more of its Subsidiaries or (b)&nbsp;such Person
or any other Subsidiary of such Person is a general partner (excluding any such partnership where
such Person or any Subsidiary of such party does not have a majority of the voting interest in such
partnership).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Tax</U>&#148; or &#147;<U>Taxes</U>&#148; shall mean all taxes, charges, fees, duties, levies,
penalties or other assessments imposed by any federal, state, local or foreign governmental
authority, including income, gross receipts, excise, property, sales, gain, use, license, custom
duty, unemployment, capital stock, transfer, franchise, payroll, withholding, social security,
minimum estimated, profit, gift, severance, value added, disability, premium, recapture, credit,
occupation, service, leasing, employment, stamp and other taxes, and shall include interest,
penalties or additions attributable thereto or attributable to any failure to comply with any
requirement regarding Tax Returns.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Tax Return</U>&#148; shall mean any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any such document prepared on a
consolidated, combined or unitary basis and also including any schedule or attachment thereto, and
including any amendment thereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Trademarks</U>&#148; shall mean U.S. and foreign registered and unregistered trademarks, trade
dress, service marks, logos, trade names, corporate names and all registrations and applications to
register the same including all common law rights and common law rights therein.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Trade Secrets</U>&#148; shall have the meaning ascribed thereto in Section&nbsp;3.18.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Transactions</U>&#148; shall mean all the transactions provided for or contemplated by this
Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Transfer Taxes</U>&#148; shall mean all sales (including, without limitation, bulk sales),
use, transfer, recording, ad valorem, privilege, documentary, gains, gross receipts, registration,
conveyance, excise, license, stamp, duties or similar Taxes and fees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;<U>Transfer Tax Payor</U>&#148; shall mean the party which has primary legal responsibility for
the payment of any particular Transfer Tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;9.2 <U>Interpretation</U>.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;When a reference is made in this Agreement to a section or article, such reference shall
be to a section or article of this Agreement unless otherwise clearly indicated to the contrary.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Whenever the words &#147;include&#148;, &#147;includes&#148; or &#147;including&#148; are used in this Agreement they
shall be deemed to be followed by the words &#147;without limitation.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;The words &#147;hereof&#148;, &#147;herein&#148; and &#147;herewith&#148; and words of similar import shall, unless
otherwise stated, be construed to refer to this Agreement as a whole and not to any particular
provision of this Agreement, and article, section, paragraph, exhibit and schedule references are
to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise
specified.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;The meaning assigned to each term defined herein shall be equally applicable to both the
singular and the plural forms of such term, and words denoting any gender shall include all
genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a
corresponding meaning.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;A reference to any party to this Agreement or any other agreement or document shall
include such party&#146;s successors and permitted assigns.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;A reference to any legislation or to any provision of any legislation shall include any
amendment to, and any modification or re-enactment thereof, any legislative provision substituted
therefor and all regulations and statutory instruments issued thereunder or pursuant thereto.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;The parties have participated jointly in the negotiation and drafting of this Agreement.
In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.
</DIV>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt">ARTICLE X
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">MISCELLANEOUS

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.1 <U>Fees and Expenses</U>. All costs and expenses incurred in connection with
this Agreement and the consummation of the Transactions shall be paid by the party incurring such
expenses, except as specifically provided to the contrary in this Agreement (including in the
proviso of Section&nbsp;2.2 and in Section&nbsp;7.2) and except that all Transfer Taxes arising out of, in
connection with or attributable to the transactions effected pursuant to this Agreement shall be
borne and paid by Seller. The Transfer Tax Payor shall prepare and timely file all relevant Tax
Returns required to be filed in respect of such Transfer Tax, pay the Transfer Tax shown on such
Tax Return, and notify the other parties in writing of the Transfer Tax shown on such Tax Return
and how such Transfer Tax was calculated, and if the Transfer Tax Payor is Purchaser or its
Affiliates, Seller shall, except as set forth in the following sentence, reimburse the Transfer Tax
Payor for the amount of such Transfer Tax in immediately available funds within ten (10)&nbsp;business
days of receipt of such notice. Notwithstanding the preceding sentence, Purchaser shall be
responsible for Transfer Taxes incurred with respect to the transfer by Seller to Purchaser of
tangible personal property having a fair market value of up to $20,000 U.S. and, to the extent
Transfer Taxes with respect to the transfer by Seller to Purchaser of tangible personal property
having a fair market value of up to $20,000 U.S. are paid by Seller, Purchaser shall reimburse
Seller in respect of such Transfer Taxes by wire transfer of immediately available funds within ten
(10)&nbsp;business days of receipt of notice and proof of payment from Seller.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.2 <U>Amendment and Modification</U>. Subject to the revision of <U>Schedule
E</U> by Purchaser as contemplated by the definition of &#147;Assumed Contracts,&#148; this Agreement may be
amended, modified and supplemented in any and all respects, but only by a written instrument signed
by all of the parties hereto expressly stating that such instrument is intended to amend, modify or
supplement this Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.3 <U>Notices</U>. All notices and other communications hereunder shall be in
writing and shall be deemed given when mailed, delivered personally, telecopied (which is
confirmed) or sent by an overnight courier service, such as Federal Express, to the parties at the
following addresses (or at such other address for a party as shall be specified by such party by
like notice):
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">if to Purchaser or Purchaser<BR>
Subsidiary, to:

</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">DTS, Inc.<BR>
5171 Clareton Drive<BR>
Agoura Hills, CA 91301
</DIV>

<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">Attention: General Counsel<BR>
Telephone: (818)&nbsp;706-3525<BR>
Telecopy: (818)&nbsp;824-2470
</DIV>

<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">with a copy to:
</DIV>


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



<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">Heller Ehrman<BR>
4350 La Jolla Village<BR>
Seventh Floor<BR>
San Diego, CA 92122
</DIV>

<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">Attention: Kirt Shuldberg, Esq.<BR>
Telephone: (858)&nbsp;450-5766<BR>
Telecopy: (858)&nbsp;587-5928
</DIV>

<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">And
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">if to Seller or Seller<BR>
Subsidiary, to:

</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">Spatializer Audio Laboratories, Inc.<BR>
4215 Tierra Rejada Rd.<BR>
PMB 159<BR>
Moorpark, CA 93021<BR>
Attention: Henry Mandell, CEO<BR>
Telephone:<BR>
Telecopy:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-left: 9%; margin-top: 6pt">With a copy to:<BR>
Reed Smith LLP<BR>
1901 Avenue of the Stars<BR>
Suite&nbsp;700<BR>
Los Angeles, California 90062<BR>
Attention: John Iino, Esq.<BR>
Telephone: (310)&nbsp;734-5200<BR>
Telecopy: (310)&nbsp;734-5299
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.4 <U>Counterparts</U>. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and shall become
effective when two or more counterparts have been signed by each of the parties and delivered to
the other parties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.5 <U>Entire Agreement; No Third Party Beneficiaries</U>. This Agreement (a)
constitutes the entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof and thereof and (b)
are not intended to confer upon any Person other than the parties hereto and the Purchaser
Indemnified Persons any rights or remedies hereunder.
</DIV>

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</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.6 <U>Severability</U>. Any term or provision of this Agreement that is held by a
court of competent jurisdiction or other authority to be invalid, void or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability of the remaining
terms and provisions hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction. If the final judgment of a court of competent
jurisdiction or other authority declares that any term or provision hereof is invalid, void or
unenforceable, the parties agree that the court making such determination shall have the power to
reduce the scope, duration, area or applicability of the term or provision, to delete specific
words or phrases, or to replace any invalid, void or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.7 <U>Governing Law</U>. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to the principles of
conflicts of law thereof; provided, that, the General Corporation Law of the State of Delaware
shall apply to the extent applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.8 <U>Enforcement; Venue</U>. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any court of the United States
located in the State of California or in California state court, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each of the parties
hereto (a)&nbsp;consents to submit itself to the personal jurisdiction of any Federal or state court
located in the County of Los Angeles, California in the event any dispute arises out of this
Agreement or any of the Transactions, (b)&nbsp;agrees that it shall not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court and (c)&nbsp;agrees that
it shall not bring any action relating to this Agreement or any of the Transactions in any court
other than a Federal or state court sitting in the County of Los Angeles, California.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.9 <U>Time of Essence</U>. Each of the parties hereto hereby agrees that, with
regard to all dates and time periods set forth or referred to in this Agreement, time is of the
essence.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.10 <U>Extension; Waiver</U>. At any time prior to the Closing Date, the parties
may (a)&nbsp;extend the time for the performance of any of the obligations or other acts of the other
parties, (b)&nbsp;waive any inaccuracies in the representations and warranties of the other parties
contained in this Agreement or in any document delivered pursuant to this Agreement or (c)&nbsp;waive
compliance by the other parties with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or otherwise shall not
constitute a waiver of those rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.11 <U>Election of Remedies</U>. Neither the exercise of nor the failure to
exercise a right or to give notice of a claim under this Agreement will constitute an election of
remedies or
</DIV>

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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">limit Purchaser or any of the Purchaser Indemnified Persons in any manner in the enforcement
of any other remedies that may be available to any of them, whether at law or in equity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.12 <U>Assignment</U>. Neither this Agreement not any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law
or otherwise) without the prior written content of the other parties, except that Purchaser may
assign, in its sole discretion, any or all of its rights and interests hereunder to any direct or
indirect wholly owned Subsidiary of Purchaser. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Section&nbsp;10.13 <U>Joint and Several Liability</U>. Purchaser and Purchaser Subsidiary shall
be jointly and severally liable for all obligations of Purchaser Subsidiary hereunder or under any
agreement executed by Purchaser Subsidiary and delivered to Seller at the Closing, including
without limitation the Assumption Agreement.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IN WITNESS WHEREOF, Purchaser, Purchaser Subsidiary, Seller and Seller Subsidiary have
executed this Agreement or caused this Agreement to be executed by their respective officers
thereunto duly authorized as of the date first written above.
</DIV>

<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">DTS, INC.<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/  JON E. KIRCHNER
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Name:&nbsp;&nbsp;</TD>
    <TD align="left">Jon Kirchner&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Title:&nbsp;&nbsp;</TD>
    <TD align="left">President &#038; Chief Executive Officer&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">DTS BVI LIMITED<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/  JON E. KIRCHNER
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Name:&nbsp;&nbsp;</TD>
    <TD align="left">Jon E. Kirchner&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Title:&nbsp;&nbsp;</TD>
    <TD align="left">Chairman&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">SPATIALIZER AUDIO LABORATORIES, INC.<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 R. MANDELL
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Name:&nbsp;&nbsp;</TD>
    <TD align="left">Henry R. Mandell&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Title:&nbsp;&nbsp;</TD>
    <TD align="left">Chairman&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">DESPER PRODUCTS, INC.<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 R. MANDELL
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Name:&nbsp;&nbsp;</TD>
    <TD align="left">Henry R. Mandell&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top">Title:&nbsp;&nbsp;</TD>
    <TD align="left">President&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
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<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>3
<FILENAME>v25172exv31.htm
<DESCRIPTION>EXHIBIT 31
<TEXT>
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<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;31</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>RULE 13a-14(a)/15d-14(a) CERTIFICATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">I, Henry R. Mandell certify that:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">1.&nbsp;I have reviewed this quarterly report on Form 10-Q of Spatializer Audio Laboratories, Inc.;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">2.&nbsp;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;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">3.&nbsp;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;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">4.&nbsp;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:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">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;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">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
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">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
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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):
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">a) All significant deficiencies and material weaknesses 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
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">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>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Date: November&nbsp;14, 2006
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">/s/ Henry R. Mandell

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Henry R. Mandell<BR>
Chairman of the Board<BR>
(performing the functions of principal executive officer and principal financial officer)

</DIV>

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</DIV>

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<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>4
<FILENAME>v25172exv32.htm
<DESCRIPTION>EXHIBIT 32
<TEXT>
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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Exhibit&nbsp;32</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SECTION 1350 CERTIFICATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)&nbsp;and (b)&nbsp;of section 1350,
chapter 63 of Title 18, United States Code), the undersigned officer of Spatializer Audio
Laboratories, Inc. (the &#147;Company&#148;) hereby certifies with respect to the Quarterly Report on Form
10-Q of the Company for the quarter ended September&nbsp;30, 2006 as filed with the Securities and
Exchange Commission (the &#147;10-Q Report&#148;) that to his knowledge:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Date: November&nbsp;10, 2006
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">/s/ Henry R. Mandell

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Henry R. Mandell<BR>
Chairman of the Board<BR>
(performing the functions of principal executive officer and principal financial officer)

</DIV>


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


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