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<SEC-DOCUMENT>0000950124-07-002656.txt : 20070503
<SEC-HEADER>0000950124-07-002656.hdr.sgml : 20070503
<ACCEPTANCE-DATETIME>20070503140751
ACCESSION NUMBER:		0000950124-07-002656
CONFORMED SUBMISSION TYPE:	PREM14A
PUBLIC DOCUMENT COUNT:		2
FILED AS OF DATE:		20070503
DATE AS OF CHANGE:		20070503

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:		PREM14A
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-26460
		FILM NUMBER:		07814672

	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>PREM14A
<SEQUENCE>1
<FILENAME>v29806prem14a.htm
<DESCRIPTION>PRELIMINARY PROXY STATEMENT
<TEXT>
<HTML>
<HEAD>
<TITLE>Spatializer Audio Laboratories, Inc.</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 14pt; margin-top: 6pt"><B>UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

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

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B>SCHEDULE 14A</B>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 12pt">Proxy Statement Pursuant to Section&nbsp;14(a) of the Securities<BR>
Exchange Act of 1934 (Amendment No.&nbsp;&nbsp;)</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Filed by the Registrant <FONT face="wingdings" size="2">&#254;</FONT><BR>
Filed by a Party other than the Registrant <FONT face="wingdings" size="2">&#111;</FONT>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Check the appropriate box:

</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" valign="top">
<FONT face="wingdings" size="2">&#254;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>Preliminary Proxy Statement</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="1%" nowrap align="left" valign="top">
<FONT face="wingdings" size="2">&#111;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD><B>Confidential, for Use of the Commission Only (as permitted by Rule&nbsp;14a-</B><B>6(e)(2)</B><B>)</B></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="1%" nowrap align="left" valign="top">
<FONT face="wingdings" size="2">&#111;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>Definitive Proxy Statement</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="1%" nowrap align="left" valign="top">
<FONT face="wingdings" size="2">&#111;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>Definitive Additional Materials</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="1%" nowrap align="left" valign="top">
<FONT face="wingdings" size="2">&#111;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>Soliciting Material Pursuant to &#167;240.14a-12</TD>
</TR>

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

<DIV align="center">
SPATIALIZER AUDIO LABORATORIES, INC.</DIV>
<DIV align="center" style="font-size: 10pt"><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV>
(Name of Registrant as Specified In Its Charter)</DIV>


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

<DIV align="center">
</DIV>
<DIV align="center" style="font-size: 10pt"><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV>
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Payment of Filing Fee (Check the appropriate box):

</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" valign="top">
<FONT face="wingdings" size="2">&#111;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>No fee required.</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="1%" nowrap align="left" valign="top">
<FONT face="wingdings" size="2">&#254;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>Fee computed on table below per Exchange Act Rules&nbsp;14a-6(i)(1) and 0-11.</TD>
</TR>

</TABLE>
</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="3%" nowrap align="left">(1)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Title of each class of securities to which transaction applies:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">
Common Stock
</DIV></TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></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="3%" nowrap align="left">(2)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Aggregate number of securities to which transaction applies:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">

</DIV></TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></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="3%" nowrap align="left">(3)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Per unit price or other underlying value of transaction computed pursuant to Exchange Act
Rule&nbsp;0-11 (set forth the amount on which the filing fee is calculated and state how it was
determined):</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">
$1,000,000.00 (cash purchase price of the assets)
</DIV></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></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="3%" nowrap align="left">(4)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Proposed maximum aggregate value of transaction:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">
$1,000,000.00
</DIV></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></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="3%" nowrap align="left">(5)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Total fee paid:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">
$30.70
</DIV></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></TD>
</TR>

</TABLE>
</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" valign="top">
<FONT face="wingdings" size="2">&#111;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>Fee paid previously with preliminary materials.</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" valign="top">
<FONT face="wingdings" size="2">&#111;</FONT></TD>
<TD width="1%">&nbsp;</TD>
<TD>Check box if any part of the fee is offset as provided by Exchange Act Rule&nbsp;0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form or Schedule and the date of its
filing.</TD>
</TR>

</TABLE>
</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="3%" nowrap align="left">(1)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Amount Previously Paid:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">

</DIV></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></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="3%" nowrap align="left">(2)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Form, Schedule or Registration Statement No.:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">

</DIV></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></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="3%" nowrap align="left">(3)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Filing Party:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">

</DIV></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></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="3%" nowrap align="left">(4)</TD>
<TD width="1%">&nbsp;</TD>
<TD>Date Filed:</TD>
</TR>

<TR>
<TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
<TD width="2%">&nbsp;</TD>
<TD width="3%">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD style="font-size: 10pt"><DIV align="left">

</DIV></TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<TD width="2%" style="background: transparent">&nbsp;</TD>
<TD width="3%" nowrap align="left">&nbsp;</TD>
<TD width="1%">&nbsp;</TD>
<TD><DIV style="border-bottom: 1px solid #000000; font-size: 1px">&nbsp;</DIV></TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt">
</DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><IMG src="v29806v2980601.jpg" alt="(SPATIALIZER LOGO)">
</DIV>


<DIV align="center" style="font-size: 11pt; margin-top: 8pt"><FONT style="font-variant: SMALL-CAPS">2060 East Avenida de los arboles, #d190</FONT> <FONT face="Wingdings">&#108;</FONT> <FONT style="font-variant: SMALL-CAPS">thousand oaks, CA 91362-1376</FONT>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">May __, 2007
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On behalf of the board of directors (the &#147;Board&#148;), I cordially invite you to a Special Meeting
of the stockholders (the &#147;Special Meeting&#148;) of Spatializer Audio Laboratories, Inc. (&#147;Spatializer&#148;)
which will be held on &#95;&#95;&#95;, &#95;&#95;&#95;, 2007 at 4:00 p.m. at the offices of Reed Smith LLP,
1901 Avenue of the Stars, Suite&nbsp;700, Los Angeles, California 90067. I hope that you will be able
to attend in person. Following the formal business of the Special Meeting, management will be
available to respond to your questions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At the Special Meeting, stockholders will be asked to consider and vote upon the following
matters:
</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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(1)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The sale of all or substantially all of the assets of Spatializer and
Desper Products, Inc., a wholly owned subsidiary of Spatializer, to DTS, Inc. and its
wholly owned subsidiary DTS BVI, Limited pursuant to an Asset Purchase Agreement as
described in the accompanying proxy materials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(2)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Approval of an amendment to Spatializer&#146;s Certificate of Incorporation
increasing the authorized number of shares of Common Stock (as defined below) from
65,000,000 shares to 300,000,000 shares;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(3)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Authorization for the Board to effect a reverse stock split of
Spatializer&#146;s Common Stock at a specific ratio to be determined by the Board within a
range from one-for-five to one-for-fifty; 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(4)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Such other matters as properly be presented at the Special Meeting or any
adjournment or postponement thereof.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board has approved and recommends that the stockholders vote FOR each of the matters
described in proposals nos. 1, 2, and 3 above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At the Special Meeting, each holder of record of shares of common stock, par value $0.01 per
share (&#147;Common Stock&#148;), as of &#95;&#95;&#95;, 2007, the
record date for the meeting, will be entitled to
one vote on each matter properly brought before the Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information regarding the proposed sale of assets of Spatializer, the proposed amendment to
the Certificate of Incorporation increasing the number of authorized shares of Common Stock, the
proposed authorization for the Board to effect the proposed reverse stock split of Spatializer&#146;s
Common Stock and other important information is set forth in the accompanying Notice and Proxy
Statement and should be considered carefully by stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I hope that you will attend the Special Meeting. Whether or not you plan to attend the Special
Meeting, and regardless of the number of shares of stock you own, please complete, date and sign
the enclosed proxy card and return it promptly in the accompanying envelope. You may, of course,
attend the Special Meeting and vote in person, even if you have previously returned your proxy
card. The accompanying proxy statement is dated &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007 and is first being mailed to
stockholders of Spatializer on or about &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007.
</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">Sincerely,<BR>
SPATIALIZER AUDIO LABORATORIES, INC.<BR>
<BR>
<BR>
HENRY R. MANDELL<BR>
Chairman of the Board<BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

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

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

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

<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>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><IMG src="v29806v2980601.jpg" alt="(SPATIALIZER LOGO)">
</DIV>


<DIV align="center" style="font-size: 11pt; margin-top: 8pt"><FONT style="font-variant: SMALL-CAPS">2060 East Avenida de los arboles, #d190</FONT> <FONT face="Wingdings">&#108;</FONT> <FONT style="font-variant: SMALL-CAPS">thousand oaks, CA 91362-1376</FONT>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notice is hereby given that Spatializer Audio Laboratories, Inc. (&#147;Spatializer&#148;) will hold a
Special Meeting of Stockholders (&#147;Special Meeting&#148;) on &#95;&#95;&#95;, &#95;&#95;&#95;, 2007 at 4:00 p.m.
at the offices of Reed Smith LLP, 1901 Avenue of the Stars, Suite&nbsp;700, Los Angeles, California
90067 for the following purposes:
</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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">1.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>To approve of the sale of all or substantially all of the assets of
Spatializer and Desper Products, Inc., a wholly owned subsidiary of Spatializer, to
DTS, Inc. and its wholly owned subsidiary DTS BVI, Limited pursuant to an Asset
Purchase Agreement as described in the accompanying proxy materials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">2.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Approval of an amendment to Spatializer&#146;s Certificate of Incorporation
increasing the authorized number of shares of common stock from 65,000,000 shares
to 300,000,000 shares;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">3.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Authorization for the Board of Directors (the &#147;Board&#148;) to effect a
reverse stock split Spatializer&#146;s common stock at a specific ratio to be determined
by the Board within a range from one-for-five to one-for-fifty; 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">4.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Such other matters as properly be presented at the Special Meeting or
any adjournment or postponement thereof.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board has fixed &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007 as the record date for the determination of the
stockholders entitled to notice of, and to vote at, the Special Meeting or any adjournment or
postponement of the Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At the Special Meeting, each share of common stock represented will be entitled to one vote on
each matter properly brought before the Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Your attention is directed to the accompanying Proxy Statement. Stockholders who do not expect
to attend the Special Meeting in person are requested to date, sign and mail the enclosed proxy as
promptly as possible in the enclosed envelope.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying proxy statement is
dated &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007 and is first being mailed to
stockholders of Spatializer on or about &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007.
</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="35%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="55%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">DATED:&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;&#95;&#95;&#95;, 2007
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">BY ORDER OF THE BOARD OF DIRECTORS</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"><BR>HENRY R. MANDELL</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">Chairman of the Board</TD>
</TR>
<!-- End Table Body --></TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THE BOARD HAS APPROVED AND RECOMMENDS THAT THE STOCKHOLDERS VOTE <B>FOR </B>EACH OF THE PROPOSALS
DESCRIBED IN THIS NOTICE.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IT IS IMPORTANT THAT ALL STOCKHOLDERS VOTE. WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR
TO ITS EXERCISE. IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS, PLEASE INDICATE
ON THE PROXY WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING.
</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"><A HREF="#tocpage">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>Table of Contents</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="90%">&nbsp;</TD>
    <TD width="3%">&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="3"><B>Page</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<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"><A href="#101">SUMMARY TERM SHEET</A></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:15px; text-indent:-15px"><A href="#102">PROXY STATEMENT</A></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:15px; text-indent:-15px"><A href="#103"><B>VOTING RIGHTS AND SOLICITATION OF PROXIES</B></A></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"><A href="#104"><B>Quorum Required</B></A></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"><A href="#105"><B>Vote Required</B></A></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"><A href="#106"><B>Revocability of Proxies</B></A></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"><A href="#107"><B>Proxy Solicitation</B></A></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:15px; text-indent:-15px"><A href="#108">QUESTIONS AND ANSWERS</A></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:15px; text-indent:-15px"><A href="#109">CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION</A></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:15px; text-indent:-15px"><A href="#110">SALE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS</A></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"><A href="#111"><B>General</B></A></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"><A href="#112"><B>Background of the Sale of Assets</B></A></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"><A href="#113"><B>Recommendation of our Board of Directors and Reasons for the Sale of Assets</B></A></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"><A href="#114"><B>Effective Time of the Sale of Assets</B></A></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"><A href="#115"><B>Material Federal Income Tax Consequences</B></A></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:15px; text-indent:-15px"><A href="#116">MARKET PRICE AND DIVIDEND DATA</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#117">PROPOSAL
NO.&nbsp;1 APPROVAL OF SALE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF SPATIALIZER AND DESPER PRODUCTS</A></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"><A href="#119"><B>Parties to Agreement</B></A></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"><A href="#120"><B>Assets to be Acquired; Liabilities</B></A></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"><A href="#121"><B>Consideration</B></A></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"><A href="#122"><B>Representations and Warranties</B></A></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"><A href="#123"><B>Covenants of Spatializer and Desper Products</B></A></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"><A href="#124"><B>No Solicitation</B></A></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"><A href="#125"><B>Conditions to Closing</B></A></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"><A href="#126"><B>Termination of Agreement</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#127"><B>Indemnification</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#128"><B>Brokers</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#129"><B>Transfer Taxes</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#331"><B>Joint
and Several Liability</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
<TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#332"><B>Vote
Required</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28</TD>
    <TD>&nbsp;</TD>
</TR>


<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#130"><B>PROPOSAL
NO. 2 AMENDMENT OF SPATIALIZER&#146;S CERTIFICATE OF INCORPORATION TO
INCREASE THE AUTHORIZED COMMON STOCK</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#131"><B>General</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#132"><B>Purposes of the Amendment to Increase the Authorized Number of Shares of Common Stock</B></A></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"><A href="#133"><B>Effects of the Amendment</B></A></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"><A href="#134"><B>Vote Required</B></A></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:15px; text-indent:-15px"><A href="#135"><B>PROPOSAL
NO. 3 AUTHORIZATION OF THE BOARD OF DIRECTORS TO EFFECT A REVERSE
STOCK SPLIT IN A RANGE FROM ONE-FOR-FIVE TO ONE-FOR-FIFTY</B></A></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"><A href="#136"><B>General</B></A></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"><A href="#137"><B>Purposes of the Proposed Reverse Stock Split</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#138"><B>Principal Effects of a Reverse Stock Split</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#139"><B>Accounting Matters</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#140"><B>No Dissenters Rights</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#141"><B>Material Federal Income Tax Consequences of the Proposed Reverse Stock Split</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#142"><B>Vote Required for Stockholder Approval of a Reverse Stock Split within a range from One-for-Five to One-for-Fifty.</B></A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39</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"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head --><TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&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="3"><B>Page</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<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"><A href="#143">SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#144">AVAILABLE
INFORMATION AND FINANCIAL STATEMENTS</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#145">OTHER BUSINESS</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#146">ANNEX
A ASSET PURCHASE AGREEMENT</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#147">ANNEX
B PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION INCREASING THE
NUMBER OF SHARES OF AUTHORIZED COMMON STOCK</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">73</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#148">ANNEX
C PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION FOR REVERSE
STOCK SPLIT</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#149">ANNEX D ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2006</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body --></TABLE>
</DIV>


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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="101"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SUMMARY TERM SHEET &#151; PROPOSAL NO. 1</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following summary briefly describes the material terms of the proposed sale of assets by
Spatializer Audio Laboratories, Inc. (&#147;Spatializer&#148; or &#147;we,&#148; &#147;our&#148; or similar words) and its wholly
owned subsidiary, Desper Products, Inc. (&#147;Desper Products&#148;). While this summary describes the
material terms that you should consider when evaluating the asset sale, the proxy statement
contains a more detailed description of these terms. A copy of the Asset Purchase Agreement (as
defined below) is attached hereto as Annex A and we encourage you to read it and the proxy
statement carefully before voting your shares of Spatializer&#146;s common stock. We have included
section and page references to the proxy statement to direct you to a more complete description of
the topics described in this summary.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Spatializer </I>is a Delaware corporation and is a developer, licensor and marketer of next
generation technologies for the consumer electronics, personal computing, entertainment and
cellular telephone markets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Desper Products </I>is a California corporation and a wholly owned subsidiary of Spatializer. It
owns certain of the key intellectual property to be sold to DTS, Inc. pursuant to the Asset
Purchase Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>DTS, Inc. </I>(&#147;DTS&#148;) is a Delaware corporation and a leading provider of entertainment technology,
products and services to the audio and image entertainment markets worldwide. DTS desires to
acquire all or substantially all of the assets of Spatializer and Desper Products pursuant to the
terms of the Asset Purchase Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>DTS BVI, Limited </I>(&#147;DTS BVI&#148;) is a British Virgin Island corporation and a wholly owned subsidiary
of DTS.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Asset Purchase Agreement </I>- Spatializer and Desper Products have entered into an Asset Purchase
Agreement, dated as of September&nbsp;18, 2006 (&#147;Asset Purchase Agreement&#148;), with DTS and DTS BVI
pursuant to which DTS and DTS BVI will acquire substantially all of the assets of both Spatializer
and Desper Products for an aggregate cash payment of $1,000,000, provided that, among other things,
the sale is approved by the stockholders of Spatializer. Spatializer, as the sole stockholder of
Desper Products, has already approved of the sale of the assets of Desper Products to DTS. See
&#147;Proposal No.&nbsp;1 &#151; Approval of Sale of All or Substantially All of the Assets of Spatializer and Desper
Products&#148; commencing on page 23.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Reasons for the Sale of Assets </I>- The Board of Directors of Spatializer (&#147;Board of Directors&#148;)
considered a number of factors in deciding to sell its assets. Those reasons included, among
others, the consideration to be received by Spatializer; the poor business outlook for Spatializer;
the current and future competitive landscape for Spatializer in our industry; the weak financial
viability of Spatializer; the lack of full-time management; the status and history of discussions
with other potential bidders and our auction process; and the terms of the Asset Purchase
Agreement. See &#147;Sale of All or Substantially All of the Assets &#151; Recommendation of the Board of
Directors and Reasons for the Sale of Assets&#148; commencing on page&nbsp;18.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Recommendation of the Board of Directors of Spatializer </I>- The Board of Directors of Spatializer
has unanimously deemed the sale of substantially all of Spatializer&#146;s and Desper Products&#146; assets
to be in the best interests of Spatializer. Our Board of Directors has unanimously approved the
Asset Purchase Agreement and the sale of assets contemplated by that agreement, recommends its
advisability and recommends that you vote at the Special Meeting of our stockholders (&#147;Special
Meeting&#148;) &#147;FOR&#148; the approval of the Asset Purchase Agreement and the sale of assets contemplated by
that agreement. See
</DIV>
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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&#147;Sale of All or Substantially All of the Assets of Spatializer and Desper Products &#151; Recommendation
of the Board of Directors and Reasons for the Sale of Assets&#148; on
page 18.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Prior Stockholder Meeting</I>. On January&nbsp;24, 2007 the Annual Meeting of Stockholders of
Spatializer (the &#147;Annual Meeting&#148;), was held and the Annual Meeting was adjourned by the vote of a
majority of the shares present at the meeting. The Annual Meeting reconvened on February&nbsp;21, 2007.
While the shares voted at the Annual Meeting were overwhelmingly in favor of the proposed sale of
assets to DTS and DTS BVI the proposal was not approved because the required vote needed to pass
such proposal was not obtained.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Appraisal Rights </I>- The stockholders of Spatializer will not have any appraisal rights in
connection with the sale of substantially all of the assets of Spatializer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Required Vote </I>- For us to complete the sale of substantially all of the assets of Spatializer and
Desper Products, stockholders holding at least a majority of the shares of Spatializer&#146;s common
stock outstanding at the close of business on the record date of &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007 must vote
&#147;FOR&#148; the sale of assets as provided in the Asset Purchase Agreement. See &#147;Voting Rights and
Solicitations of Proxies &#151; Vote Required&#148; commencing on page 3.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Conditions to the Completion of the Sale of the Assets </I>- The obligations of DTS and DTS BVI to
buy the assets of Spatializer and Desper Products as provided in the Asset Purchase Agreement is
subject to various conditions, including approval of the sale of assets by the stockholders of
Spatializer and obtaining the consent of the parties to the various agreements to be assigned to
DTS and/or DTS BVI in connection with the acquisition of the assets. See &#147;Approval of Sale of All
or Substantially All of the Assets of Spatializer and Desper Products &#151; Conditions to Closing&#148;
commencing on page 26.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Termination of Agreement </I>- The Asset Purchase Agreement and the sale of assets may be terminated
under certain circumstances, including the failure of the transaction to close by June&nbsp;30, 2007.
See &#147;Approval of Sale of All or Substantially All of the Assets of Spatializer and Desper Products
- - Termination of Agreement&#148; commencing on page 27.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Material Federal Tax Consequences </I>- The sale of all or substantially all of the assets of
Spatializer and Desper Products to DTS likely will not result in any federal corporate income tax
liability (including any alternative minimum tax liability) because we anticipate that any taxable
gain from the sale of a particular asset to DTS and/or DTS BVI either will be offset for income tax
purposes by losses that Spatializer or Desper Products will recognize from the sale of other assets
to DTS and DTS BVI, or by Spatializer&#146;s current and prior years&#146; net operating losses on a
consolidated basis. After the sale of all or substantially all of their assets to DTS and/or DTS
BVI, Spatializer and Desper Products, on a consolidated basis, will continue to be subject to
federal income taxation on taxable income, if any. See &#147;Sale of All or Substantially All of the
Assets of Spatializer and Desper Products &#151; Material Federal Income Tax Consequences&#148; commencing on
page 19.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><FONT face="Wingdings" style="font-size: 8pt">&#108;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <I>Special Meeting </I>- The Special Meeting of stockholders of Spatializer will be held on &#95;&#95;&#95;,
&#95;&#95;&#95;, 2007 at 4:00 p.m. at the offices of Reed Smith LLP, 1901 Avenue of the Stars,
Suite&nbsp;700, Los Angeles, California 90067 or at any adjournment or postponement of the Special
Meeting. The Special Meeting will be held to consider and such other business as may properly come
before the meeting.
</DIV>


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



<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><IMG src="v29806v2980601.jpg" alt="(SPATIALIZER LOGO)">
</DIV>


<DIV align="center" style="font-size: 11pt; margin-top: 8pt"><FONT style="font-variant: SMALL-CAPS">2025 Gateway Place, Suite&nbsp;365 West Wing</FONT> <FONT face="Wingdings">&#108;</FONT> <FONT style="font-variant: SMALL-CAPS">San Jose, CA 95110</FONT>
</DIV>

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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PROXY STATEMENT<BR>
FOR THE SPECIAL MEETING OF STOCKHOLDERS</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">To be held on ___________ __, 2007
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The enclosed proxy is being solicited by the Board of Directors (&#147;Board of Directors&#148;) of
Spatializer Audio Laboratories, Inc. (&#147;we&#148;, &#147;us&#148;, &#147;our&#148;, &#147;Spatializer&#148; or similar words in this
proxy statement) for use at the Special Meeting of Stockholders of Spatializer (&#147;Special Meeting&#148;)
to be held on&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007 at 4:00 p.m. at the offices of Reed Smith LLP, 1901
Avenue of the Stars, Suite&nbsp;700, Los Angeles, California 90067, and at any adjournments or
postponements of the Special Meeting. This proxy statement and accompanying proxy will be mailed
beginning on or about &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007, to give holders of record of Spatializer&#146;s common
stock on &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007, the record date, an opportunity to vote at the Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The purpose of the meeting will be to vote on each of the following matters:
</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="3%" nowrap align="left">1.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>To approve of the sale of all or substantially all of the assets of Spatializer and
Desper Products, Inc., a wholly owned subsidiary of Spatializer (&#147;Desper Products&#148;), to
DTS, Inc. (&#147;DTS&#148;) and its wholly owned subsidiary DTS BVI, Limited (&#147;DTS BVI&#148;) pursuant to
the terms of the Asset Purchase Agreement, dated September&nbsp;18, 2006 (the &#147;Asset Purchase
Agreement&#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="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">2.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Approval of an amendment to Spatializer&#146;s Certificate of Incorporation increasing the
authorized number of shares of common stock of Spatializer from 65,000,000 shares to
300,000,000 shares;</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="3%" nowrap align="left">3.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Authorization for the Board of Directors of Spatializer to effect a reverse stock split
Spatializer&#146;s common stock at a specific ratio to be determined by the Board of Directors
within a range from one-for-five to one-for-fifty; 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="3%" nowrap align="left">4.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Such other matters as properly be presented at the Special Meeting or any adjournment
or postponement thereof.</TD>
</TR>

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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>VOTING RIGHTS AND SOLICITATION OF PROXIES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer&#146;s common stock
is the only security entitled to vote at the Special Meeting. On
&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007, the record date for determination of stockholders entitled to vote at the
Special Meeting, there were 65,000,000 shares of common stock outstanding and no shares of
preferred stock outstanding. Each stockholder of record as of the close of business on
&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007 is entitled to one vote for each share of common stock held by such stockholder
on such date. All votes will be tabulated by the inspector of elections appointed for the meeting,
who will separately tabulate affirmative and negative votes, withheld votes, abstentions and broker
non-votes.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="104"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Quorum Required</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Delaware law and our charter documents provide that the holders of a majority of Spatializer&#146;s
common stock issued and outstanding and entitled to vote at the Special Meeting, present in person
or represented by proxy, will constitute a quorum for the transaction of business at the Special
Meeting. Abstentions, broker non-votes and votes withheld in a proxy otherwise signed and returned
will be counted as present for the purpose of determining the presence of a quorum.
</DIV>
<DIV align="left">
<A name="105"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Vote Required</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Proposal No.&nbsp;1, the proposal to approve the sale of all or substantially all of the assets of
Spatializer and Desper Products to DTS and DTS BVI pursuant to the terms of the Asset Purchase
Agreement, requires approval by holders of a majority of the shares of common stock of Spatializer
outstanding at the close of business on the record date for the Special Meeting. Abstentions and
non-votes are not affirmative votes and, therefore, will have the same effect as a vote against
Proposal No.&nbsp;1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Proposal No.&nbsp;2, the proposal to approve the amendment to Spatializer&#146;s Certificate of
Incorporation increasing the authorized number of shares of common stock from 65,000,000 shares to
300,000,000 shares, requires approval by holders of a majority of the shares of common stock of
Spatializer outstanding at the close of business on the record date for the Special Meeting.
Abstentions and non-votes are not affirmative votes and, therefore, will have the same effect as a
vote against Proposal No.&nbsp;2.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Proposal No.&nbsp;3, the proposal to approve the authorization for the Board of Directors to effect
a reverse stock split of Spatializer&#146;s common stock at a specific ratio to be determined by the
Board of Directors within a range from one-for-five to one-for-fifty, requires approval by holders
of a majority of the shares of common stock of Spatializer outstanding at the close of business on
the record date for the Special Meeting. Abstentions and non-votes are not affirmative votes and,
therefore, will have the same effect as a vote against Proposal No.&nbsp;3.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In voting, please specify your choices by marking the appropriate spaces on the enclosed
proxy, signing and dating the proxy and returning it in the accompanying envelope. If no
directions are given and the signed proxy is returned, the proxy holders will vote the shares FOR
the sale of the assets, FOR the proposed amendment of the Certificate of Incorporation, FOR the
proposed authorization for the Board of Directors to effect a reverse stock split of Spatializer&#146;s
common stock and, at their discretion, on any other matters that may properly come before the
Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In situations where brokers are prohibited from exercising discretionary authority for
beneficial owners who have not returned proxies to the brokers (so-called &#147;broker non-votes&#148;), the
affected shares will be counted for purposes of determining the presence or absence of a quorum for
the transaction of business but will not be included in the vote totals. A broker non-vote
generally occurs when a broker, bank or other nominee holding shares on your behalf returns a
signed proxy card voting on one or more matters but does not vote on a proposal because that
nominee has not received your voting instructions and lacks discretionary power to vote the shares.
Generally, brokers and other similar nominees have the discretion to vote for directors or other
routine matters, unless you instruct otherwise. Broker non-votes will count for the purpose of
determining whether a quorum is present. Broker non-votes will have the same effect as a vote
AGAINST the proposals regarding the asset sale transaction, the amendment of the Certificate of
Incorporation to increase the authorized common stock and the proposed authorization for the Board
of Directors to effect a reverse stock split of Spatializer&#146;s common stock.
</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 failure by a stockholder to return a proxy and indicate the stockholder&#146;s vote concerning
the sale of the assets, the amendment of the Certificate of Incorporation to increase the
authorized common stock and the proposed authorization for the Board of Directors to effect a reverse stock
split of Spatializer&#146;s common stock, in effect, be treated as a vote against such matter, as shares
cannot be counted as a FOR vote if a proxy is not returned.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE &#147;FOR&#148; THE SALE OF THE ASSETS OF SPATIALIZER AND
DESPER PRODUCTS.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE &#147;FOR&#148; THE AMENDMENT OF THE CERTIFICATE OF
INCORPORATION INCREASING THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK FROM 65,000,000 TO
300,000,000 SHARES.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE &#147;FOR&#148; THE AUTHORIZATION FOR THE BOARD OF DIRECTORS
TO EFFECT A REVERSE STOCK SPLIT OF SPATIALIZER&#146;S COMMON STOCK AT A SPECIFIC RATIO TO BE DETERMINED
BY THE BOARD OF DIRECTORS WITHIN A RANGE FROM ONE-FOR-FIVE TO ONE-FOR-FIFTY.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A STOCKHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A STOCKHOLDER) TO ATTEND AND
ACT ON HIS BEHALF AT THE MEETING. SUCH PERSON NEED NOT BE DESIGNATED IN THE ACCOMPANYING FORM OF
PROXY. TO EXERCISE THIS RIGHT, THE STOCKHOLDER MAY INSERT THE NAME OF THE DESIRED PERSON IN THE
BLANK SPACE PROVIDED IN THE PROXY AND STRIKE OUT THE OTHER NAME OR MAY SUBMIT ANOTHER PROXY.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THE SHARES REPRESENTED BY PROXIES IN FAVOR OF MANAGEMENT WILL BE VOTED ON ANY BALLOT (SUBJECT
TO ANY RESTRICTIONS THEY MAY CONTAIN) IN FAVOR OF THE MATTERS DESCRIBED IN THE PROXY.
</DIV>
<DIV align="left">
<A name="106"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Revocability of Proxies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any stockholder giving a proxy has the power to revoke it at any time before the proxy is
voted. In addition to revocation in any other manner permitted by law, you can deliver to the
Secretary of Spatializer a written notice bearing a date later than the proxy stating that you
would like to revoke your proxy. You can also complete, execute and deliver to the Secretary of
Spatializer a new, later-dated proxy card for the same shares, provided the new proxy is received
before voting has closed. Additionally, you can attend the Special Meeting and vote in person but
please note that your attendance alone will not revoke your proxy. Any written notice of
revocation or subsequent proxy should be delivered to Spatializer at 2060 East Avenida de Los
Arboles, # D190, Thousand Oaks, California 91362-1376, or to Proxy Service c/o Computershare
Investor Services, P.O. Box 43101, Providence, Rhode Island 02940 (the &#147;Transfer Agent&#148;) by the
last business day preceding the date of the meeting, or any adjournments thereof, or to the
chairman of the Special Meeting at or before the taking of the vote at the Special Meeting.
</DIV>
<DIV align="left">
<A name="107"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Proxy Solicitation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer will bear the entire cost of the solicitation of proxies, including preparation,
assembly and mailing of this proxy statement, the proxy and any additional material furnished to
stockholders. Proxies may be solicited by directors or officers of Spatializer personally or by
mail, telephone or telegraph, but such persons will not be specially compensated for such services.
In addition, we have retained the services of Morrow &#038; Co. a proxy solicitation firm, to solicit
proxies in connection with the
</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">meeting, who will be paid approximately $5,500 plus expenses for its
services. Copies of solicitation material will be furnished to brokerage houses, fiduciaries and
custodians which hold shares of common stock of record for beneficial owners for forwarding to such
beneficial owners. Spatializer may reimburse persons representing beneficial owners for their costs
of forwarding the solicitation material to such owners.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR MARKED PROXY PROMPTLY SO YOUR SHARES CAN BE
REPRESENTED, EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON.
</DIV>


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

<DIV align="left">
<A name="108"></A>
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion is intended to address briefly some commonly asked questions
regarding the Special Meeting and, in particular, the proposal to sell all or substantially all of
the assets of Spatializer and Desper Products. These questions and answers may not address all
questions that may be important to you as a stockholder of Spatializer. Please refer to the more
detailed information contained elsewhere in this proxy statement, the annex to this proxy
statement, and the documents referred to and incorporated by reference in this proxy statement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: What matters am I being asked to vote on at the Special Meeting?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: You are being asked to vote on the following proposals:
</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>To approve the sale of all or substantially all of the assets of Spatializer and
Desper Products to DTS and DTS BVI pursuant to the Asset Purchase Agreement;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>To approve the amendment to the Certificate of Incorporation increasing the
authorized number of shares of common stock from 65,000,000 shares to 300,000,000
shares; 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>To approve the authorization for the Board of Directors of Spatializer to effect a
reverse stock split of Spatializer&#146;s common stock at a specific ratio to be
determined by the Board of Directors within a range from one-for-five to
one-for-fifty.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Finally, you may be asked to vote on such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof. If there are not sufficient votes at
the time of the meeting to approve the asset sale, the Board of Directors may postpone the meeting
to allow time to solicit additional proxies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: How does Spatializer&#146;s Board of Directors recommend that you vote on the proposals?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: Our Board of Directors recommends that you vote:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;FOR&#148; the proposal to approve the sale of all or substantially all of the assets of
Spatializer and Desper Products to DTS and DTS BVI pursuant to the Asset Purchase Agreement;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;FOR&#148; the proposal to amend the Certificate of Incorporation increasing the authorized number
of shares of Common Stock from 65,000,000 to 300,000,000 shares;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;FOR&#148; the authorization for the Board of Directors to effect a reverse stock split of
Spatializer&#146;s common stock at a specific ratio to be determined by the Board of Directors within a
range from one-for-five to one-for-fifty.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: What is the proposed asset sale transaction?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: Spatializer is proposing to sell all or substantially all of assets and those of its wholly
owned subsidiary, Desper Products, to DTS and DTS BVI for cash in the amount of $1,000,000 pursuant
to an Asset Purchase Agreement, a copy of which is attached to this proxy statement as Annex A.
</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;Q: If, after the sale of assets of Spatializer, there are assets available for distribution,
when would such distribution take place?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: The Asset Purchase Agreement contains certain representations and warranties made by
Spatializer and Desper Products to DTS and DTS BVI which will survive for a period of six months
following the closing of the asset sale transaction and certain covenants that will last for 275
days following the closing of the asset sale transaction. The Asset Purchase Agreement requires
indemnification by Spatializer and Desper Products of DTS, DTS BVI and certain of their affiliates
for the breach of these representations and the covenants thereunder and certain other matters as
provided in the Asset Purchase Agreement. In order to ensure that there are funds available to
satisfy Spatializer&#146;s and Desper Products&#146; indemnification obligations under the Asset Purchase
Agreement, we do not intend to make any distribution of assets until at least six months following
the closing (or thereafter if any claims are pending as of the end of such six month period) and
then only after all other assets have been marshaled, if any, and liabilities and obligations paid
or otherwise provided for as required by Delaware law. Spatializer will distribute remaining
funds, if any, thereafter but does not know when that date might be or how much would be available
for distribution, if any.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: Am I entitled to appraisal rights?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: No.&nbsp;Delaware does not provide for appraisal rights in asset sales transactions unless a
corporation&#146;s certificate of incorporation expressly provides for those rights. Our certificate of
incorporation does not provide for appraisal rights under these circumstances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: What factors did our Board of Directors consider in making its recommendation regarding the
asset sale transaction proposal?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: In making its recommendation, our Board of Directors took into account, among other things:
the consideration to be received by Spatializer; the poor business outlook for Spatializer; the
current and future competitive landscape in our industry; the weak financial viability of
Spatializer; the lack of full-time management; the status and history of discussions with other
potential bidders and our auction process; and the terms of the Asset Purchase Agreement. See &#147;Sale
of All or Substantially All of the Assets of Spatializer and Desper Products &#151; Recommendation of
our Board of Directors and Reasons for the Sale of Assets&#148;
commencing on page 18.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: What vote of stockholders is required for each proposal at the Special Meeting?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: The proposal regarding the sale of assets requires the affirmative vote of stockholders
holding at least a majority of the shares of our common stock outstanding at the close of business
on the record date. The proposal regarding the proposed amendment to the Certificate of
Incorporation increasing the number of authorized shares of common stock requires the affirmative
vote of stockholders holding at least a majority of the shares of our common stock outstanding at
the close of business on the record date. The proposal regarding the authorization for the Board
of Directors to effect the reverse stock split requires the affirmative vote of stockholders
holding at least a majority of the shares of our common stock outstanding at the close of business
on the record date. See &#147;Voting Rights and Solicitation of
Proxies&nbsp;&#151; Required Vote.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: Who is entitled to vote at the Special Meeting?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: Only stockholders
of record as of the close of business on &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;
&#95;&#95;&#95;, 2007, the record
date for the Special Meeting, are entitled to receive notice of the meeting and to vote the shares
of our common stock that they held at that time at the meeting, or at any adjournments or
postponements of the
</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">meeting. On the record date, approximately 65,000,000 shares of our common stock, held by
approximately &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95; stockholders of record, were outstanding and entitled to vote. No preferred
stock is currently issued or outstanding. You may vote all shares you owned as of the record date.
You are entitled to one vote per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: How do I cast a vote?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: If your shares are registered in your name, you may vote by returning a signed proxy card
or voting in person at the Special Meeting. Proxies submitted by mail must be received prior to
the opening of the polls. To vote by mail, mark, sign and date the proxy card and return it in the
postage-paid envelope provided.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If your shares are held in &#147;street name&#148; through a broker or bank, you may vote by completing
and returning the voting form provided by your broker or bank, or by telephone through your broker
or bank if such a service is provided. To vote by telephone through your broker or bank, you
should follow the instructions on the voting form provided by your broker or bank.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: May I vote in person?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: Yes. If your shares are not held in &#147;street name&#148; through a broker or bank you may attend
the Special Meeting and vote your shares in person at the Special Meeting by giving us a signed
proxy card or ballot before voting is closed, rather than signing and returning your proxy card via
mail. If you choose to vote in person, please bring proof of identification with you to the Special
Meeting. Even if you plan to attend the Special Meeting, we recommend that you vote your shares in
advance as described above, so that your vote will be counted if you later decide not to attend.
If your shares are held in &#147;street name,&#148; you must get a proxy from your broker or bank in order to
attend the Special Meeting and vote. In order to do this, you should contact your broker or bank.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: What happens if I do not return my proxy card or attend the Special Meeting and vote in
person?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: Approval of the asset sale transaction, the proposed amendment to the Certificate of
Incorporation increasing the number of authorized common stock and the proposed authorization for
the Board of Directors to effect the reverse stock split requires the affirmative vote of the
holders of a majority of the shares of our common stock outstanding at the close of business on the
record date. Therefore, if you do not return your proxy card or attend the Special Meeting and vote
in person, it will have the same effect as if you voted against adoption of each of the proposals.
See &#147;Voting Rights and Solicitation of Proxies&nbsp;&#151; Votes Required&#148; above for a description of the vote
required for each proposal included in this proxy statement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: If my broker holds my shares in &#147;street name,&#148; will my broker vote my shares for me?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: <B>Your broker will not be able to vote your shares without instructions from you. </B>If you do
not instruct your broker how to vote and you are in favor of the asset sale transaction, your
broker <B>cannot </B>vote your shares and your votes will then be deemed a non-vote with the effect of a
vote against the asset transaction. Thus, it is imperative that you vote your shares or instruct
your broker how to vote your shares at the Special Meeting, especially if you are in favor of the
asset sale transaction. You should instruct your broker to vote your shares following the
procedure provided by your broker. Without instructions, your shares will not be voted on the
proposal regarding the sale of assets, the proposed amendment to the Certificate of Incorporation
increasing the number of authorized shares of common stock, and the proposal authorizing the Board
of Directors to effect the reverse stock split, which will
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">have the same effect as if you voted against those proposals. See &#147;Voting Rights and
Solicitation of Proxies&nbsp;&#151; Vote Required&#148; above for a description of the effect of broker non-votes
on the other proposals included in this proxy statement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: May I change my vote after I have mailed my signed proxy card?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: Yes. You may change your vote at any time before your proxy card is voted at the Special
Meeting. You can do this in one of three ways:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;First, you can deliver to the Secretary of Spatializer a written notice bearing a date later
than the proxy stating that you would like to revoke your proxy.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Second, you can complete, execute and deliver to the Secretary of Spatializer a new,
later-dated proxy card for the same shares, provided the new proxy is received before voting has
closed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Third, you can attend the Special Meeting and vote in person. Your attendance alone will not
revoke your proxy. Any written notice of revocation or subsequent proxy should be delivered to
Spatializer at 2060 East Avenida de Los Arboles, # D190, Thousand Oaks, California 91362-1376, or
to the Transfer Agent at Proxy Service c/o Computershare Investor Services, P.O. Box 43101,
Providence, Rhode Island 02940 by the last business day preceding the date of the meeting, or any
adjournments thereof, or to the chairman of the meeting, our Chairman of the Board of Directors, at
or before the taking of the vote at the Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If you have instructed a broker to vote your shares, you must follow directions received from
your broker to change those instructions. Your last vote before voting is closed at the Special
Meeting is the vote that will be counted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: What is a quorum?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: A quorum of the holders of the outstanding shares of our common stock must be present for
the Special Meeting to be held. A quorum is present if the holders of a majority of the issued and
outstanding shares of our common stock entitled to be voted at the Special Meeting are present at
the Special Meeting, either in person or by proxy. Abstentions, broker non-votes, and votes
withheld in a proxy otherwise signed and returned will be counted as present for the purpose of
determining the presence of a quorum.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: How are votes counted?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: For the proposal relating to the approval of the sale of assets, the proposed amendment of
the Certificate of Incorporation or the proposed authorization for the Board of Directors to effect
the proposed reverse stock split, you may vote &#147;FOR,&#148; &#147;AGAINST&#148; or &#147;ABSTAIN.&#148; If you ABSTAIN, it
has the same effect as if you voted against that proposal. Approval of each of the proposal to
sell all or substantially all of the assets of Spatializer and Desper Products, the proposed
amendment of the Certificate of Incorporation and the authorization for the Board of Directors to
effect the reverse stock split requires the affirmative vote of holders of our common stock holding
at least a majority of the shares of our common stock outstanding at the close of business on the
record date.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If you sign your proxy card without indicating your vote, your shares will be voted &#147;FOR&#148; the
sale of the assets of Spatializer and Desper Products, &#147;FOR&#148; the proposed amendment of the
Certificate of Incorporation, &#147;FOR&#148; the authorization for the Board of Directors to effect the
reverse stock
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">split and in accordance with the recommendations of Spatializer&#146;s Board of Directors on any
other matters properly brought before the Special Meeting for a vote.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A broker non-vote generally occurs when a broker, bank or other nominee holding shares on your
behalf returns a signed proxy card voting on one or more matters but does not vote on a proposal
because such nominee has not received your voting instructions and lacks discretionary power to
vote the shares. Generally, brokers and other similar nominees have the discretion to vote for
directors or other routine matters, unless you instruct otherwise. Broker non-votes will count for
the purpose of determining whether a quorum is present. Broker non-votes will have the same effect
as a vote <B>AGAINST </B>the proposals regarding the asset sale transaction.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: Who will bear the cost of this solicitation?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: Spatializer shall bear the entire cost of the solicitation of proxies, including
preparation, assembly and mailing of this proxy statement, the proxy and any additional material
furnished to stockholders. Proxies may be solicited by directors or officers of Spatializer
personally or by mail, telephone or telegraph, but such persons will not be specially compensated
for such services. In addition, we have retained the services of Morrow &#038; Co., a proxy
solicitation firm, to solicit proxies in connection with the meeting, who will be paid
approximately $5,500 for its services plus reimbursement of expenses. Copies of solicitation
material will be furnished to brokerage houses, fiduciaries and custodians which hold shares of
common stock of record for beneficial owners for forwarding to such beneficial owners. Spatializer
may reimburse persons representing beneficial owners for their costs of forwarding the solicitation
material to such owners.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: Should I send in my stock certificates?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: No.&nbsp;Unlike a merger transaction, you will not need to, and you should not, surrender your
stock certificates in connection with the asset sales transaction.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: What do I need to do now?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: We urge you to read this proxy statement carefully and to consider how the sale of assets
of Spatializer and Desper Products, the proposed amendment to the Certificate of Incorporation
increasing the authorized number of shares of common stock and the proposed authorization for the
Board of Directors to effect a reverse stock split affects you. Then mark your proxy and mail your
completed, dated and signed proxy card in the enclosed return envelope as soon as possible so that
your shares can be voted at the Special Meeting of our stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Q: Who can help answer my questions?
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A: If you would like additional copies, without charge, of this proxy statement or if you have
questions about the proposed sale of assets, the proposed amendment to the Certificate of
Incorporation increasing the authorized number of shares of common stock and the proposed
authorization for the Board of Directors to effect a reverse stock split, including the procedures
for voting your shares, you should contact:
</DIV>
<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Henry R. Mandell<BR>
Spatializer Audio Laboratories, Inc.<BR>
henry@spatializer.com</DIV>

<DIV align="left" style="font-size: 10pt; margin-left: 3%; margin-top: 6pt">Morrow &#038; Co.<BR>
(800)&nbsp;607-0088
</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;<B>NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORY AGENCY HAS
APPROVED OR DISAPPROVED THE SALE OF ASSETS TRANSACTION, PASSED UPON THE MERITS OR FAIRNESS OF THE
SALE OF ASSETS TRANSACTION, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THIS
PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.</B>
</DIV>
<DIV align="left">
<A name="109"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This proxy statement contains forward-looking statements within the meaning of Section&nbsp;21E of
the Securities Exchange Act of 1934, as amended, and Section&nbsp;27A of the Securities Act of 1933, as
amended, reflecting management&#146;s current expectations. Examples of such forward-looking statements
include our expectations with respect to our future prospects and strategy. Although we believe
that our expectations are based upon reasonable assumptions, there can be no assurances that our
financial goals or any transactions described herein will be realized. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such forward-looking
statements. Numerous factors may affect our actual results and may cause results to differ
materially from those expressed in forward-looking statements made by or on behalf of our company.
For this purpose, any statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the words, &#147;believes,&#148;
&#147;anticipates,&#148; &#147;plans,&#148; &#147;expects&#148; and similar expressions are intended to identify forward-looking
statements. We assume no obligation to update the forward-looking information to reflect actual
results or changes in the factors affecting such forward-looking information.
</DIV>


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</DIV>


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

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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SALE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS<BR>
OF SPATIALIZER AND DESPER PRODUCTS</B>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>General</B>
</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 2060 East Avenida de Los
Arboles, #D190, Thousand Oaks, California 91362-1376.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Desper Products, a wholly owned subsidiary of Spatializer, developed a suite of proprietary
advanced audio signal processing technologies for the entire spectrum of applications falling under
the general category of virtual audio and 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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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">
<A name="112"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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;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;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 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 April&nbsp;2002, the Board of Directors created a Special Committee to review certain
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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. Although unexpected
sources of income have been received, at the time, 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 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 of
Directors 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 of Directors 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 of
Directors. 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>

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<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. On April&nbsp;19, 2007, the agreement was extended to June&nbsp;30, 2008.
</DIV>

<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
</DIV>

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


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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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 substantially in the form attached hereto as
Annex A
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">and other ancillary documents proposed to be attached as exhibits and schedules to 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. The Board of Directors
also recommended that the stockholders of Spatializer vote in favor of the sale of assets
transaction. 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. The Board of
Directors also recommended that the stockholders of Spatializer vote in favor of the sale of assets
transaction.
</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 Desper Products was presented with and carefully
considered a draft of the Asset Purchase Agreement substantially in the form attached hereto as
Annex A and other ancillary documents proposed to be attached as exhibits and schedules to the
Asset Purchase Agreement. After due consideration of all of the foregoing, the Board of Directors
of Desper Products, by a written consent of sole director dated August&nbsp;28, 2006, authorized the
execution and delivery on behalf of Desper Products of the Asset Purchase Agreement providing for
the sale to DTS and DTS BVI of all or substantially all of the assets of Desper Products.
</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 stockholder of Desper Products, executed a
written consent of sole stockholder 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 in the
form attached hereto as Annex A.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On November&nbsp;30, 2006, Spatializer solicited a proxy statement to approve the asset sale
transaction at the Annual Meeting of our stockholders. On January&nbsp;24, 2007, the Annual Meeting of
Stockholders of Spatializer (the &#147;Annual Meeting&#148;) was held and the Annual Meeting was adjourned by
the vote of a majority of the shares present at the meeting. The Annual Meeting reconvened on
February&nbsp;21, 2007. While the shares voted at the Annual Meeting were overwhelmingly in favor of the
proposed sale of assets to DTS and DTS BVI the proposal was not approved because the required vote
needed to pass such proposal was not obtained.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On April&nbsp;25, 2007, Spatializer consummated the sale of 16,236,615 shares of our common stock
to three investors, Jay A. Gottlieb, Greggory Schneider and Helaine Kaplan (collectively, the
&#147;Investors&#148;), for an aggregate purchase price of $162,366.15 pursuant to a Common Stock Purchase
Agreement (&#147;Stock Purchase Agreement&#148;) among the Investors and Spatializer. In the event the
transactions contemplated in the Asset Purchase Agreement are consummated, including receipt of
stockholder approval, Spatializer will receive additional consideration in the amount of $259,786.
There is no voting agreement between Spatializer and the Investors to vote in favor of the
transactions contemplated in the Asset Purchase Agreement. However, the Investors, based on the
Schedules 13D filed with the Securities and Exchange Commission on April&nbsp;30, 2007, would be able to
vote 23,328,115 shares or 35.9% of the outstanding common stock of Spatializer in favor of the sale
of substantially all of the assets of Spatializer.
</DIV>


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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Recommendation of our Board of Directors and Reasons for the Sale of Assets</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Board of Directors unanimously recommends that you vote &#147;FOR&#148; the sale of all or
substantially all of the assets of Spatializer and Desper Products to DTS and DTS BVI. In approving
the Asset Purchase Agreement, our Board of Directors considered a number of factors, including the
following:
</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the anticipated inability for Spatializer to remain liquid in the near term or to
continue operations;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the business, competitive position, strategy and prospects of Spatializer, the fact
that we have not been successful in creating a strategy or value proposition that resonates with
potential licensees, the competitive position of current and likely competitors in the industry in
which we compete, and current industry, economic, and market conditions;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the conclusion that continuing further licensing efforts as a going concern would not
result in greater stockholder value;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the resignation of the two directors in December&nbsp;2005, all full-time Spatializer
employees, including the former CEO and Principal Engineer, having successfully found other
employment during 2006 and the inability to attract new management under the aforementioned
circumstances;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the fact that our open auction for the sale of assets or perpetual licenses and
discussions with other potential acquirers of Spatializer in both 2003 and 2006 both generated
limited interest and, in 2006, DTS&#146;s proposal was the superior offer to acquire us;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the value of the consideration to be received by our stockholders and the fact that
the consideration would be paid in cash, which provides certainty and immediate value to
Spatializer; 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>this is the best offer received by Spatializer through the efforts of SEG.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Board of Directors also considered a variety of risks and other potentially negative
factors applicable to the sale of assets, including the following:
</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the fact that, following sale of our assets, we will be unable to operate as a going
business and our stockholders will forego any future increase in our value that might result from
our possible growth;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the risks and contingencies related to the announcement and pendency of the sale of
assets, including the impact of the asset sale on our customers and our relationships with other
third parties, including the potential negative reaction of these parties to the fact that we would
be selling our assets to DTS;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the conditions to DTS&#146;s and DTS BVI&#146;s obligation to complete the asset sale
transaction and the right of DTS to terminate the Asset Purchase Agreement under certain
circumstances, including for breaches by us of our representations, warranties, covenants and
agreements in the Asset Purchase Agreement;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the risk that the asset sale might not receive necessary stockholder approval; 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the fact that DTS was not willing to structure the sale transaction as a merger or
stock acquisition.</TD>
</TR>

</TABLE>
</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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Board of Directors did not assign any particular weight or rank to any of the positive or
potentially negative factors or risks discussed in this section, and our Board of Directors
carefully considered all of these factors as a whole in reaching its determination and
recommendation.
</DIV>
<DIV align="left">
<A name="114"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Effective Time of the Sale of Assets</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It is anticipated that, assuming approval of the asset sale transaction by the stockholders of
Spatializer, the transaction will close as soon thereafter as all conditions to closing have
occurred. If the closing does not occur on or before June&nbsp;30, 2007, the asset sale transaction may
be terminated provided the party electing to terminate is not in breach of any representation,
warranty or covenant of that party under the Asset Purchase Agreement.
</DIV>
<DIV align="left">
<A name="115"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Material Federal Income Tax Consequences</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion summarizes the material U.S. federal income tax consequences (i)&nbsp;to
Spatializer as a result of the sale of assets to DTS and DTS BVI pursuant to the Asset Purchase
Agreement, and (ii)&nbsp;to the holders of Spatializer&#146;s common stock who are United States holders (as
hereafter defined) as a result of the receipt of one or more distributions from Spatializer of the
net cash proceeds from such sale. For these purposes, a &#147;United States holder&#148; is a
stockholder that is: (i)&nbsp;a citizen or resident of the United States, (ii)&nbsp;a domestic corporation,
(iii)&nbsp;an estate whose income is subject to United States federal income tax regardless of its
source, or (iv)&nbsp;a trust if a United States court can exercise primary supervision over the trust&#146;s
administration and one or more United States persons are authorized to control all substantial
decisions of the trust, or if the trust has a valid election in effect under applicable U.S.
Treasury Regulations to be treated as a United States person. For purposes of this tax discussion,
all references to Spatializer means Spatializer and Desper Products on a consolidated basis. This
discussion is based on the Internal Revenue Code of 1986, as amended (the &#147;Code&#148;), Treasury
Regulations promulgated under the Code, Internal Revenue Service rulings, judicial decisions and
administrative rulings as of the date of this proxy statement, all of which are subject to change
or differing interpretations, including changes and interpretations with retroactive effect. No
assurance can be given that the tax treatment described in this proxy statement will remain
unchanged at the time of such distributions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This discussion is for general information only and may not address all tax considerations
that may be significant to a holder of our common stock. It does not address all U.S. federal
income tax consequences or any state, local or foreign tax consequences of Spatializer&#146;s sale of
assets to DTS and DTS BVI. Stockholders subject to special treatment under certain federal income
tax laws, including dealers in securities or foreign currency, tax-exempt entities, non-U.S.
stockholders, banks, thrifts, insurance companies, mutual funds, persons that hold shares of our
stock as part of a &#147;straddle,&#148; a &#147;hedge,&#148; a &#147;constructive sale&#148; transaction or a &#147;conversion
transaction,&#148; persons that have &#147;functional currency&#148; other than the U.S. dollar, investors in
pass-through entities, stockholders subject to the alternative minimum tax, and persons who
acquired their shares of our stock upon exercise of stock options or in other compensatory
transactions may be subject to special rules not discussed below. This discussion also does not
address the U.S. federal income tax consequences to stockholders who do not hold their shares of
our stock as a capital asset. Stockholders are urged to consult their own tax advisors to
determine the particular tax consequences, including the application of any state, local or
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This discussion has no binding effect on the Internal Revenue Service or the courts and
assumes that the sale of assets will be consummated in accordance with the Asset Purchase Agreement
and that the net cash proceeds of such sale, if any, will distributed to the stockholders as
described herein. No ruling has been requested from the Internal Revenue Service, nor will we seek
an opinion of counsel, with respect to the anticipated tax consequences of the sale of assets and
the distribution, if any, of the net cash proceeds to the stockholders. If any of the anticipated
tax consequences described herein prove to be
</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 align="left" style="font-size: 10pt; margin-top: 6pt">incorrect, the result could be an increased tax liability at the corporate and/or stockholder
level, thus reducing the benefits to us and our stockholders from the sale of assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Tax Consequences to Spatializer</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Tax consequences to Spatializer of the sale of assets to DTS and DTS BVI</I>. The purchase price
that Spatializer receives for substantially all its assets, plus the amount of any liabilities
assumed by DTS and DTS BVI that are required to be capitalized for tax purposes, will be allocated
among all of Spatializer&#146;s assets that are sold to DTS and DTS BVI. Spatializer will recognize
gain or loss on each of the assets sold in an amount equal to the difference between the sales
price allocated to that asset and Spatializer&#146;s adjusted tax basis in that asset.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not believe the sale of assets will result in any federal corporate income tax liability
(including any alternative minimum tax liability) because we anticipate that any taxable gain from
the sale of a particular asset to DTS and DTS BVI will be offset for income tax purposes either by
losses that Spatializer will recognize from the sale of other assets to DTS and DTS BVI, or by
Spatializer&#146;s current and prior years&#146; net operating losses on a consolidated basis. However, the
Internal Revenue Service may disagree with our determination of the amount of Spatializer&#146;s net
operating loss carryforward available to offset all of such gain or Spatializer&#146;s allocation of the
purchase price among the assets sold, either of which may increase Spatializer&#146;s income tax
liability as a result of the sale of assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Tax consequences to Spatializer after consummation of the sale of assets. </I>After the
consummation of the sale of assets to DTS and DTS BVI, Spatializer will continue to be subject to
federal income taxation on its taxable income, if any, such as interest income, gain from the sale
of any remaining assets or income from the collection of accounts receivables not sold to DTS and
DTS BVI. Spatializer will not recognize any income or loss on any distribution it makes to
stockholders of the net cash proceeds from the sale to DTS and DTS BVI. In addition, although we
currently do not intend to make distributions of property other than cash to our stockholders, in
the event we do make a distribution of property to our stockholders, Spatializer may recognize gain
upon such a distribution. In such case, Spatializer will be treated as though it sold the
distributed property to the distributee-stockholders for its fair market value on the date of the
distribution. Management believes that Spatializer has available a sufficient amount of its net
operating loss carryforward on a consolidated basis to offset any income or gain recognized by
Spatializer as a result of a distribution of property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Tax Consequences to our Stockholders</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amounts received by a stockholder as a result of one or more distributions from Spatializer of
the net cash proceeds from the sale of Spatializer&#146;s and Desper Products&#146; assets to DTS and DTS BVI
or the fair market value of any property distributed to a stockholder will be taxed as a dividend
to the extent of the stockholder&#146;s ratable share of Spatializer&#146;s current and accumulated earnings
and profits determined on a consolidated basis. Any amounts received in excess of the
stockholder&#146;s ratable share of Spatializer&#146;s current and accumulated earnings and profits will be
used to reduce the stockholder&#146;s adjusted tax basis in his, her or its shares of common stock of
Spatializer. If amounts so received have reduced a stockholder&#146;s adjusted tax basis in his, her or
its shares of common stock to zero, any amounts received in excess of basis will be taxed to the
stockholder as capital gain. If the stockholder&#146;s holding period for his, her or its shares of
common stock of Spatializer is longer than one year as of the date of the distribution, the gain
will be taxed as long-term capital gain; otherwise, the gain will
constitute short-term capital gain. Certain U.S. stockholders, including individuals, are
eligible for preferential rates of tax in respect of long-term capital gains. If a stockholder
acquired different blocks of common stock of Spatializer at different times and at different
prices, the stockholder must determine his, her or its adjusted tax basis and holding period
separately with respect to each block of common stock for purposes of calculating the amount of
taxable gain and the applicable tax rate.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->-20-<!-- /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;After the close of our taxable year, we will provide stockholders and the Internal Revenue
Service with a statement of the amount of cash, if any, distributed to each stockholder during the
year as a payment and, if any property was distributed, our best estimate of the value of such
property.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>THE FOREGOING SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES IS INCLUDED FOR GENERAL
INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE TO ANY STOCKHOLDER. EACH STOCKHOLDER
IS URGED TO CONSULT A TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE SALE OF ASSETS AND THE
PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF AMOUNTS RECEIVED AS A RESULT OF ONE OR MORE
DISTRIBUTIONS OF THE NET SALES PROCEEDS OF SAID SALE, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN LAWS AND CHANGES IN APPLICABLE TAX LAWS.</B>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->-21-<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="116"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>MARKET PRICE AND DIVIDEND DATA</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our common stock was listed and commenced trading on the NASDAQ SmallCap market on August&nbsp;21,
1995 under the symbol &#147;SPAZ.OB&#148;. In January&nbsp;1999, the common stock was delisted by the NASDAQ
SmallCap Market due to our inability to maintain listing requirements. Our common stock
immediately commenced trading on the OTC Bulletin Board under the same symbol. The following table
sets forth the high and low bid price of our common stock as reported on the OTC Bulletin Board for
fiscal years 2005, 2006 and the first quarter of fiscal 2007. The quotations listed below reflect
interim dealer prices without retail mark-up, mark-down or commission and may not represent actual
transactions.
</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 nowrap align="left" style="border-bottom: 1px solid #000000"><B>Period:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High (U.S. $)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low (U.S. $)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- 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">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.06</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</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;On April &#95;&#95;&#95;, 2007, the closing price reported by the OTC Bulletin Board was U.S. $0.&#95;&#95;&#95;.
Stockholders are urged to obtain current market prices for our common stock. Computershare Investor
Services, LLC is our transfer agent and registrar.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2005, we issued shares of our common stock in connection with the mandatory
conversion of our Series&nbsp;B-1 Redeemable Convertible Preferred Stock, par value $.01 per share,
which transaction was previously described and included in our Form 8-K filed with the SEC on
December&nbsp;30, 2005 (with date of earliest event reported of December&nbsp;29, 2005). There were no sales
of unregistered securities by Spatializer during the year ended December&nbsp;31, 2006 nor any
repurchases by Spatializer of any of our common stock during the fourth quarter of 2006 or the
first quarter of 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To our knowledge, there were approximately &#95;&#95;&#95;holders of record of the stock of Spatializer as
of &#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;&#95;, 2007. Our transfer agent has indicated that beneficial ownership is in excess of &#95;&#95;&#95;
stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not paid any cash dividends on our common stock. While our policy has been to retain
earnings, if any, for use in operations and in the development of our business, if the sale of
assets contemplated in this proxy statement is approved and effectuated, all remaining funds, other
than $100,000 cash for working capital, and assets available for distribution, if any, will be
distributed to stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer did not repurchase any of its equity securities during the first quarter of fiscal
year 2007.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->-22-<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="117"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PROPOSAL
NO.&nbsp;1<BR>
APPROVAL OF SALE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF<BR>
SPATIALIZER AND DESPER PRODUCTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following sets forth a summary of the terms of the proposed sale of all or substantially
all of the assets of Spatializer and its wholly owned subsidiary, Desper Products. The following
is qualified in its entirety by reference to the Asset Purchase Agreement attached hereto as Annex
A. All stockholders are urged to read the Asset Purchase Agreement carefully.
</DIV>
<DIV align="left">
<A name="119"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer, Desper Products, DTS and DTS BVI, entered into an Asset Purchase Agreement dated
as of September&nbsp;18, 2006.
</DIV>
<DIV align="left">
<A name="120"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Assets to be Acquired; Liabilities</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The agreement provides that DTS and DTS BVI will acquire all of our and Desper Products&#146;
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 our and Desper
Products&#146; business. Those assets include intellectual property, certain contracts proposed to be
assumed by DTS and DTS BVI, accounts receivable originating from those assumed contracts (subject
to the payment to Spatializer by DTS of a pro rata portion of the quarterly royalties received
during the quarter in which the closing of the asset transaction occurs) and records, reports and
databases relating to certain intellectual property. Neither DTS nor DTS BVI is acquiring our cash
or cash equivalents or any accounts receivable not originating from the assumed contracts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Except for certain specified liabilities, neither DTS nor DTS BVI will be assuming any
liabilities of Spatializer or Desper Products, other than the obligations from and after the
closing under the agreements assumed by DTS and DTS BVI.
</DIV>
<DIV align="left">
<A name="121"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At the closing of the sale transaction, DTS and DTS BVI will pay Spatializer cash in the
amount of $1,000,000 and assume the liabilities and obligations described above.
</DIV>
<DIV align="left">
<A name="122"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer and Desper Products made certain representations and warranties to DTS and DTS BVI
regarding, among other things:
</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our respective corporate authority to execute and deliver the Asset Purchase
Agreement;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>due execution and delivery of the Asset Purchase Agreement;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>enforceability of the Asset Purchase Agreement (except 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 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);</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->-23-<!-- /Folio -->
</DIV>

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

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

<DIV 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our respective corporate existence, organization and similar corporate matters;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our respective subsidiaries;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>required consents, approvals, orders and authorizations of, and notices to,
governmental authorities and third parties relating to, the Asset Purchase Agreement and related
matters;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>documents that Spatializer has filed with the Securities and Exchange Commission, the
accuracy of certain specified financial statements and other information contained in documents
Spatializer filed with the Securities and Exchange Commission since January&nbsp;1, 2004, and its
compliance with the Sarbanes-Oxley Act of 2002 and other matters with respect to its internal
controls and procedures;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>absence of certain changes since December&nbsp;31, 2005 to the assets being transferred;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>absence of dividends, stock splits, combinations or reclassifications of capital
stock, certain employee-related events, changes in financial or tax accounting methods, tax
elections or any licensing or other agreement with regard to material intellectual property or
rights thereto related to us since December&nbsp;31, 2005;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>title to the assets being transferred;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>environmental matters;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>certain of our contracts;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any material adverse changes in our business relationship with certain of our
customers;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the absence of pending and threatened litigation involving either Spatializer or
Desper 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our compliance with applicable laws, judgments, and permits;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>employee benefit plans;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>tax matters with respect to Spatializer;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our intellectual property;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our engagement of, and payment of fees to, brokers, investment bankers, and financial
advisors, and fees payable by us to other advisors in connection with the transaction contemplated
by the Asset Purchase Agreement;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>solvency; 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>accuracy of information supplied by us in connection with this proxy statement.</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="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>DTS and DTS BVI made certain representations and warranties in the Asset Purchase Agreement
relating to, among other things:</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>its corporate organization and similar corporate matters;</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->-24-<!-- /Folio -->
</DIV>

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

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

<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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>authorization, execution, delivery, performance, and enforceability of, and required
consents, approvals, orders, and authorizations of, and notices to, governmental authorities and
third parties relating to, the Asset Purchase Agreement and related matters;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>its engagement of brokers, investment bankers or financial advisors; 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>accuracy of information supplied by DTS and DTS BVI in connection with this proxy
statement.</TD>
</TR>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Covenants of Spatializer and Desper Products</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each of Spatializer and Desper Products has agreed to a number of covenants that it must
comply with between the date of the Asset Purchase Agreement and the date of the closing of the
asset sale or the termination of the Asset Purchase Agreement. Those covenants include, without
limitation, the following:
</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>neither Spatializer nor Desper Products will (i)&nbsp;modify, amend or terminate any of its
material contracts or waive, release or assign any material rights or claims, (ii)&nbsp;enter into,
terminate or amend any material contract, (iii)&nbsp;incur any material liability, (iv)&nbsp;permit the
assets to be sold to become subject to any encumbrance or (v)&nbsp;sell, transfer, lease, license or
otherwise dispose of any of those assets or our intellectual property;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>neither Spatializer nor Desper Products will adopt a plan of complete or partial
liquidation or dissolution. However, Spatializer may adopt a plan of dissolution in accordance
with the Delaware General Corporation Law (&#147;DGCL&#148;) if and only if (x)&nbsp;such plan provides for the
consummation of the asset sale transaction in accordance with the terms of the Asset Purchase
Agreement; (y)&nbsp;such plan is adopted in accordance with the DGCL; and (z)&nbsp;Spatializer does not adopt
a plan of distribution or make any distribution on or prior to the 213th day after the date of the
closing of the asset sale transaction;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>neither Spatializer nor Desper Products will adopt a plan of complete or partial
merger, consolidation, restructuring, recapitalization or other reorganization; provided, that
Spatializer may adopt a plan of merger for the sole purpose of the sale of Spatializer as a
corporate shell and without any of the assets to be sold to DTS and DTS BVI, provided such plan
includes the consummation of the transactions in accordance with the terms of the Asset Purchase
Agreement and Spatializer demonstrates that such plan will not delay either the solicitation of
proxies in favor of, nor the consummation, of the transactions contemplated by the Asset Purchase
Agreement;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>each of Spatializer and Desper Products will file, on a timely basis, with appropriate
taxing authorities all tax returns required to be filed by it prior to the closing date and timely
pay all taxes related thereto;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>neither Spatializer nor Desper Products will 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 the agreement not being satisfied, or would make any representation or warranty of either
Spatializer or Desper Products contained in the Asset Purchase Agreement inaccurate in any respect
at, or as of any time prior to, the closing date, or that would materially impair the ability of
DTS, DTS BVI, Spatializer or Desper Products to consummate the closing in accordance with the terms
of the Asset Purchase Agreement or materially delay the consummation of the transactions
contemplated by the Asset Purchase Agreement; and</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->-25-<!-- /Folio -->
</DIV>

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

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

<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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>neither Spatializer nor Desper Products will 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.</TD>
</TR>

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

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>No Solicitation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each of Spatializer and Desper Products agreed that neither it nor any affiliate of it would,
directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations
with, or provide any information to, any person or group (other than DTS or any of its affiliates
or representatives) concerning any acquisition proposal. Furthermore, Spatializer agreed not to
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 the Asset Purchase
Agreement, Spatializer, Desper Products and their representatives were required to immediately
cease any existing activities, discussions or negotiations with any parties conducted with respect
to any of the foregoing and to request or demand the return of all documents, analyses, financial
statements, projections, descriptions and other data previously furnished to others in connection
with efforts to sell the assets to be sold to DTS and DTS BVI. Spatializer must immediately notify
DTS of the existence of any proposal or inquiry received by Spatializer, Desper Products or their
representatives. Additionally, Spatializer is required to immediately communicate to DTS the terms
of any proposal or inquiry which may be received (and provide to DTS copies of any written
materials received by Spatializer 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;Neither the Board of Directors of Spatializer nor Desper Products is permitted to (i)&nbsp;withdraw
or modify, or propose to withdraw or modify, in a manner adverse to DTS and DTS BVI, the approval
by its Board of Directors of the Asset Purchase Agreement or the transactions contemplated thereby
or the recommendation to the stockholders of Spatializer, (ii)&nbsp;approve or recommend or propose to
approve or recommend, any acquisition proposal or (iii)&nbsp;authorize Spatializer or Desper Products to
enter into any agreement (other than pursuant to the Asset Purchase Agreement) with respect to any
acquisition proposal.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;However, Spatializer may engage in discussions with third parties for the sole purpose of the
sale of Spatializer as a corporate shell and without any of the assets to be sold to DTS or DTS BVI
provided the terms would include the consummation of the asset sale transaction in accordance with
the terms of the Asset Purchase Agreement and Spatializer demonstrates that such transaction will
not delay either the solicitation of proxies in favor of the transactions, or the consummation of
the transactions, contemplated in the Asset Purchase Agreement.
</DIV>
<DIV align="left">
<A name="125"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Asset Purchase Agreement contains a number of conditions to the obligations of the parties
to consummate the asset sale transaction. Neither party is obligated to close if the approval of
the stockholders of Spatializer is not obtained at the Special Meeting or any postponement,
adjournment or continuation thereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Neither DTS nor DTS BVI will be required to purchase the assets of Spatializer or Desper
Products pursuant to the Asset Purchase Agreement under certain specified circumstances. For
example, DTS and DTS BVI will not be required to purchase the assets of Spatializer or Desper
Products if there is any threatened or pending suit, action or proceeding by any governmental
entity affecting DTS&#146;s or DTS BVI&#146;s ability to exploit the assets proposed to be sold or seeking to
preclude consummation of the asset sale transaction. Furthermore, Spatializer and Desper Products
must have obtained all consents and approvals of any person necessary to the consummation of the
closing. If any material adverse change (or
</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">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 Spatializer and Desper Products taken as a whole or on DTS&#146;s or DTS
BVI&#146;s ability to exploit the assets proposed to be sold has occurred, DTS and DTS BVI will have the
right not to consummate the asset sale transaction. All of the representations and warranties of
Spatializer set forth in the Asset Purchase Agreement that are qualified as to materiality must be
true and complete in all respects and any such representations and warranties that are not so
qualified must be true and complete in all material respects, in each case as of the date of the
Asset Purchase Agreement and as of the closing date. Additionally, neither Spatializer nor Desper
Products shall have failed to perform in any material respect any material obligation or to comply
in any material respect with any of its respective agreement or covenant to be performed or
complied with by it under the Asset Purchase Agreement. As the foregoing conditions are for the
sole benefit of DTS and DTS BVI, DTS may waive, in whole or in part, any of those conditions at any
time and from time to time in its sole discretion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The obligations of Spatializer to consummate the sale of its assets pursuant to the Asset
Purchase Agreement are also subject to the satisfaction on or prior to the closing date of certain
conditions, including that all of the representations and warranties of DTS and DTS BVI set forth
in the Asset Purchase Agreement that are qualified as to materiality are true and complete in all
respects and any such representations and warranties that are not so qualified will be true and
complete in all material respects, in each case as of the date of the Asset Purchase Agreement and
as of the closing date and neither DTS nor DTS BVI shall have failed to perform in any material
respect any material obligation or to comply in any material respect with any agreement or covenant
to be performed or complied with by it under the Asset Purchase Agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No federal or state regulatory approval is required in order to consummate the asset sale
transaction.
</DIV>
<DIV align="left">
<A name="126"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The asset sale transaction may be terminated or abandoned at any time prior to the closing
date:
</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>By the mutual written consent of Spatializer and DTS.</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>By either Spatializer or DTS if any governmental entity issues a final and
non-appealable order, decree or ruling or takes any other action which permanently restrains,
enjoins or otherwise prohibits the asset sale transaction.</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>By Spatializer or DTS if the other has breached in any material respect any of its
respective representations, warranties, covenants or other agreements contained in the Asset
Purchase Agreement, which breach cannot be or has not been cured within 30&nbsp;days after written
notice of such breach.</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>By Spatializer or DTS on or after June&nbsp;30, 2007, if the closing has not occurred by
that date and if the failure of the closing to occur is not the result of a breach of a
representation, warranty or covenant by the party desiring to terminate the Asset Purchase
Agreement.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the Asset Purchase Agreement is terminated after the Special Meeting and stockholder
approval is not obtained at the Special Meeting, Spatializer is required to reimburse DTS for all
out-of-pocket expenses incurred by DTS in connection with the asset sale transaction. However, if
Spatializer uses its best efforts to secure stockholder approval, it will not be responsible for
reimbursing those expenses.
</DIV>


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</DIV>


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

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

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer and Desper Products are required to jointly and severally indemnify, defend and
hold harmless DTS and DTS BVI and certain affiliates thereof from and against and in respect of
losses:
</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>that arise out of any breach by Spatializer or Desper Products of its representations
and warranties contained in or made pursuant to the Asset Purchase Agreement provided any claim for
such losses is brought within 183&nbsp;days of the closing;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>that arise out of any breach by Spatializer or Desper Products of its covenants or
agreements contained in or made pursuant to the Asset Purchase Agreement;</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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>related to liabilities not agreed to be assumed by DTS and DTS BVI; 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="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>that arise from the failure to obtain any required consent with respect to the
assignment of the contracts to be assumed by DTS and DTS BVI in connection with the asset sale
transaction.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Neither Spatializer nor Desper Products will be liable for any losses resulting from a breach
of its responsibilities or warranties described above unless and until the amount of those losses
exceeds $50,000. Once such losses exceed $50,000 Spatializer will be responsible for any amounts
in excess of $15,000. Certain covenants of Spatializer and Desper Products terminate on the
275<SUP style="font-size: 85%; vertical-align: text-top">th</SUP> day following the closing.
</DIV>
<DIV align="left">
<A name="128"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer engaged the services of SEG to assist it in locating a potential buyer for
Spatializer. At the closing, Spatializer will be required to pay SEG (or its affiliates) the sum
of $250,000 in cash for its services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Neither DTS nor DTS BVI engaged the services of any broker or finder in connection with the
transactions contemplated by the Asset Purchase Agreement.
</DIV>
<DIV align="left">
<A name="129"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DTS will pay for transfer taxes incurred with respect to the transfer by Spatializer to DTS
and DTS BVI of tangible personal property having a fair market value of up to $20,000. To the
extent that such taxes are paid by Spatializer, DTS will reimburse Spatializer for such transfer
taxes within ten business days of DTS&#146;s receipt of notice and proof of payment from Spatializer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Joint and Several Liability</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DTS has agreed to be jointly and severally liable for any obligations of DTS BVI under the
Asset Purchase Agreement, any agreement signed by DTS BVI at the closing of the asset sale
transaction.
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The approval of the sale of assets of Spatializer requires the affirmative vote of a majority
of the outstanding shares of common stock at the close of business on the record date for the
Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>THE BOARD OF DIRECTORS OF SPATIALIZER HAS DEEMED THE SALE OF ASSETS OF SPATIALIZER AND DESPER
PRODUCTS TO BE IN THE BEST INTERESTS OF THE STOCKHOLDERS OF SPATIALIZER AND ADVISABLE AND
UNANIMOUSLY</B>
</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"><B>RECOMMENDS THAT YOU VOTE &#147;FOR&#148; THE SALE OF ASSETS TO DTS AND DTS BVI PURSUANT TO THE ASSET
PURCHASE AGREEMENT.</B>
</DIV>


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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="130"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PROPOSAL NO. 2<BR>
AMENDMENT OF SPATIALIZER&#146;S<BR>
CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED COMMON STOCK</B>
</DIV>

<DIV align="left">
<A name="131"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On April&nbsp;25, 2007, Spatializer consummated the sale of 16,236,615 shares of our common stock,
which constituted the remaining balance of shares which were authorized but unissued, to three
investors, Jay A. Gottlieb, Greggory Schneider and Helaine Kaplan (collectively, the &#147;Investors&#148;)
for an aggregate purchase price of $162,366.15 pursuant to a Common Stock Purchase Agreement (the
&#147;Stock Purchase Agreement&#148;) among Spatializer and the Investors. In the event the transactions
contemplated pursuant to the Asset Purchase Agreement are consummated, Spatializer will receive
additional consideration in the amount of $259,786. Pursuant to the Stock Purchase Agreement,
Spatializer agreed to file a proxy statement with the Securities and Exchange Commission to approve
an amendment to Spatializer&#146;s certificate of incorporation to provide for an increase in the
authorized number of common stock to 300,000,000 from 65,000,000 and a reverse stock split with a
ratio of between one-for-five to one-for-fifty, the exact ratio to be determined by the Board of
Directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer has also agreed not to issue any additional shares of common stock of Spatializer
for a period commencing on the closing of the Stock Purchase Agreement and ending 275&nbsp;days after
the closing of the transactions contemplated under that certain Asset Purchase Agreement.
Spatializer has further agreed not to make any distributions or dividends to the stockholders of
Spatializer during the same period. If the closing of the transactions contemplated under the Asset
Purchase Agreement occurs, within ten days after the end of this 275&nbsp;day period, the Board of
Directors has agreed to pay certain of Spatializer&#146;s liabilities, provide for $100,000 in working
capital for Spatializer and declare a distribution or dividend to the stockholders of any remaining
funds if permitted under Delaware law.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Additionally, Spatializer has agreed to take corporate action as reasonably required to ensure
that the directors constituting the Board of Directors is set at three. After the closing of the
transactions contemplated by the Asset Purchase Agreement, Spatializer shall take such corporate
action as may be reasonably required to appoint Mr.&nbsp;Gottlieb or his designee to the Board of
Directors. Furthermore, the Investors agree to take such action as may reasonably be required to
elect Henry R. Mandell or his designee and one additional designee of Mr.&nbsp;Mandell as directors of
the Company from the period commencing from April&nbsp;25, 2007, the closing date of the Stock Purchase
Agreement, to the earlier of the termination of the Asset Purchase Agreement or the distribution of
any funds of Spatializer received from the Asset Purchase Agreement (the &#147;Closing Period&#148;). Upon
termination of the Closing Period, Mr.&nbsp;Mandell and/or his designees shall resign as members of the
Board of Directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;After the Closing Period, Mr.&nbsp;Gottlieb will likely be the sole member serving on the Board of
Directors. Several of the Investors&#146; have filed their respective Schedules 13D with the Securities
and Exchange Commission. Based on review of such filings, it appears that at least one of the
Investors is in favor of the proposals to increase the authorized common stock and the reverse
stock split in order to later help facilitate a reverse public merger with an operating company or
similar extraordinary transaction. Spatializer believes that this may allow Spatializer to
continue as an operating company in the event that the sale of the assets is consummated. No
formal agreement, however, has been made nor at this time is any such transaction contemplated.
There can be no assurance that the Investors&#146; will enter into any such transaction or that if the
Investors&#146; were to enter into such transaction that it would be successful.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the Stock Purchase Agreement, the Board of Directors has adopted a resolution
approving an amendment to Spatializer&#146;s Certificate of Incorporation to increase the number of
shares of
</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">common stock that Spatializer is authorized to issue from 65,000,000 shares to 300,000,000
shares. Giving effect to the amendment the total authorized capital stock would be 301,000,000
shares which would consist of 300,000,000 of common stock and 1,000,000 shares of preferred stock.
The Board of Directors directed that this proposed amendment be considered by the stockholders at
the Special Meeting. The Board of Directors believes this capital structure more appropriately
reflects the present and future needs of Spatializer. Spatializer issued all of its remaining
authorized and unissued common stock to three investors on April&nbsp;25, 2007. The authorization of an
additional 235,000,000 shares of common stock would give the Board of Directors the express
authority, without further action of the stockholders, to issue such shares of common stock from
time to time as the Board of Directors deems necessary. A copy of the text of this proposed
amendment to the Certificate of Incorporation of Spatializer is set forth in full as Annex B
attached to this Proxy Statement and is hereby incorporated herein by this reference; provided,
however, that the text of the amendment is subject to change as may be required by the Secretary of
State of the State of Delaware.
</DIV>

<DIV align="left">
<A name="132"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Purposes of the Amendment to Increase the Authorized Number of Shares of Common Stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The proposed increase in the authorized number of shares of common stock will allow
Spatializer to reserve an additional number of shares sufficient to provide flexibility for the
future. In particular, Spatializer may decide to acquire other businesses or change the business
strategy. In addition, the additional authorized shares may be used in the future for any other
proper corporate purpose approved by the Board of Directors, including corporate mergers or
acquisitions, stock dividends or splits, or other corporate purposes. By having additional shares
readily available for issuance, Spatializer will be able to act expeditiously without spending the
time and incurring the expense of soliciting proxies and holding special meetings of stockholders.
At present, Spatializer has no plans, agreements or understandings for the issuance of additional
shares of capital stock or options therefore no further action or authorization by the stockholders
would be necessary prior to the issuance of additional shares unless applicable laws or regulations
require such approval.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board of Directors believes the increase in the authorized shares is necessary to provide
Spatializer with the flexibility to act in the future with respect to financings, acquisitions and
other corporate purposes without the delay and expense associated with obtaining special
stockholder approval each time an opportunity requiring the issuance of shares may arise.
</DIV>
<DIV align="left">
<A name="133"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Possible Effects of the Amendment</B>
</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;Increasing the number of authorized shares of common stock will not have any immediate effect
on the rights of current stockholders. If the Board of Directors
determines that an issuance of shares of Spatializer&#146;s common stock is in the best interests of Spatializer and its stockholders, the issuance
of additional shares could have the effect of diluting the earnings per share or the book value per
share of the outstanding shares of common stock. To the extent that any additional authorized
shares of common stock are issued in the future, they may decrease existing stockholders&#146;
percentage equity ownership and, depending on the price at which they are issued, could be dilutive
to the voting rights of existing stockholders and have a negative effect on the market price of the
common stock. Current stockholders have no preemptive or similar rights, which means, current
stockholders do not have a prior right to purchase any new issue of common stock in order to
maintain their proportionate ownership thereof. However, the increase in the number of authorized
shares of common stock, when and if issued, will not in any way change the inherent rights of
existing or future common stockholders. If and when issued, each share of additional authorized
common stock will continue to entitle the holder to one vote per share on matters to be voted upon
by the stockholders, and entitle the holder to receive dividends from
available funds, if and when declared by our Board of Directors, and entitle the holder to share
ratably in assets legally available for distribution to shareholders in the event of our
liquidation, dissolution or winding up of operations. Additionally, it will not entitle the holder to any cumulative voting, cumulative dividends,
preemptive, subscription or redemption rights. Spatializer has not proposed the increase in
the number of authorized shares of common stock with the intention of using the additional
authorized shares for anti-takeover purposes, but Spatializer would be able to use the additional
shares to oppose a hostile takeover attempt or delay or prevent changes in control or management of
Spatializer. For example, without further stockholder approval, the
Board of Directors could sell shares of
common stock in a private transaction to purchasers who would oppose a takeover or favor the
current Board of Directors. Stockholders should be aware that approval of this proposal could facilitate future
efforts by Spatializer to oppose changes in control of Spatializer and perpetuate Spatializer&#146;s
management, including transactions in which the stockholders might otherwise receive a premium for
their shares over then current market prices. The Company could also use the additional shares of
common stock for potential strategic transactions including acquisitions, strategic partnerships,
and joint ventures, although Spatializer has no present plans to do so. Spatializer cannot provide
assurances that any such transactions will be consummated on favorable terms or at all, that they
will enhance stockholder value or that they will not adversely affect Spatializer&#146;s business or the
trading price of the common stock. Any such transactions may require Spatializer to incur
non-recurring or other charges and may pose significant integration challenges and/or management
and business disruptions, any of which could materially and adversely affect Spatializer&#146;s business
and financial results.
</DIV>
<DIV align="left">
<A name="134"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The approval of the amendment of the Certificate of Incorporation increasing the authorized
number of shares of common stock requires the affirmative vote of a majority of the outstanding
shares of common stock at the close of business on the record date for the Special Meeting.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>THE BOARD OF DIRECTORS OF SPATIALIZER HAS DEEMED THE PROPOSED AMENDMENT OF SPATIALIZER&#146;S
CERTIFICATE OF INCORPORATION INCREASING THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK IS IN THE
BEST INTEREST OF SPATIALIZER AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE &#147;FOR&#148; THE AMENDMENT OF
SPATIALIZER&#146;S CERTIFICATE OF INCORPORATION INCREASING THE AUTHORIZED NUMBER OF SHARES OF COMMON
STOCK.</B>
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="135"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PROPOSAL NO. 3<BR>
AUTHORIZATION OF THE BOARD OF DIRECTORS TO<BR>
EFFECT A REVERSE STOCK SPLIT<BR>
IN A RANGE FROM<BR>
ONE-FOR-FIVE TO ONE-FOR-FIFTY</B>
</DIV>

<DIV align="left">
<A name="136"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer&#146;s stockholders are being asked to authorize the Board of Directors, in its
discretion, to effect a reverse stock split of Spatializer&#146;s common stock at a specific ratio,
ranging from one-for-five to one-for-fifty, to be determined by the Board of Directors within a
twelve month period from the date of the Special Meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An amendment of Spatializer&#146;s Certificate of Incorporation will be required to effect such
reverse stock split. The complete text of the form of an amendment to the Certificate of
Incorporation for the reverse stock split is set forth in Annex C to this Proxy Statement;
provided, however, that such text is subject to amendment to include such changes as may be
required by the Secretary of State of the State of Delaware. If Proposal No.&nbsp;3 is approved by the
requisite vote of Spatializer&#146;s stockholders, then the Board of Directors will have the authority,
for the twelve month period following the date of the Special Meeting, to determine the specific
ratio of a reverse stock split within the range described herein and to effect the reverse stock
split of the Spatializer&#146;s common stock in such specific ratio. To effectuate the reverse stock
split, Spatializer would fill in the specific ratio of the stock split in the attached amendment to
the Certificate of Incorporation and file the amendment with the Secretary of State of the State of
Delaware. Such reverse stock split will be effective as of the date and time of the filing. Each
share of common stock issued and outstanding immediately prior to effective time of the reverse
stock split (the &#147;Old Common Stock&#148;), will be, automatically and without any action on the part of
the stockholders, converted into and reconstituted into a fraction of a share of the Spatializer&#146;s
Common Stock (the &#147;New Common Stock&#148;) represented by the specific ratio approved by the Board of
Directors. However, no fractional shares of common stock will be issued as a result of the reverse
stock split. In lieu of any such fractional share interest, each holder of Old Common Stock who
would otherwise be entitled to receive a fractional share of New Common Stock would receive cash in
lieu of such fractional share of New Common Stock in an amount equal to the product obtained by
multiplying (a)&nbsp;the average of the high-bid and low-asked per share prices of the Old Common Stock
as reported on the OTC Bulletin Board on the effective date of the reverse stock split (adjusted if
necessary to reflect the per share price of the Old Common Stock without giving effect to the
reverse stock split) by (b)&nbsp;the number of shares of Old Common Stock held by such holder that would
otherwise have been exchanged for such fractional share interest. For example, if the Board of
Directors authorizes a reverse stock split in the ratio of one-for-fifty, then, upon the date and
the time of the filing of the amendment to the Certificate of Incorporation to effect such stock
split, each share of the Old Common Stock will be converted into and reconstituted as 1/50th of a
share of the Spatializer&#146;s New Common Stock. No fractional shares would be issued in connection
therewith. As a result, any stockholder who held less than fifty shares of the Old Common Stock
would no longer have any stock interest in Spatializer after the one-for-fifty reverse stock split
but instead would receive cash for such stockholder&#146;s fractional interest, the amount of which
would be determined in the manner described above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shortly after the effective date of the reverse stock split, stockholders will be asked to
surrender certificates representing shares of Old Common Stock in accordance with the procedures
set forth in a letter of transmittal to be sent by Spatializer. Upon such surrender, a certificate
representing the number of shares of New Common Stock each such stockholder is deemed to own (after
giving effect to the specific reverse stock split) will be issued and forwarded to the stockholder
(and cash in lieu of any
</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">fractional share interest). However, pending surrender, each certificate representing shares
of Old Common Stock will continue to be valid but will represent the number of shares of New Common
Stock (and cash in lieu of fractional shares of Old Common Stock, as described above) that such
stockholder is deemed to own after giving effect to the reverse stock split. STOCKHOLDERS SHOULD
NOT SEND THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL LETTER.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The reverse stock split will be effected only upon determination by the Board of Directors
that the reverse stock split (with an exchange ratio determined by the Board of Directors as
described herein) is in the best interest of Spatializer and its stockholders. The Board of
Directors may not proceed or may abandon the reverse stock split if the Board of Directors
determines it is not in the best interest of Spatializer and its stockholders.
</DIV>
<DIV align="left">
<A name="137"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Purposes of the Proposed Reverse Stock Splitt</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the Stock Purchase Agreement, as more fully described in Proposal No.&nbsp;2,
Spatializer has agreed to file a proxy statement to effect a reverse stock split. As of the record
date, Spatializer had outstanding 65,000,000 shares of common stock and the stock price in the
over-the-counter market on that date (based on the average of the high-bid and low-asked per share
price of the common stock as reported on the &#95;&#95;&#95;on that date) was $0.&#95;&#95;&#95;per share,
resulting in a market capitalization of approximately $&#95;&#95;&#95;. The Board of Directors has
determined that Spatializer has a relatively high number of shares outstanding given Spatializer&#146;s
market capitalization. Additionally, if the Board of Directors were to effect a reverse stock
split, Spatializer will decrease the number of shares outstanding, which may result in a
proportionate increase in the price of Spatializer&#146;s common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board of Directors also believes that a reverse stock split would facilitate the
completion of certain corporate governance matters. Spatializer has a large number of stockholders
owning a small number of shares of our common stock. Due to the current low price of our common
stock and the fact that a large number of stockholders own a small number of shares, it has become
increasingly difficult to address certain corporate governance matters that require a majority vote
of outstanding common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There can be no assurance that any or all of the effects described in this Proxy Statement
will occur, including, without limitation, that the market price per share of New Common Stock
after a reverse stock split will be equal to the applicable multiple of the market price per share
of Old Common Stock before a reverse stock split, or that such price will either exceed or remain
in excess of the current market price. Further, there is no assurance that the market for the
common stock will be improved. Stockholders should note that the Board of Directors cannot predict
what effect any specific reverse stock split will have on the market price of the common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the stockholders approve Proposal No.&nbsp;3, the Board of Directors would effect a reverse
stock split only upon the Board of Director&#146;s determination that a reverse stock split would be in
the best interests of Spatializer and its stockholders at that time. If the Board of Directors
were to effect a reverse stock split, the Board of Directors would set the timing for such reverse
stock split and select the specific ratio within the range set forth herein. No further action on
the part of stockholders will be required to either implement or abandon a reverse stock split. If
stockholders approve Proposal No.&nbsp;3, and the Board of Directors determines to implement a reverse
stock split, Spatializer would communicate to the public, prior to the effective date of such
reverse stock split, additional details regarding the reverse stock split, including the specific
ratio the Board of Directors has selected. If the Board of Directors does not implement the
reverse stock split within twelve months from the Special Meeting, the authority granted in this
proposal to implement the reverse stock split will terminate. The Board of Directors reserves its
right to elect not to proceed, or may abandon, the reverse stock split if it determines, in its sole
discretion, that this proposal is not in the best interests of Spatializer and its stockholders.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->- 34 -<!-- /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;Spatializer does not intend to effectuate any reverse stock split before the distribution, if
any, is paid to the stockholders as described under Proposal No.&nbsp;1 above.
</DIV>
<DIV align="left">
<A name="138"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Principal Effects of a Reverse Stock Split</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Contingent upon stockholder and Board of Directors approval, the reverse stock split will be
effected by filing with the Secretary of State of the State of Delaware an amendment to
Spatializer&#146;s Certificate of Incorporation in substantially the form of Annex C attached hereto,
setting forth therein the specific ratio approved by the Board of Directors. The amendment and the
reverse stock split will be effective immediately upon such filing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Without any further action on the part of Spatializer or the stockholders, after the filing of
an amendment to Spatializer&#146;s Certificate of Incorporation effecting the approved reverse stock
split, the shares of Old Common Stock will be converted into and reconstituted into the appropriate
number of shares of New Common Stock resulting from the approved reverse stock split (and, where
applicable, cash in lieu of any fractional shares, as described elsewhere in this Proxy Statement).
Each stockholder will own fewer shares of our common stock following a reverse stock split.
However, a reverse stock split will affect all of the holders of our common stock uniformly and
will not disproportionately affect any stockholder&#146;s percentage ownership of Spatializer except to
the extent that the reverse stock split results in fractional shares. As a result of paying cash
in lieu of fractional shares resulting from a reverse stock split, a number of stockholders (those
holding fewer shares than the ratio of the approved reverse stock split) will be eliminated as
stockholders of Spatializer. Because such transaction would be automatic and effective as to all
shares outstanding prior to the reverse stock split, stockholders who otherwise may wish to retain
their existing equity interest in Spatializer would be adversely affected. For example, if the
Board of Directors authorizes a reverse stock split in the ratio of one-for-fifty, then, upon the
date and the time of the filing of the amendment to the Certificate of Incorporation to effect such
stock split, each share of the Old Common Stock will be converted into and reconstituted as 1/50th
of a share of the Spatializer&#146;s New Common Stock. No fractional shares would be issued in
connection therewith. As a result, any stockholder who held less than fifty shares of the Old
Common Stock would no longer have any stock interest in Spatializer after the one-for-fifty reverse
stock split but instead would receive cash for such stockholder&#146;s fractional interest, the amount
of which would be determined in the manner described below. Shares of common stock no longer
outstanding as a result of the fractional share settlement procedure will be returned to authorized
but unissued shares of Spatializer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There will be no material differences between the rights of the holders of the shares of
common stock outstanding prior to the reverse stock split and those outstanding after the reverse
stock split is effected (other than those arising from the fractional share settlement) as all
stockholders are affected uniformly in such a reverse stock split.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All outstanding options to purchase shares of common stock would be adjusted as a result of
any reverse stock split, as required by the terms of those securities. In particular, the number
of shares issuable upon the exercise of each instrument would be reduced, and the exercise price
per share, if applicable, would be increased, in accordance with the terms of each instrument and
based on the ratio of the reverse stock split. Also, the number of shares reserved for issuance
under our existing stock option and equity incentive plans would be reduced proportionally based on
the ratio of the reverse stock split.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consummation of a reverse stock split will not alter the number of authorized shares of common
stock which will remain at 65,000,000 shares (or 300,000,000 shares if Proposal No.&nbsp;2 is approved).
As discussed above, proportionate voting rights and other rights of the holders of common stock
will not be altered by a reverse stock split (other than as a result of the payment of cash in lieu
of fractional shares, as
</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">described below, and other than the proportionate change in the number of
shares of common stock into which outstanding options may be exercised).
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table illustrates the effects on Spatializer&#146;s authorized, outstanding and
available shares at a reverse stock split of one-for-five and one-for-fifty. Additionally, the
table assumes the approval of Proposal No.&nbsp;2 for the increase in Spatializer&#146;s authorized common
stock to 300,000,000. The table does not give effect to any adjustments for fractional shares on
Spatializer&#146;s authorized and outstanding shares of common stock.
</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 nowrap align="center" colspan="2">Prior to Reverse Stock</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">After 1-for-5 Reverse</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">After 1-for-50 Reverse</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">Split</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Stock Split</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Stock Split</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">Authorized Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">300,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">300,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">300,000,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,300,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shares Available for Issuance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">235,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">287,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">298,700,000</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;No fractional shares of common stock will be issued as a result of the proposed reverse stock
split. Instead, stockholders who otherwise would be entitled to receive fractional shares, upon
surrender to the exchange agent of such certificates representing such fractional shares, will be
entitled to receive cash in an amount equal to the product obtained
by multiplying (i)&nbsp;the average of the high-bid and low-asked per
share price of the common stock as reported on the OTC bulletin board
on the effective date of the reverse stock split by
(ii)&nbsp;the number of shares of our common stock held by such stockholder that would otherwise have
been exchanged for such fractional share interest.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stockholders should note that certain disadvantages may result from the adoption of the
proposed reverse stock split. In the event Proposal No.&nbsp;3 is approved by the stockholders and the
Board of Directors approves a reverse stock split at a specific ratio, the number of outstanding
shares of common stock would be decreased as a result of the reverse stock split, but the number of
authorized shares of common stock would not be so decreased. Spatializer would therefore have the
authority to issue a greater number of shares of common stock following the reverse stock split
without the need to obtain stockholder approval to authorize additional shares. Any such
additional issuance may have the effect of significantly reducing the interest of the existing
stockholders of Spatializer with respect to earnings per share, liquidation value and book and
market value per share. Although Spatializer believes that the availability of such additional
shares would provide Spatializer with the flexibility to meet business needs as they may arise and
to take quickly advantage of favorable opportunities, there are no current plans to use such
additional shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This proposal has been prompted solely by the business considerations discussed in the
preceding paragraphs. Nevertheless, the additional shares of common stock that would become
available for issuance if a reverse stock split is effected could also be used by Spatializer&#146;s
management to oppose a hostile takeover attempt or delay or prevent changes in control or changes
in or removal of management, including transactions that are favored by a majority of the stockholders or in which the
stockholders might otherwise receive a premium for their shares over then-current market prices or
benefit in some other manner. For example, without further stockholder approval, the Board of
Directors could sell
</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">shares of common stock in a private transaction to purchasers who would oppose
a takeover or favor the current Board of Directors. The Board of Directors is not aware of any
pending takeover or other transactions that would result in a change in control of Spatializer, and
the proposal was not adopted to thwart any such efforts.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The common stock is currently registered under Section 12(g) of the Securities Exchange Act of
1934 (the &#147;Exchange Act&#148;) and, as a result, Spatializer is subject to the periodic reporting and
other requirements of the Exchange Act. No reverse stock split that would be permitted to be
effected by approval of Proposal No.&nbsp;3 is anticipated to effect the registration of the Common
Stock under the Exchange Act. After the effective date of the reverse stock split, trades of the
New Common Stock will continue to be reported on the OTC electronic &#147;Bulletin Board&#148; under the
Spatializer&#146;s symbol &#147;SPAZ.OB&#148;. No reverse stock split that would be permitted to be effected by
approval of Proposal No.&nbsp;3 is anticipated to result in a &#147;Rule&nbsp;13e-3 transaction&#148; as defined under
the Exchange Act.
</DIV>
<DIV align="left">
<A name="139"></A>
</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The par value per share of our common stock would remain unchanged at $0.01 per share after
the reverse stock split. As a result, on the effective date of the reverse stock split, the stated
capital on our balance sheet attributable to the common stock will be reduced proportionally, based
on the exchange ratio of the reverse stock split, from its present amount, and the additional
paid-in capital account shall be credited with the amount by which the stated capital is reduced.
The per share common stock net income or loss and net book value will be increased because there
will be fewer shares of our common stock outstanding. Spatializer does not anticipate that any
other accounting consequences would arise as a result of the reverse stock split.
</DIV>
<DIV align="left">
<A name="140"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>No Dissenters Rights</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the approval of the reverse stock split, stockholders of Spatializer will
not have a right to dissent and obtain payment for their shares under Delaware law or Spatializer&#146;s
Certificate of Incorporation or bylaws.
</DIV>
<DIV align="left">
<A name="141"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Material Federal Income Tax Consequences of the Proposed Reverse Stock Split</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion sets forth the material U.S. federal income tax consequences that
management believes will apply with respect to Spatializer and the holders of Spatializer&#146;s common
stock who are United States holders (as previously defined in the section entitled &#147;Material
Federal Income Tax Consequences&#148;) as a result of the proposed reverse stock split. For purposes of
this tax discussion, all references to Spatializer means Spatializer and Desper Products on a
consolidated basis. This discussion is based on the Code, Treasury Regulations promulgated under
the Code, Internal Revenue Service rulings, judicial decisions and administrative rulings as of the
date of this proxy statement, all of which are subject to change or differing interpretations,
including changes and interpretations with retroactive effect. No assurance can be given that the
tax treatment described in this proxy statement will remain unchanged at the time of such reverse
stock split.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This discussion is for general information only and may not address all tax considerations
that may be significant to a holder of our common stock. This discussion has no binding effect on
the Internal Revenue Service or the courts. Spatializer has not sought and will not seek an
opinion of counsel or a ruling from the Internal Revenue Service regarding the federal income tax
consequences of the proposed reverse stock split. This discussion does not address the tax consequences of transactions
effectuated prior to or after any approved reverse stock split, including, without limitation, the
tax consequences of the exercise of options, warrants or similar rights to purchase stock.
Furthermore, no foreign, state or local tax considerations are addressed herein. This discussion
is a summary only and each stockholder is
</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">urged to consult with his, her or its own tax advisors as to the tax effects of a reverse stock split to him, her or it.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If any of the anticipated tax consequences described herein prove to be incorrect, the result
could be an increased tax liability at the corporate and/or stockholder level.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer believes that the proposed reverse stock split, if effectuated, will have the
following federal income tax effects:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;A stockholder will not recognize gain or loss on the exchange of Old Common Stock for New
Common Stock resulting from the reverse stock split. In the aggregate, a stockholder&#146;s basis in
his, her or its shares of such New Common Stock will equal his, her or its basis in the shares of
Old Common Stock exchanged therefor (provided that such basis of such New Common Stock will be
reduced by the basis of the shares of Old Common Stock for which the stockholder received cash in
lieu of a fractional share of New Common Stock, but only if such stockholder was treated for tax
purposes as though such stockholder sold the fractional share for cash and the cash was not taxed
as a dividend. (Please see discussion of the tax treatment of cash in lieu of fractional shares in
paragraph 4 below.)
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;In the aggregate, a stockholder&#146;s holding period for tax purposes for his, her or its
shares of New Common Stock will be the same as the holding period for tax purposes of the shares of
Old Common Stock exchanged therefor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;Spatializer will not recognize any gain or loss as a result of the reverse stock split
(regardless of the ratio selected). The reverse stock split will constitute a tax-free
reorganization under Section&nbsp;368(a)(1)(E) of the Code or will otherwise qualify for general
non-recognition treatment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;Cash received by a stockholder from Spatializer in lieu of a fractional share of New Common
Stock will be taxable to the stockholder. The tax treatment of such cash will depend on whether
(i)&nbsp;a stockholder no longer has any stock interest in Spatializer after the reverse stock split
(which would be the case if a stockholder receives cash for such stockholder&#146;s entire interest in
Spatializer)(a &#147;complete redemption&#148;), or (ii)&nbsp;a stockholder owns shares of New Common Stock after
the reverse stock split (which would be the case if a stockholder receives cash for only the
fractional share portion of such stockholder&#146;s interest in Spatializer)(a &#147;partial redemption&#148;).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the case of a complete redemption, a stockholder will be treated for tax purposes as though
he, she or it sold the fractional share to Spatializer for cash, and will recognize gain or loss
equal to the difference between the amount of cash received and the holder&#146;s adjusted federal
income tax basis in the fractional share. Such gain or loss will generally be a capital gain or
loss.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the case of a partial redemption, a stockholder will be treated for tax purposes as though
he, she or it sold the fractional share for cash only if such stockholder&#146;s partial redemption
either is &#147;substantially disproportionate&#148; or &#147;not essentially equivalent to a dividend.&#148; Whether
a partial redemption is &#147;substantially disproportionate&#148; or &#147;not essentially equivalent to a
dividend&#148; with respect to a stockholder will depend on the stockholder&#146;s particular circumstances.
In general, a partial redemption will be &#147;substantially disproportionate&#148; with respect to a
stockholder if (1)&nbsp;the percentage of the outstanding voting stock of Spatializer actually and
constructively owned by the stockholder immediately after the partial redemption is less than 80%
of (2)&nbsp;the percentage of the outstanding voting stock of Spatializer that the stockholder is deemed
actually and constructively to have owned immediately prior to the partial redemption. In order for
a partial redemption to be &#147;not essentially equivalent to a dividend,&#148; the partial redemption must result
in a &#147;meaningful reduction&#148; of the stockholder&#146;s deemed percentage stock ownership of Spatializer. The
Internal Revenue Service has indicated that a minority stockholder in
</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">a publicly traded corporation whose
relative stock interest is minimal and who exercises no control with respect to corporate affairs will
experience a &#147;meaningful reduction&#148; if that stockholder has any reduction in its percentage stock
ownership. However, in applying the foregoing tests, a stockholder may, under the constructive ownership
rules, be deemed to own stock that is owned by other persons or otherwise in addition to the stock actually owned by
that stockholder. <B>Because the constructive ownership rules are complex, each stockholder should
consult his, her or its own tax advisor as to the applicability of these rules to a partial
redemption by such stockholder. </B>If a stockholder is treated for tax purposes as though he, she or
it sold the fractional share for cash, such stockholder will recognize gain or loss equal to the
difference between the amount of cash received and the holder&#146;s adjusted federal income tax basis
in the fractional share. Such gain or loss will generally be a capital gain or loss.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the partial redemption is neither &#147;substantially disproportionate&#148; nor &#147;not essentially
equivalent to a dividend,&#148; then the cash received by a stockholder for a fractional share will be
taxed as a dividend to the extent of Spatializer&#146;s current and accumulated earnings and profits
determined on a consolidated basis; any cash received by a stockholder in excess of Spatializer&#146;s
current and accumulated earnings and profits will reduce the stockholder&#146;s adjusted tax basis in
his, her or its shares of New Common Stock. If the cash so received has reduced a stockholder&#146;s
adjusted tax basis in such stockholder&#146;s shares of New Common Stock to zero, any cash received in
excess of basis will be taxed to the stockholder as capital gain.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If a stockholder&#146;s holding period for his, her or its shares of common stock of Spatializer is
longer than one year as of the date of the distribution, the capital
gain or loss will be taxed as long-term
capital gain or loss, otherwise, it will constitute short-term
capital gain or loss. Certain U.S. stockholders, including individuals, are eligible for preferential
rates of tax in respect of long-term capital gains. If a stockholder acquired different blocks of
common stock of Spatializer at different times and at different prices, the stockholder must
determine his, her or its adjusted tax basis and holding period separately with respect to each
block of common stock for purposes of calculating the amount of taxable gain and the applicable tax
rate. Deduction of capital losses are subject to certain limitations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>THE FOREGOING SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES IS INCLUDED FOR
GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE TO ANY STOCKHOLDER. EACH
STOCKHOLDER IS URGED TO CONSULT A TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE PROPOSED REVERSE
STOCK SPLIT AND THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF ANY SHARES OF NEW COMMON
STOCK AND/OR CASH RECEIVED AS A RESULT OF THE PROPOSED REVERSE STOCK SPLIT, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS AND CHANGES IN APPLICABLE TAX LAWS.</B>
</DIV>
<DIV align="left">
<A name="142"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Vote Required for Stockholder Approval of a Reverse Stock Split within a range from
One-for-Five to One-for-Fifty.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The approval of this Proposal No.&nbsp;3 requires the affirmative vote of holders of our common
stock holding at least or majority of the shares of any common stock outstanding at the close of
business on the record date. Spatializer&#146;s Certificate of Incorporation provides that in the event
of any reclassification of securities (including any reverse stock split) (whether or not with or
into or otherwise involving any interested stockholder, as defined therein) which in any such case
has the effect, directly or indirectly, of increasing the proportionate share of any class or
series of stock or securities convertible into stock of Spatializer or any subsidiary of Spatializer which is directly or indirectly owned by any
interested stockholder such transaction shall not consummate without both the affirmative vote of
the holders of at least 80% of the combined Voting Power, as defined therein, of the then
outstanding shares of all classes and series of voting stock and the affirmative vote of a majority
of the combined voting power of the then
</DIV>

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

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">outstanding shares of all classes and series of voting
stock held by disinterested stockholders. Spatializer&#146;s Certificate of Incorporation, however,
provides that such a super-majority vote is not required when the transaction is approved by a
majority of the disinterested directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>THE BOARD OF DIRECTORS OF SPATIALIZER HAS DEEMED THAT THE PROPOSED AUTHORIZATION FOR THE BOARD OF
DIRECTORS TO AMEND THE CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT WITHIN A RANGE
FROM ONE-FOR-FIVE TO ONE-FOR-FIFTY IS IN THE BEST INTEREST OF SPATIALIZER AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE &#147;FOR&#148; THE AUTHORIZATION FOR THE BOARD OF DIRECTORS TO AMEND THE
CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT WITHIN A RANGE FROM ONE-FOR-FIVE TO
ONE-FOR-FIFTY.</B>
</DIV>


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

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="143"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth information (except as otherwise indicated by footnote) as to
shares of common stock owned as of April&nbsp;25, 2007 or which can be acquired within sixty days of
April&nbsp;25, 2007 by (i)&nbsp;each person known by management to beneficially own more than five percent
(5%) of Spatializer&#146;s outstanding common stock, (ii)&nbsp;each of Spatializer&#146;s directors, and officers,
(iii)&nbsp;all executive officers and directors as a group. On April&nbsp;25, 2007 there were 65,000,000
shares of common stock outstanding.
</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="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="3">AMOUNT AND NATURE</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">OF</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">PERCENT OF</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000">NAME OF BENEFICIAL OWNER</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">BENEFICIAL OWNERSHIP</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">CLASS</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<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">Jay Gottlieb(1)(2)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,605,615</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">20.9</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">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Greggory A. Schneider(1)(3)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,497,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">10.0</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">Carlo Civelli(1)(4)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,763,780</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">8.6</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">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Henry R. Mandell(1)(4)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,212,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.3</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">All directors and executive
officers as a group (2
persons)(1)(4)(5)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,976,655</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">12.0</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body --></TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>The persons named in the table have sole voting and investment power with respect to all
shares shown to be beneficially owned by them, subject to community property laws, where
applicable, and the information contained in the footnotes to this table.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Based on the Schedule&nbsp;13D filed by Mr.&nbsp;Gottlieb with the Securities and Exchange Commission
on April&nbsp;30, 2007. Mr.&nbsp;Gottlieb&#146;s address is 27 Misty Brook Lane, New Fairfield, Connecticut
06812.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>Based on the Schedule&nbsp;13D filed by Mr.&nbsp;Schneider with the Securities and Exchange Commission
on April&nbsp;30, 2007. Mr.&nbsp;Schneider&#146;s address is 10445 Wilshire Blvd., #1806, Los Angeles,
California 90024.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>Carlo Civelli controls Clarion Finanz AG, a non-reporting investment company. Holdings of Mr.
Civelli and Clarion Finanz AG are combined, and include all shares of Spatializer held of
record or beneficially by them, and all additional shares over which he either currently
exercises full or partial control, without duplication through attribution. Includes 250,000
options to acquire common stock held by Mr.&nbsp;Civelli, all of which are vested and currently
exercisable. Mr.&nbsp;Civelli&#146;s address is Gerberstrasse 5 8023, Zurich, Switzerland.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(5)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 1,500,000 options held by Mr.&nbsp;Mandell, all of which are vested and are exercisable
at various prices from $0.05 to $0.30. This includes options granted on February&nbsp;21, 2005,
and exercisable at $0.10 per share, relating to the extension of Mr.&nbsp;Mandell&#146;s employment
agreement in 2005. The options have varying expiration dates of which the final such
expiration date is February&nbsp;21, 2010.</TD>
</TR>

</TABLE>



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

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="144"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>AVAILABLE INFORMATION AND FINANCIAL STATEMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer&#146;s financial statements included in Spatializer&#146;s Annual Report on Form&nbsp;10K for the
fiscal year ended December&nbsp;31, 2006 filed with the Securities and Exchange Commission on March&nbsp;29,
2007 are being mailed with this Proxy Statement as Annex D. If you do not receive your copy of the
audited financial statements, or if you wish to receive other filings Spatializer has made with the
Securities and Exchange Commission, please contact Spatializer, 2060 East Avenida de Los Arboles,
#D190, Thousand Oaks, California 91362-1376, Attention: Henry R. Mandell. You may read and copy
any materials Spatializer files with the Securities and Exchange Commission at the Securities and
Exchange Commission&#146;s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the
Public Reference Room. Spatializer&#146;s public filings can also be found on the website of the
Securities and Exchange Commission (www.sec.gov).
</DIV>
<DIV align="left">
<A name="145"></A>
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board of Directors does not know of any business to be presented at the Special Meeting
other than the matters set forth above, but if other matters came before the Special Meeting, it is
the intention of the proxies to vote in accordance with their best judgment on such matters.
</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">DATED: _____ __, 2007&nbsp;</TD>
    <TD colspan="3" align="left">BY ORDER OF THE BOARD OF DIRECTORS<BR></TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left"><DIV style="margin-left:20px;text-indent:-10px">Henry R. Mandell</DIV></TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left"><DIV style="margin-left:20px;text-indent:-10px">Chairman</DIV></TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>


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

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="146"></A>
</DIV>

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


</DIV>

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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="right" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">EXECUTION
    COPY</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">ASSET
    PURCHASE AGREEMENT<BR>
    by and among<BR>
    DTS, INC.,<BR>
    DTS BVI LIMITED,<BR>
    SPATIALIZER AUDIO LABORATORIES, INC.<BR>
    and<BR>
    DESPER PRODUCTS, INC.<BR>
    dated as of<BR>
    September&#160;18, 2006</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

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

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

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><U><FONT style="font-family: 'Times New Roman', Times">TABLE
    OF CONTENTS</FONT></U></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="18%">&nbsp;</TD> <!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=02 type=gutter -->
    <TD width="76%">&nbsp;</TD> <!-- colindex=02 type=maindata -->
    <TD width="3%">&nbsp;</TD>  <!-- colindex=03 type=gutter -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=03 type=quadleft -->
    <TD width="1%">&nbsp;</TD>  <!-- colindex=03 type=maindata -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=03 type=quadright -->
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Page(s)</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;I
    PURCHASE AND SALE OF ASSETS
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-1
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;1.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Sale and Transfer of Assets
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-1
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;1.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Assumption of Liabilities
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-1
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;1.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Excluded Liabilities
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-2
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;1.4
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">The Purchase Price
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-2
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;1.5
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Allocation of Purchase Price; Tax
    Filings
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-2
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;II
    THE CLOSING
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-3
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;2.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">The Closing
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-3
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;2.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Deliveries by Seller and Seller
    Subsidiary
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-3
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;2.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Deliveries by Purchaser
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-3
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;III
    REPRESENTATIONS AND WARRANTIES OF SELLER AND SELLER SUBSIDIARY
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-4
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Authorization
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-4
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Binding Agreement
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-4
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Good Title&#160;Conveyed
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-4
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.4
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Organization; Qualification of
    Seller
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-4
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.5
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Subsidiaries and Affiliates
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-5
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.6
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Consents and Approvals; No
    Violations
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-5
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.7
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">SEC Reports and Financial
    Statements
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-5
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.8
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Property Held by Others
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-6
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.9
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Absence of Certain Changes
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-6
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.10
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Title to Properties; Encumbrances
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-6
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.11
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Environmental Matters
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-6
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.12
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Contracts and Commitments
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-6
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.13
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Customers
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-6
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.14
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Litigation
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-6
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.15
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Compliance with Laws
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-7
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.16
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Employee Benefit Plans
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-7
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.17
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Tax Matters
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-7
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.18
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Intellectual Property
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-7
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.19
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Solvency
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-9
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.20
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Brokers or Finders
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-9
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.21
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Full Disclosure
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-9
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;3.22
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Proxy Statement
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-9
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;IV
    REPRESENTATIONS AND WARRANTIES OF PURCHASER
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-9
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;4.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Organization
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-9
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;4.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Authorization; Validity of
    Agreement; Necessary Action
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-9
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;4.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Consents and Approvals; No
    Violations
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-10
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;4.4
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Brokers or Finders
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-10
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;4.5
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Information Supplied
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-10
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-i
</DIV>



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

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="18%">&nbsp;</TD> <!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=02 type=gutter -->
    <TD width="76%">&nbsp;</TD> <!-- colindex=02 type=maindata -->
    <TD width="3%">&nbsp;</TD>  <!-- colindex=03 type=gutter -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=03 type=quadleft -->
    <TD width="1%">&nbsp;</TD>  <!-- colindex=03 type=maindata -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=03 type=quadright -->
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Page(s)</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;V
    COVENANTS
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-10
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Interim Operations of Seller and
    Seller Subsidiary
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-10
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Access; Confidentiality
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-11
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Stockholder Meeting
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-11
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.4
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Proxy Statement
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-11
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.5
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Efforts and Actions to Cause
    Closing to Occur
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-12
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.6
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Notification of Certain Matters
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-12
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.7
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">No Solicitation of Competing
    Transaction
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-13
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.8
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">No Assumption of Labor Liabilities
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-13
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.9
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Subsequent Actions
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-13
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.10
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Publicity
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-14
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.11
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Mail Received After Closing
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-14
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.12
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Access to Books and Records
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-14
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.13
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Waiver of Bulk Sales Requirement
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-14
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.14
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Accounts Receivable
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-14
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.15
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Proxy Solicitation Efforts
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-14
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;5.16
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Post-Closing Assignment
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-14
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;VI
    CONDITIONS
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-15
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;6.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Conditions to Each Party&#146;s
    Obligation to Effect the Closing
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-15
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;6.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Conditions to Obligations of
    Purchaser to Effect the Closing
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-15
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;6.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Conditions to Obligations of
    Seller to Effect the Closing
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-16
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;VII
    TERMINATION
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-16
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;7.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Termination
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-16
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;7.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Effect of Termination
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-17
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;VIII
    INDEMNIFICATION
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-17
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;8.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Indemnification; Remedies
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-17
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;8.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Limitations
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-17
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;8.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Notice of Claim; Defense
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-18
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;8.4
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Survival of Indemnification Claims
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-18
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;8.5
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Tax Effect of Indemnification
    Payments
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-18
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;8.6
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Survival of Covenants,
    Representations and Warranties
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-18
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;IX
    DEFINITIONS AND INTERPRETATION
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-18
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;9.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Definitions
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-18
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;9.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Interpretation
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-21
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom" style="line-height: 19pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" align="left" valign="top">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">ARTICLE&#160;X
    MISCELLANEOUS
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-22
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.1
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Fees and Expenses
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-22
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.2
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Amendment and Modification
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-22
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.3
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Notices
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-22
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.4
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Counterparts
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-23
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.5
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Entire Agreement; No Third Party
    Beneficiaries
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-23
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.6
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Severability
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-23
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.7
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Governing Law
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-23
    </FONT>
</TD>
<TD>
</TD>
</TR>
</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-ii
</DIV><!-- END LOGICAL PAGE -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="18%">&nbsp;</TD> <!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=02 type=gutter -->
    <TD width="76%">&nbsp;</TD> <!-- colindex=02 type=maindata -->
    <TD width="3%">&nbsp;</TD>  <!-- colindex=03 type=gutter -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=03 type=quadleft -->
    <TD width="1%">&nbsp;</TD>  <!-- colindex=03 type=maindata -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=03 type=quadright -->
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Page(s)</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.8
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Enforcement; Venue
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-23
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.9
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Time of Essence
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-24
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.10
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Extension; Waiver
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-24
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.11
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    <FONT style="font-size: 10pt">Election of Remedies
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-24
    </FONT>
</TD>
<TD>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt; font-variant: SMALL-CAPS">Section</FONT><FONT style="font-size: 10pt">&#160;10.12
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 10pt">Assignment
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD>
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 10pt">A-24
    </FONT>
</TD>
<TD>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><U><FONT style="font-family: 'Times New Roman', Times">EXHIBITS</FONT></U></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="9%">&nbsp;</TD>  <!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>  <!-- colindex=02 type=gutter -->
    <TD width="2%">&nbsp;</TD>  <!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>  <!-- colindex=03 type=gutter -->
    <TD width="87%">&nbsp;</TD> <!-- colindex=03 type=maindata -->
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt">Exhibit&#160;A
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    <FONT style="font-size: 10pt">&#151;
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <FONT style="font-size: 10pt">Form&#160;Of Assumption Agreement
    </FONT>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt">Exhibit&#160;B
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    <FONT style="font-size: 10pt">&#151;
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <FONT style="font-size: 10pt">Purchase Price Allocation
    </FONT>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt">Exhibit&#160;C
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    <FONT style="font-size: 10pt">&#151;
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <FONT style="font-size: 10pt">Form&#160;Of Bill Of Sale And
    Assignment
    </FONT>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt">Exhibit&#160;D
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    <FONT style="font-size: 10pt">&#151;
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    <FONT style="font-size: 10pt">Schedule&#160;Of Liens
    </FONT>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 10pt">Exhibit&#160;E
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    <FONT style="font-size: 10pt">&#151;
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <FONT style="font-size: 10pt">Assumed Contracts
    </FONT>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-iii
</DIV><!-- END LOGICAL PAGE -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">ASSET
    PURCHASE AGREEMENT</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Asset Purchase Agreement, dated as of September&#160;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&#160;IX.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;I<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">PURCHASE AND
    SALE OF ASSETS
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;1.1&#160;&#160;<I><U>Sale
    and Transfer of Assets</U>.</I>&#160;&#160;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&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;all Seller Intellectual Property;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;all Assumed Contracts;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;all accounts receivable and royalties originating from
    the Assumed Contracts, subject to Purchaser&#146;s obligation
    pursuant to Section&#160;5.14;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;all records, reports and databases related to outbound
    licenses of Seller Intellectual Property;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <U>provided</U>, <U>that</U>, (x)&#160;cash and cash equivalents
    and (y)&#160;accounts receivable not originating from the
    Assumed Contracts are not Purchased Assets.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;1.2&#160;&#160;<I><U>Assumption
    of Liabilities</U>.</I>&#160;&#160;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
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-1
</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;1.3&#160;&#160;<I><U>Excluded
    Liabilities</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;all Liabilities relating to the operations of Seller or
    Seller Subsidiary or the Business, except as set forth in
    Section&#160;1.2;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;all Liabilities related to any Assumed Contract that
    arise prior to the Effective Time;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (e)&#160;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>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (f)&#160;all Liabilities with respect to Taxes relating to the
    Business, the Seller or Seller Subsidiary;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (g)&#160;subject to Purchaser&#146;s limited obligation pursuant
    to Section&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (h)&#160;all Liabilities with respect to Taxes relating to the
    ownership or use of the Purchased Assets prior to the Effective
    Time;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (i)&#160;all Liabilities, obligations and commitments relating
    to any Environmental Claim;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (j)&#160;all Liabilities relating to any employee benefits or
    employee plans provided to any employee or consultant of Seller
    or Seller Subsidiary;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (k)&#160;all Liabilities relating to employment, severance or
    termination agreements with any employee or consultant of Seller
    or Seller Subsidiary;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (l)&#160;all Liabilities relating to any violation of law by
    Seller or Seller Subsidiary or any litigation against Seller or
    Seller Subsidiary;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (m)&#160;all Liabilities relating to brokers fees or success
    fees with respect to the Transaction.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;1.4&#160;&#160;<I><U>The
    Purchase Price</U>.</I>&#160;&#160;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)&#160;pay or cause to be paid to Seller an
    amount of cash equal to One&#160;Million Dollars ($1,000,000)
    U.S. and (ii)&#160;Purchaser or Purchaser Subsidiary, as
    determined by Purchaser, shall assume the Assumed Liabilities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;1.5&#160;&#160;<I><U>Allocation
    of Purchase Price; Tax Filings</U>.</I>&#160;&#160;The Purchase
    Price shall be allocated among the Purchased Assets as set forth
    in <U>Exhibit&#160;B</U> hereto, which has been arrived at by
    arm&#146;s length negotiation, in compliance with
    Section&#160;1060 of the Code and the regulations promulgated
    thereunder. Each of Purchaser, Purchaser Subsidiary, Seller and
    Seller Subsidiary shall (i)&#160;timely file all forms
    (including Internal Revenue Service Form&#160;8594)&#160;and Tax
    Returns required to be filed in connection with such allocation,
    (ii)&#160;be bound by such allocation for purposes of
    determining Taxes, (iii)&#160;prepare and file, and cause its
    Affiliates to prepare and file, its Tax Returns on a basis
    consistent with such allocation and (iv)&#160;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
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-2
</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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&#160;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>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;II<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">THE CLOSING
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;2.1&#160;&#160;<I><U>The
    Closing</U>.</I>&#160;&#160;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&#160;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&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;2.2&#160;&#160;<I><U>Deliveries
    by Seller and Seller Subsidiary</U>.</I>&#160;&#160;At the
    Closing, Seller and Seller Subsidiary shall deliver or cause to
    be delivered to Purchaser and Purchaser Subsidiary:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;a duly executed Bill of Sale and Assignment in the form
    annexed hereto as <U>Exhibit&#160;C</U>;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;duly executed copies of all required consents;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (e)&#160;all documents containing or relating to
    &#147;know-how&#148; to be acquired by Purchaser or Purchaser
    Subsidiary pursuant hereto;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (f)&#160;all of the books, records and customer data and reports
    of Seller or Seller Subsidiary relating to the Purchased Assets;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (g)&#160;the officers&#146; certificate referred to in
    Section&#160;6.2(c) hereof;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (h)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (i)&#160;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&#160;D</U> hereto;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (j)&#160;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>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;2.3&#160;&#160;<I><U>Deliveries
    by Purchaser</U>.</I>&#160;&#160;At the Closing, Purchaser shall
    deliver or cause to be delivered to Seller:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;immediately available funds in the amount of One
    Million Dollars ($1,000,000) (U.S.);
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;the Assumption Agreement, duly executed by Purchaser or
    Purchaser Subsidiary, as applicable;
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-3
</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;the officer&#146;s certificate referred to in
    Section&#160;6.3 hereof;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;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 style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;III<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">REPRESENTATIONS
    AND WARRANTIES OF SELLER AND SELLER SUBSIDIARY
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.1&#160;&#160;<I><U>Authorization</U>.</I>&#160;&#160;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
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.2&#160;&#160;<I><U>Binding
    Agreement</U>.</I>&#160;&#160;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)&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.3&#160;&#160;<I><U>Good
    Title&#160;Conveyed</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.4&#160;&#160;<I><U>Organization;
    Qualification of Seller</U>.</I>&#160;&#160;Each of Seller and
    Seller Subsidiary (i)&#160;is a corporation duly organized,
    validly existing and in good standing under the laws of its
    state of incorporation; (ii)&#160;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)&#160;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>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-4
</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.5&#160;&#160;<I><U>Subsidiaries
    and Affiliates</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.6&#160;&#160;<I><U>Consents
    and Approvals; No Violations</U>.</I>&#160;&#160;Except for the
    filing with the SEC of (x)&#160;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)&#160;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)&#160;conflict with 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)&#160;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)&#160;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)&#160;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&#160;(ii), (iii)&#160;and
    (iv)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.7&#160;&#160;<I><U>SEC
    Reports and Financial Statements</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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&#160;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)&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    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&#160;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)&#160;as disclosed in
    such financial statements and (b)&#160;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 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>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-5
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.8&#160;&#160;<I><U>Property
    Held by Others</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.9&#160;&#160;<I><U>Absence
    of Certain Changes</U>.</I>&#160;&#160;Since the Balance Sheet
    Date, neither Seller nor Seller Subsidiary has:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;permitted or allowed any of the Purchased Assets to be
    subjected to any Encumbrance;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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;&#160;or
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;agreed, whether in writing or otherwise, to take any
    action described in this section.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.10&#160;&#160;<I><U>Title
    to Properties; Encumbrances</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.11&#160;&#160;<I><U>Environmental
    Matters</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.12&#160;&#160;<I><U>Contracts
    and Commitments</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;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&#160;3.12(a) or 3.12(b).
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;Neither Seller nor Seller Subsidiary is restricted by
    agreement from carrying on its business anywhere in the world.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (e)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (f)&#160;Except for the contracts set forth in
    Section&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (g)&#160;Except for the contracts set forth in
    Section&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.13&#160;&#160;<I><U>Customers</U>.</I>&#160;&#160;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&#160;31, 2005.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.14&#160;&#160;<I><U>Litigation</U>.</I>&#160;&#160;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>

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    <BR>
    A-6

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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.15&#160;&#160;<I><U>Compliance
    with Laws</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.16&#160;&#160;<I><U>Employee
    Benefit Plans</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.17&#160;&#160;<I><U>Tax
    Matters</U>.</I>&#160;&#160;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 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.18&#160;&#160;<I><U>Intellectual
    Property</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;Except as indicated in the Disclosure Schedule, all
    Patents, registrations and applications for Intellectual
    Property that are owned by Seller or Seller Subsidiary
    (i)&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;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)&#160;alleging any such conflict or infringement
    with any third party&#146;s proprietary rights or
    (ii)&#160;challenging the ownership, use, validity or
    enforceability of the Seller Intellectual Property.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (e)&#160;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)&#160;computer programs, including any and all
    software implementations of algorithms, models
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-7

</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    and methodologies, whether in source code or object code,
    (ii)&#160;computer databases and computer compilations,
    including any and all data and collections of data, whether
    machine readable or otherwise, (iii)&#160;descriptions, flow-
    charts and other work product used to design, plan, organize and
    develop any of the foregoing, (iv)&#160;any Domain Names and the
    technology supporting and content contained on any Internet
    site(s), and (v)&#160;all documentation, including user manuals
    and training materials, relating to any of the foregoing.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (f)&#160;Each item of Software listed in the Disclosure Schedule
    is either (i)&#160;owned by Seller or Seller Subsidiary, or
    (ii)&#160;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)&#160;employees of Seller or Seller Subsidiary within the
    scope of their employment; or (y)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (g)&#160;Except pursuant to the outbound licenses of Seller
    Intellectual Property set forth in Section&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (h)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (i)&#160;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 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (j)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (k)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (l)&#160;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>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-8

</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.19&#160;&#160;<I><U>Solvency</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.20&#160;&#160;<I><U>Brokers
    or Finders</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.21&#160;&#160;<I><U>Full
    Disclosure</U>.</I>&#160;&#160;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>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;3.22&#160;&#160;<I><U>Proxy
    Statement</U>.</I>&#160;&#160;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 style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;IV<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">REPRESENTATIONS
    AND WARRANTIES OF PURCHASER AND PURCHASER SUBSIDIARY
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Purchaser represents and warrants to Seller that:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;4.1&#160;&#160;<I><U>Organization</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;4.2&#160;&#160;<I><U>Authorization;
    Validity of Agreement; Necessary Action</U>.</I>&#160;&#160;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
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-9
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    in accordance with its terms except (i)&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;4.3&#160;&#160;<I><U>Consents
    and Approvals; No Violations</U>.</I>&#160;&#160;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)&#160;conflict with or result in any breach of
    any provision of the certificate of incorporation or by-laws of
    Purchaser or Purchaser Subsidiary, (ii)&#160;require any filing
    with, or permit, authorization, consent or approval of, any
    Governmental Entity, (iii)&#160;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)&#160;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&#160;(ii), (iii)&#160;and (iv)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;4.4&#160;&#160;<I><U>Brokers
    or Finders</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;4.5&#160;&#160;<I><U>Information
    Supplied</U>.</I>&#160;&#160;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 style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;V<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">COVENANTS
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.1&#160;&#160;<I><U>Interim
    Operations of Seller and Seller
    Subsidiary</U>.</I>&#160;&#160;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)&#160;as expressly provided
    in this Agreement, (ii)&#160;as set forth in the Disclosure
    Schedule or (iii)&#160;as may be agreed in writing by Purchaser
    in its sole discretion:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;neither Seller nor Seller Subsidiary shall
    (i)&#160;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)&#160;enter
    into, terminate or amend any contract identified on
    <U>Schedule&#160;E</U> hereto or any material contract,
    (iii)&#160;incur any material liability, (iv)&#160;permit the
    Purchased Assets to become subject to any Encumbrance or
    (v)&#160;sell, transfer, lease, license or otherwise dispose of
    any of the Purchased Assets or Seller Intellectual Property;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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)&#160;such plan provides for the consummation of the
    Transactions in accordance with the terms of this Agreement;
    (y)&#160;such plan is adopted in accordance with the DGCL; and
    (z)&#160;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>&#160;day
    after the Closing Date;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;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
</DIV>

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    <BR>
    A-10
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (e)&#160;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&#160;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;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (f)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.2&#160;&#160;<I><U>Access;
    Confidentiality</U>.</I>&#160;&#160;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)&#160;afford Purchaser and its authorized
    representatives reasonable access to all offices and other
    facilities and to all books and records, (ii)&#160;permit
    Purchaser to make such inspections and to make copies of such
    books and records as it may reasonably require and
    (iii)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.3&#160;&#160;<I><U>Stockholder
    Meeting</U>.</I>&#160;&#160;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&#160;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>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.4&#160;&#160;<I><U>Proxy
    Statement</U>.</I>&#160;&#160;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)&#160;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)&#160;cause the Proxy Statement to
    be mailed to its stockholders as promptly as practicable. Seller
    shall promptly (i)&#160;notify Purchaser upon the receipt of any
    such comments or requests and (ii)&#160;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)&#160;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)&#160;Seller shall include in such drafts,
    correspondence and filings all comments reasonably proposed by
    Purchaser and (iii)&#160;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>

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    <BR>
    A-11
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.5&#160;&#160;<I><U>Efforts
    and Actions to Cause Closing to Occur</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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 provide the other parties with
    copies of any communication received by such party from any
    Governmental Entity regarding any of the Transactions.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;Seller shall use its best efforts to obtain the release
    of the liens and judgments described in Section&#160;3.3 of the
    Disclosure Schedule (other than tax liens, which shall be
    discharged in accordance with (i)&#160;below) and otherwise
    shall obtain, prior to the Closing, (i)&#160;the unconditional
    release of each Person holding a tax or other lien (other than
    those liens, excepting tax liens, and judgments described in
    Section&#160;3.3 of the Disclosure Schedule) on property owned
    or leased by Seller or Seller Subsidiary and (ii)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.6&#160;&#160;<I><U>Notification
    of Certain Matters</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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&#160;5.6(a) or otherwise
    shall, except as set forth in Section&#160;5.6(b), be deemed to
    cure any breach of any representation of or warranty made
    pursuant to this Agreement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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&#160;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&#160;5.6(b).
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;Seller and Seller Subsidiary shall give notice to
    Purchaser promptly after becoming aware of (i)&#160;the
    occurrence or non-occurrence of any event whose occurrence or
    non-occurrence would be likely to cause either (A)&#160;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)&#160;any condition
    set forth in ARTICLE&#160;VI to be unsatisfied in any material
    respect at any time from the date hereof to the Closing Date and
    (ii)&#160;any failure of Seller and Seller Subsidiary or any
    officer, director, employee or agent thereof, to comply with or
    satisfy any covenant, condition or
</DIV>

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    <BR>
    A-12
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.7&#160;&#160;<I><U>No
    Solicitation of Competing Transaction</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;Neither Seller&#146;s Board of Directors nor Seller
    Subsidiary&#146;s Board of Directors shall (i)&#160;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)&#160;approve or recommend or propose to
    approve or recommend, any Acquisition Proposal or
    (iii)&#160;authorize Seller or Seller Subsidiary to enter into
    any agreement (other than pursuant to this Agreement) with
    respect to any Acquisition Proposal.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;Notwithstanding the foregoing clauses&#160;(a) 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.8&#160;&#160;<I><U>No
    Assumption of Labor Liabilities</U>.</I>&#160;&#160;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,
    <FONT style="white-space: nowrap">and/or</FONT> any
    other term or condition of employment.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.9&#160;&#160;<I><U>Subsequent
    Actions</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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>

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    <BR>
    A-13
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.10&#160;&#160;<I><U>Publicity</U>.</I>&#160;&#160;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&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.11&#160;&#160;<I><U>Mail
    Received After Closing</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.12&#160;&#160;<I><U>Access
    to Books and Records</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.13&#160;&#160;<I><U>Waiver
    of Bulk Sales Requirement</U>.</I>&#160;&#160;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 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.14&#160;&#160;<I><U>Accounts
    Receivable</U>.</I>&#160;&#160;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 70th&#160;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)&#160;the total
    amount of self reported royalties actually received by Purchaser
    on or prior to the 60th&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.15&#160;&#160;<I><U>Proxy
    Solicitation Efforts</U>.</I>&#160;&#160;Seller shall
    (x)&#160;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)&#160;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)&#160;otherwise use its best
    efforts to secure Stockholder Approval for the Transactions.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.16&#160;&#160;<I><U>Post-Closing
    Assignment</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;5.17&#160;&#160;<I><U>Pre-Closing
    Delivery</U>.</I>&#160;&#160;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&#160;365, San&#160;Jose,
    California 95110 as of April&#160;13, 2006 and the DVDs
    containing the source code for the
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-14
</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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&#160;Jose offices on
    April&#160;13, 2006.
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;VI<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">CONDITIONS
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;6.1&#160;&#160;<I><U>Conditions
    to Each Party&#146;s Obligation to Effect the
    Closing</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;<I><U>Statutes; Court Orders</U>.</I>&#160;&#160;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;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;<I><U>Stockholder
    Approval</U>.</I>&#160;&#160;Stockholder Approval shall have
    been obtained.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;6.2&#160;&#160;<I><U>Conditions
    to Obligations of Purchaser and Purchaser Subsidiary to Effect
    the Closing</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;<I><U>Government Action</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;Intentionally Omitted.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;<I><U>Officer&#146;s
    Certificate</U>.</I>&#160;&#160;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)&#160;all of the representations and
    warranties of Seller set forth in this Agreement that are
    qualified as to materiality are true and complete, (x)&#160;all
    such representations and warranties that are not so qualified
    are true and complete in all material respects, (y)&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;<I><U>Consents Obtained</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (e)&#160;<I><U>Material Adverse Change</U>.</I>&#160;&#160;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 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (f)&#160;Intentionally Omitted.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (g)&#160;<I><U>Material Liabilities</U>.</I>&#160;&#160;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
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-15
</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Liabilities of Seller or Seller Subsidiary other than those to
    be assumed pursuant to the Assumption Agreement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (h)&#160;<I><U>Representations and
    Warranties</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (i)&#160;<I><U>Confirming Inspection</U>.</I>&#160;&#160;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&#160;365, San&#160;Jose, California 95110 as of
    April&#160;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&#160;Jose offices on
    April&#160;13, 2006.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (j)&#160;<I><U>Breach</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;6.3&#160;&#160;<I><U>Conditions
    to Obligations of Seller to Effect the
    Closing</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;<I><U>Representations and
    Warranties</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;<I><U>Breach</U>.</I>&#160;&#160;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;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;<I><U>Officer&#146;s
    Certificate</U>.</I>&#160;&#160;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)&#160;all of the representations and
    warranties of Purchaser set forth in this Agreement that are
    qualified as to materiality are true and complete, (y)&#160;all
    such representations and warranties that are not so qualified
    are true and complete in all material respects, and
    (z)&#160;Purchaser has performed all obligations required under
    this Agreement to be performed by it at or prior to the Closing.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;VII<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">TERMINATION
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;7.1&#160;&#160;<I><U>Termination</U>.</I>&#160;&#160;The
    Transactions may be terminated or abandoned at any time prior to
    the Closing Date:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;By the mutual written consent of Purchaser and Seller;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-16
</DIV><!-- END LOGICAL PAGE -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;By Seller:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 8%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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&#160;days after
    the giving of written notice by Seller to Purchaser specifying
    such breach;&#160;or
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 8%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    on or after June&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;By Purchaser:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 8%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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&#160;days after the giving of written notice by
    Purchaser to Seller specifying such breach;&#160;or
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 8%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    on or after June&#160;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>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;7.2&#160;&#160;<I><U>Effect
    of Termination</U>.</I>&#160;&#160;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)&#160;for fraud, (B)&#160;for breach of this Agreement
    prior to such termination or abandonment of the Transactions and
    (C)&#160;as set forth in Section&#160;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&#160;5.15, Seller shall
    reimburse Purchaser for all
    <FONT style="white-space: nowrap">out-of-pocket</FONT>
    expenses incurred by Purchaser in connection with the
    Transactions.
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;VIII<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">INDEMNIFICATION
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;8.1&#160;&#160;<I><U>Indemnification;
    Remedies</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;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;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;8.2&#160;&#160;<I><U>Limitations</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;No claim for the recovery of any Losses pursuant to
    section&#160;8.1(a) may be asserted by any Purchaser Indemnified
    Person more than 183&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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.&#160;of Losses.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-17
</DIV><!-- END LOGICAL PAGE -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;8.3&#160;&#160;<I><U>Notice
    of Claim; Defense</U>.</I>&#160;&#160;Purchaser shall give
    Seller prompt (and in any event within 183&#160;days after the
    Closing Date for a claim made pursuant to Section&#160;8.1(a)
    above) notice of any third-party claim that may give rise to any
    indemnification obligation under this Article&#160;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&#160;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
    <FONT style="white-space: nowrap">third-party</FONT>
    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)&#160;provides for
    injunctive or other non-monetary relief affecting Purchaser or
    any Affiliate of Purchaser or (ii)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;8.4&#160;&#160;<I><U>Survival
    of Indemnification Claims</U>.</I>&#160;&#160;The
    indemnification obligations set forth in this Article&#160;VIII
    shall survive the Closing.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;8.5&#160;&#160;<I><U>Tax
    Effect of Indemnification Payments</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;8.6&#160;&#160;<I><U>Survival
    of Covenants, Representations and
    Warranties</U>.</I>&#160;&#160;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&#160;8.2(a);
    provided, that, the covenants in Section&#160;5.9,
    Section&#160;5.12 and Section&#160;5.16 shall terminate on the
    275<SUP style="font-size: 85%; vertical-align: text-top">th</SUP>&#160;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>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;IX<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">DEFINITIONS
    AND INTERPRETATION
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;9.1&#160;&#160;<I><U>Definitions</U>.</I>&#160;&#160;For
    all purposes of this Agreement, except as otherwise expressly
    provided or unless the context clearly requires otherwise:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Acquisition Proposal</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Affiliate</U>&#148;</I> shall have the meaning set
    forth in
    <FONT style="white-space: nowrap">Rule&#160;12b-2</FONT>
    promulgated under the Exchange Act.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Agreement</U>&#148;</I> or <I>&#147;<U>this
    Agreement</U>&#148;</I> shall mean this Asset Purchase
    Agreement, together with the Exhibits hereto and the Disclosure
    Schedule.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Associate</U>&#148;</I> shall have the meaning set
    forth in
    <FONT style="white-space: nowrap">Rule&#160;12b-2</FONT>
    promulgated under the Exchange Act.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-18
</DIV><!-- END LOGICAL PAGE -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Assumed Contracts</U>&#148;</I> shall mean
    (x)&#160;all contracts, Licenses and other agreements of Seller
    or Seller Subsidiary set forth on <U>Exhibit&#160;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)&#160;such
    additional contracts or licenses of Seller or Seller Subsidiary
    as are selected by Purchaser by written notice to Seller and
    (z)&#160;such additional contracts, Licenses and other
    agreements as are assigned to Purchaser pursuant to
    Section&#160;5.16.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Assumed Liabilities</U>&#148;</I> shall have the
    meaning ascribed thereto in Section&#160;1.2.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Assumption Agreement</U>&#148;</I> shall have the
    meaning ascribed thereto in Section&#160;1.1.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Balance Sheet</U>&#148;</I> shall mean the most
    recent audited balance sheet of the Seller and Seller Subsidiary
    in the Seller SEC Documents.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Balance Sheet Date</U>&#148;</I> shall mean
    December&#160;31, 2005.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Business</U>&#148;</I> shall mean the research,
    development, marketing, sale, service and licensing of audio and
    optical disc technologies, products and services.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Closing</U>&#148;</I> shall mean the closing
    referred to in Section&#160;2.1.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Closing Date</U>&#148;</I> shall mean the date on
    which the Closing occurs.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Closing Quarter Royalty Payment</U>&#148;</I> shall
    have the meaning ascribed thereto in Section&#160;5.14.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Code</U>&#148;</I> shall mean the Internal Revenue
    Code of 1986, as amended.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Copyrights</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>DGCL</U>&#148;</I> shall mean the Delaware General
    Corporation Law.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Disclosure Schedule</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Effective Time</U>&#148;</I> shall mean
    10:00&#160;a.m. local time on the Closing Date.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Encumbrances</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Environmental Claim</U>&#148;</I> 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)&#160;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)&#160;circumstances forming the basis of any violation, or
    alleged violation, of any Environmental Law.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Environmental Law</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>ERISA</U>&#148;</I> shall mean the Employee
    Retirement Income Security Act of 1974, as amended.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Exchange Act</U>&#148;</I> shall mean the Securities
    Exchange Act of 1934, as amended.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-19
</DIV><!-- END LOGICAL PAGE -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Excluded Liabilities</U>&#148;</I> shall have the
    meaning ascribed thereto in Section&#160;1.3.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>GAAP</U>&#148;</I> shall mean United States
    generally accepted accounting principles.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Governmental Entity</U>&#148;</I> shall mean a
    court, arbitral tribunal, administrative agency or commission or
    other governmental or other regulatory authority or agency.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Intellectual Property</U>&#148;</I> shall mean all
    of the following: Trademarks, Patents, ideas, Copyrights, domain
    names, Trade Secrets, know-how and Licenses.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Liabilities</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Licenses</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Losses</U>&#148;</I> 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&#160;VIII)&#160;incurred by any of the Purchaser
    Indemnified Persons.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Materials of Environmental Concern</U>&#148;</I>
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Patents</U>&#148;</I> shall mean issued U.S. and
    foreign patents and pending patent applications, patent
    disclosures, and any and all divisions, continuations,
    <FONT style="white-space: nowrap">continuations-in-part,</FONT>
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Person</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Plan</U>&#148;</I> shall have the meaning set forth
    in ERISA Section&#160;3(3).
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Proxy Statement</U>&#148;</I> shall have the meaning
    ascribed thereto in Section&#160;3.6.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Purchased Assets</U>&#148;</I> shall have the
    meaning ascribed thereto in Section&#160;1.1.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Purchaser</U>&#148;</I> shall have the meaning
    ascribed thereto in the Preamble.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Purchaser Subsidiary</U>&#148;</I> shall have the
    meaning ascribed thereto in the Preamble.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Purchaser Indemnified Persons</U>&#148;</I> shall
    mean Purchaser, Purchaser Subsidiary, each of their Affiliates
    and each of their officers, directors, employees, agents and
    representatives.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Securities Act</U>&#148;</I> shall mean the
    Securities Act of 1933, as amended.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>SEC</U>&#148;</I> shall mean the United States
    Securities and Exchange Commission.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Seller</U>&#148;</I> shall have the meaning ascribed
    thereto in the Preamble.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Seller Common Stock</U>&#148;</I> shall mean the
    common stock of Seller.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Seller Intellectual Property</U>&#148;</I> shall
    mean all Intellectual Property of Seller or Seller Subsidiary or
    used in connection with the Business.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Seller Software</U>&#148;</I> means all material
    computer programs and computer databases, other than
    <FONT style="white-space: nowrap">off-the-shelf</FONT>
    applications, which are owned or otherwise used by Seller or
    Seller Subsidiary.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-20
</DIV><!-- END LOGICAL PAGE -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Seller SEC Documents</U>&#148;</I> shall have the
    meaning ascribed thereto in Section&#160;3.7.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Seller Subsidiary</U>&#148;</I> shall have the
    meaning ascribed thereto in the Preamble.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Stockholder Approval</U>&#148;</I> shall have the
    meaning ascribed thereto in Section&#160;3.1.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Subsidiary</U>&#148;</I> shall mean, with respect to
    any Person, any corporation or other organization, whether
    incorporated or unincorporated, of which (a)&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Tax</U>&#148;</I> or <I>&#147;<U>Taxes</U>&#148;</I>
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Tax Return</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Trademarks</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Trade Secrets</U>&#148;</I> shall have the meaning
    ascribed thereto in Section&#160;3.18.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Transactions</U>&#148;</I> shall mean all the
    transactions provided for or contemplated by this Agreement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Transfer Taxes</U>&#148;</I> 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>&#147;<U>Transfer Tax Payor</U>&#148;</I> shall mean the
    party which has primary legal responsibility for the payment of
    any particular Transfer Tax.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;9.2&#160;&#160;<I><U>Interpretation</U>.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (e)&#160;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>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-21
</DIV><!-- END LOGICAL PAGE -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (f)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (g)&#160;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>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">ARTICLE&#160;X<BR>
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-family: 'Times New Roman', Times">MISCELLANEOUS
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.1&#160;&#160;<I><U>Fees
    and Expenses</U>.</I>&#160;&#160;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&#160;2.2 and in
    Section&#160;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)&#160;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.&#160;are paid by Seller, Purchaser shall reimburse Seller
    in respect of such Transfer Taxes by wire transfer of
    immediately available funds within ten (10)&#160;business days
    of receipt of notice and proof of payment from Seller.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.2&#160;&#160;<I><U>Amendment
    and Modification</U>.</I>&#160;&#160;Subject to the revision of
    <U>Schedule&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.3&#160;&#160;<I><U>Notices</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    if to Purchaser or Purchaser Subsidiary, to:
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    DTS, Inc.<BR>
    5171 Clareton Drive<BR>
    Agoura Hills, CA 91301<BR>
    Attention: General Counsel<BR>
    Telephone:
    <FONT style="white-space: nowrap">(818)&#160;706-3525</FONT><BR>
    Telecopy:
    <FONT style="white-space: nowrap">(818)&#160;824-2470</FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    with a copy to:
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Heller Ehrman<BR>
    4350 La&#160;Jolla Village<BR>
    Seventh Floor<BR>
    San&#160;Diego, CA 92122<BR>
    Attention: Kirt Shuldberg,&#160;Esq.<BR>
    Telephone:
    <FONT style="white-space: nowrap">(858)&#160;450-5766</FONT><BR>
    Telecopy:
    <FONT style="white-space: nowrap">(858)&#160;587-5928</FONT>
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-22
</DIV><!-- END LOGICAL PAGE -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    And
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    if to Seller or Seller Subsidiary, to:
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    With a copy to:
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Reed Smith LLP<BR>
    1901 Avenue of the Stars<BR>
    Suite&#160;700<BR>
    Los Angeles, California 90062<BR>
    Attention: John Iino,&#160;Esq.<BR>
    Telephone:
    <FONT style="white-space: nowrap">(310)&#160;734-5200</FONT><BR>
    Telecopy:
    <FONT style="white-space: nowrap">(310)&#160;734-5299</FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.4&#160;&#160;<I><U>Counterparts</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.5&#160;&#160;<I><U>Entire
    Agreement; No Third Party Beneficiaries</U>.</I>&#160;&#160;This
    Agreement (a)&#160;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)&#160;are not intended to confer upon
    any Person other than the parties hereto and the Purchaser
    Indemnified Persons any rights or remedies hereunder.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.6&#160;&#160;<I><U>Severability</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.7&#160;&#160;<I><U>Governing
    Law</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.8&#160;&#160;<I><U>Enforcement;
    Venue</U>.</I>&#160;&#160;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)&#160;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)&#160;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)&#160;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>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-23
</DIV><!-- END LOGICAL PAGE -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.9&#160;&#160;<I><U>Time
    of Essence</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.10&#160;&#160;<I><U>Extension;
    Waiver</U>.</I>&#160;&#160;At any time prior to the Closing
    Date, the parties may (a)&#160;extend the time for the
    performance of any of the obligations or other acts of the other
    parties, (b)&#160;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)&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.11&#160;&#160;<I><U>Election
    of Remedies</U>.</I>&#160;&#160;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 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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.12&#160;&#160;<I><U>Assignment</U>.</I>&#160;&#160;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 style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-variant: SMALL-CAPS">Section</FONT>&#160;10.13&#160;&#160;<I><U>Joint
    and Several Liability</U>.</I>&#160;&#160;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>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-24
</DIV><!-- END LOGICAL PAGE -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN LOGICAL PAGE -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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>

<DIV style="margin-top: 24pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 49%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    DTS, INC.
</DIV>

<DIV style="margin-top: 48pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="49%"></TD>
    <TD width="4%"></TD>
    <TD width="47%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    By:&#160;
</TD>
    <TD align="left">
    <DIV style="display: inline; text-align: left; width: 90%">/s/&#160;&#160;<FONT style="font-variant: SMALL-CAPS">JON
    E. KIRCHNER</FONT></DIV>
</TD>
</TR>

</TABLE>

<DIV style="font-size: 2pt; margin-left: 53%; width: 100%; align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=455 length=0 -->

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Name:&#160;Jon Kirchner
</DIV>

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="53%"></TD>
    <TD width="8%"></TD>
    <TD width="39%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    Title:&#160;
</TD>
    <TD align="left">
    President&#160;&#38; Chief Executive Officer
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 24pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 49%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    DTS BVI LIMITED
</DIV>

<DIV style="margin-top: 48pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="49%"></TD>
    <TD width="4%"></TD>
    <TD width="47%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    By:&#160;
</TD>
    <TD align="left">
    <DIV style="display: inline; text-align: left; width: 90%">/s/&#160;&#160;<FONT style="font-variant: SMALL-CAPS">JON
    E. KIRCHNER</FONT></DIV>
</TD>
</TR>

</TABLE>

<DIV style="font-size: 2pt; margin-left: 53%; width: 100%; align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=455 length=0 -->

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Name:&#160;Jon E. Kirchner
</DIV>

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="53%"></TD>
    <TD width="8%"></TD>
    <TD width="39%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    Title:&#160;
</TD>
    <TD align="left">
    Chairman
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 24pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 49%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    SPATIALIZER AUDIO LABORATORIES, INC.
</DIV>

<DIV style="margin-top: 48pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="49%"></TD>
    <TD width="4%"></TD>
    <TD width="47%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    By:&#160;
</TD>
    <TD align="left">
    <DIV style="display: inline; text-align: left; width: 90%">/s/&#160;&#160;<FONT style="font-variant: SMALL-CAPS">HENRY
    R. MANDELL</FONT></DIV>
</TD>
</TR>

</TABLE>

<DIV style="font-size: 2pt; margin-left: 53%; width: 100%; align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=455 length=0 -->

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Name:&#160;Henry R. Mandell
</DIV>

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="53%"></TD>
    <TD width="8%"></TD>
    <TD width="39%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    Title:&#160;
</TD>
    <TD align="left">
    Chairman
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 24pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 49%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    DESPER PRODUCTS, INC.
</DIV>

<DIV style="margin-top: 48pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="49%"></TD>
    <TD width="4%"></TD>
    <TD width="47%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    By:&#160;
</TD>
    <TD align="left">
    <DIV style="display: inline; text-align: left; width: 90%">/s/&#160;&#160;<FONT style="font-variant: SMALL-CAPS">HENRY
    R. MANDELL</FONT></DIV>
</TD>
</TR>

</TABLE>

<DIV style="font-size: 2pt; margin-left: 53%; width: 100%; align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=455 length=0 -->

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Name:&#160;Henry R. Mandell
</DIV>

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="53%"></TD>
    <TD width="8%"></TD>
    <TD width="39%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    Title:&#160;
</TD>
    <TD align="left">
    President
</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    A-25
</DIV><!-- END LOGICAL PAGE -->

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="147"></A>
</DIV>

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


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">AMENDMENT TO CERTIFICATE OF INCORPORATION INCREASING THE<BR>
NUMBER OF SHARES OF AUTHORIZED COMMON STOCK

</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">CERTIFICATE OF AMENDMENT OF</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">CERTIFICATE OF INCORPORATION OF</DIV>

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

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Audio Laboratories, a corporation organized and existing under the General
Corporation Law of the State of Delaware (the &#147;Corporation&#148;), does hereby certify as follows:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The amendment to this Corporation&#146;s Certificate of Incorporation, as amended (the
&#147;Certificate&#148;) set forth in the following resolution, was approved and duly adopted by this
Corporation&#146;s Board of Directors in accordance with the provisions of Section&nbsp;242 of the General
Corporation Law of the State of Delaware (the &#147;DGCL&#148;) and was duly adopted by written consent of
stockholders in accordance with Section&nbsp;228 of the DGCL:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;RESOLVED, that Section&nbsp;1 of Article&nbsp;IV of the Certificate of this Corporation be amended
to read in its entirety substantially as follows:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;SECTION 1. The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is 301,000,000 shares, consisting of 300,000,000 shares of
Common Stock, par value $.01 per share (&#147;Common Stock&#148;), and 1,000,000 shares of Preferred
Stock, par value $.01 per share (&#147;Preferred Stock&#148;).&#148;
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">IN WITNESS WHEREOF, Spatializer Audio Laboratories, Inc. has caused this Certificate to be signed
by its duly authorized officer this &#95;&#95;&#95;day of &#95;&#95;&#95;, 2007.
</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">SPATIALIZER AUDIO LABORATORIES, INC.<BR><BR><BR></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">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Henry R. Mandell&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Chairman of the Board of Directors of<BR>
Spatializer Audio Laboratories, Inc.&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->B-1<!-- /Folio -->
</DIV>



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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="148"></A>
</DIV>

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


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">AMENDMENT TO CERTIFICATE OF INCORPORATION FOR REVERSE STOCK SPLIT

</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">CERTIFICATE OF AMENDMENT OF</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">
CERTIFICATE OF INCORPORATION OF</DIV>

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Spatializer Audio Laboratories, a corporation organized and existing under the General Corporation
Law of the State of Delaware (the &#147;Corporation&#148;), does hereby certify as follows:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The amendment to this Corporation&#146;s Certificate of Incorporation, as amended (the &#147;Certificate&#148;)
set forth in the following resolution, was approved and duly adopted by this Corporation&#146;s Board of
Directors in accordance with the provisions of Section&nbsp;242 of the General Corporation Law of the
State of Delaware (the &#147;DGCL&#148;) and was duly adopted by written consent of stockholders in
accordance with Section&nbsp;228 of the DGCL:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;RESOLVED, that Section&nbsp;1 of Article&nbsp;IV of the Certificate of this Corporation is hereby
amended by adding at the end of Section&nbsp;1 of Article&nbsp;IV the following new sentences:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;Effective 12:01&nbsp;a.m. on &#091;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;, 200&#95;&#95;&#95;&#093; (the &#147;Effective Time&#148;) all shares of
Common Stock of the Corporation issued and outstanding immediately prior to the Effective
Time (&#147;Old Common Stock&#148;) shall be and hereby are automatically combined and reclassified
without any action on the part of the holder thereof, as follows: Every &#091;five to fifty&#093; shares of Old Common Stock shall be combined and reclassified (the &#147;Reverse Stock Split&#148;) as
one share of issued and outstanding Common Stock (&#147;New Common Stock&#148;). The Corporation
shall not issue fractional shares on account of the Reverse Stock Split and shall issue cash
in lieu thereof. Following the Effective Time, each holder of Old Common Stock shall be
entitled to receive upon surrender of such holder&#146;s certificate(s) representing Old Common
Stock (whether one or more, &#147;Old Certificates&#148;) for cancellation pursuant to procedures
adopted by the Corporation, a certificate(s) representing the number of whole shares of New
Common Stock (whether one or more, &#147;New Certificates&#148;) into which and for which the shares
of Old Common Stock formerly represented by Old Certificates so surrendered are reclassified
under the terms hereof. From and after the Effective Time, Old Certificates shall represent
only the right to receive New Certificates. The Corporation shall not recognize on its
stock record books any purported transfer of any fractional share of Common Stock of the
Corporation.&#148;
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">IN WITNESS WHEREOF, Spatializer Audio Laboratories, Inc. has caused this Certificate to be
signed by its duly authorized officer this &#95;&#95;&#95;day of &#95;&#95;&#95;, 200&#95;&#95;&#95;.
</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">SPATIALIZER AUDIO LABORATORIES, INC.<BR>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&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">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Henry R. Mandell&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="left">Chairman of the Board of Directors of Spatializer<BR>
Audio Laboratories, Inc.&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>

<P align="center" style="font-size: 10pt"><!-- Folio -->C-1<!-- /Folio -->
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="149"></A>
</DIV>

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


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">ANNUAL REPORT ON FORM 10-K

</DIV>


</DIV>

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


<DIV 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>Washington, D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 12pt"><B><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></B>
</DIV>

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

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></B>
</DIV>


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

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 2pt">
    <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>ANNUAL REPORT PURSUANT TO SECTION 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><B>For the period ended: December&nbsp;31, 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 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"><B>(Exact name of registrant as specified in its charter)</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="47%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><B>Delaware</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>95-4484725</B></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>(State or other jurisdiction of</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>(I.R.S. Employer</B></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>incorporation or organization)</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Identification No.)</B></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>2060 East Avenida de Los Arboles, # D190, Thousand Oaks, California 91362-1376</B><BR>
(Address of principal corporate offices)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Telephone Number: (408)&nbsp;453-4180</B><BR>
(Registrant&#146;s telephone number, including area code)</DIV>

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

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. <FONT face="Wingdings">&#111;</FONT> Yes <FONT face="Wingdings">&#254;</FONT> No
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. <FONT face="Wingdings">&#111;</FONT> Yes <FONT face="Wingdings">&#254;</FONT> No
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant (1)&nbsp;has filed all reports required to be filed
by Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12&nbsp;months (or
for such shorter period that the registrant was required to file such reports), and (2)&nbsp;has been
subject to such filing requirements for the past 90&nbsp;days: Yes <FONT face="Wingdings">&#254;</FONT> No <FONT face="Wingdings">&#111;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if disclosure of delinquent filers pursuant to Item&nbsp;405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant&#146;s knowledge,
in definitive proxy or information statements incorporated by reference in
Part&nbsp;III of this Form 10-K or any amendment to this Form 10-K. <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of &#147;accelerated filer and large accelerated
filer&#148; in Rule&nbsp;12b-2 of the Exchange Act.
</DIV>
<DIV align="center" style="font-size: 10pt">Large Accelerated Filer <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accelerated Filer <FONT face="Wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Non-Accelerated Filer <FONT face="Wingdings">&#254;</FONT></DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant is a shell company (as defined in Rule&nbsp;12b-2 of
the Exchange Act). <FONT face="Wingdings">&#111;</FONT> Yes <FONT face="Wingdings">&#254;</FONT> No
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate market value of the voting stock held by non-affiliates of the registrant
computed by reference to the price at which the common equity was last sold as of the last business
day of the registrant&#146;s most recently completed second quarter (June&nbsp;30, 2006) was approximately
$731,000 and at February&nbsp;25, 2007 was approximately $986,000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of February&nbsp;25, 2007, there were 48,763,383 shares of the Registrant&#146;s Common Stock
outstanding.
</DIV>

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


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









</DIV>

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

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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>TABLE OF CONTENTS</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="100%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#301">PART I</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#302">Item&nbsp;1. Business</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#303">Item&nbsp;1A. Risk Factors</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#304">Item&nbsp;1B. Unresolved Staff Comments</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#305">Item&nbsp;2. Properties</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#306">Item&nbsp;3. Legal Proceedings</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#307">Item&nbsp;4. Submission of Matters to a Vote of Security Holders</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">PART II</DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#308">Item&nbsp;5. Market for Registrant&#146;s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#309">Item&nbsp;6. Selected Financial Data</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#310">Item&nbsp;7. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#311">Item&nbsp;7A. Quantitative and Qualitative Disclosures About Market Risk</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#312">Item&nbsp;8. Financial Statements and Supplementary Data</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#313">REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#314">CONSOLIDATED BALANCE SHEETS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#315">CONSOLIDATED STATEMENTS OF OPERATIONS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#316">CONSOLIDATED STATEMENTS OF CASH FLOWS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#317">CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY (DEFICIT)</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><A href="#318">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#319">Item&nbsp;9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#320">Item&nbsp;9A. Controls and Procedures</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#321">Item&nbsp;9B. Other Information</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#322">PART III</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#323">Item&nbsp;10. Directors, Executive Officers and Corporate Governance</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#324">Item&nbsp;11. Executive Compensation</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#325">Item&nbsp;12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#326">Item&nbsp;13. Certain Relationships and Related Transactions, and Director Independence</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#327">Item&nbsp;14. Principal Accountant Fees and Services</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#128">PART IV</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><A href="#329">Item&nbsp;15. Exhibits and Financial Statement Schedules</A></DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#330">SIGNATURES</A></DIV></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-10.11 Amendment to Employment Agreement between the Company and Henry Mandell</DIV></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-21.1 Subsidiaries of the Company</DIV></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-23.1 Consent of Ramirez International Financial and Accounting Services, Inc.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-23.2 Consent of Farber Hass Hurley McEwen LLP (for 2004/2005 financials)</DIV></TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-31.1 Certificate pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002</DIV></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">EX-32.1 Certificate pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002</DIV></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section&nbsp;21E of the Securities Exchange Act of 1934, as amended, and Section&nbsp;27A of the Securities
Act of 1933, as amended, reflecting management&#146;s current expectations. Examples of such
forward-looking statements include our expectations with respect to our strategy. Although we
believe that our expectations are based upon reasonable assumptions, there can be no assurances
that our financial goals or that any potential transactions herein described will be realized or
consummated. Such forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements, or industry results,
to be materially different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Numerous factors may affect our actual results and may
cause results to differ materially from those expressed in forward-looking statements made by or on
behalf of our company. For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the
words, &#147;believes,&#148; &#147;anticipates,&#148; &#147;plans,&#148; &#147;expects&#148; and similar expressions are intended to
identify forward-looking statements. The important factors discussed under Item&nbsp;1A, Risk Factors,
among other factors, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and represent management&#146;s current expectations and are
inherently uncertain. Investors are warned that actual results may differ from management&#146;s
expectations. We assume no obligation to update the forward-looking information to reflect actual
results or changes in the factors affecting such forward-looking information.
</DIV>
<DIV align="left">
<A name="301"></A>
</DIV>

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

<DIV align="left">
<A name="302"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1. </B><B><I>Business</I></B>
</DIV>


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

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer Audio Laboratories, Inc. (&#147;Spatializer&#148; or &#147;Company&#148;) 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, a publicly held Yukon, Canada
corporation, were exchanged for an equal number of shares of our common stock. Our corporate office
is located at 2060 East Avenida de Los Arboles, # D190, Thousand Oaks, California 91362-1376
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s wholly-owned subsidiary, Desper Products, Inc. (&#147;DPI&#148; or &#147;Desper Products&#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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Copies of this Annual Report, including our financial statements, and our quarterly reports on
Form 10-Q as well as other corporate information, including press releases, of interest to our
stockholders are available on our website promptly after filing or distribution. As used herein,
Spatializer, the &#147;Company,&#148; &#147;we&#148; or &#147;our&#148; means Spatializer Audio Laboratories, Inc. and its
wholly-owned subsidiaries.
</DIV>


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

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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;&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 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;&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 Gilbert Segel, James Pace and Henry Mandell. Messrs.&nbsp;Segel
and Pace were independent directors of the Company. Spatializer hired an entity in late 2002 to
provide investment banking services, paying such entity a $75,000 retainer fee. Over 100 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;&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;&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 the 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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;19, 2005, at a regularly scheduled 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
revenues 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 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 also to remain 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;&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. Mr.
Mandell agreed to continue to provide certain specified services to Spatializer, including

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 the agreement. As an incentive for Mr.
Mandell to continue in Spatializer&#146;s employ during the term of the agreement, and in consideration
of foregoing 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 the
agreement. The agreement also provided for a monthly salary of $5,000, a bonus of $10,000 for Mr.
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 the 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 the agreement,
he is entitled to employee benefits and reimbursement of reasonable, actual and necessary business
expenses. The agreement contains certain non-competition, non-solicitation and confidentiality
provisions. The 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). The agreement was scheduled 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)&nbsp;June&nbsp;30, 2006, but
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>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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;&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;&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,
Inc, a Delaware corporation and leading provider of entertainment technology products and services
to the audio and image entertainment markets worldwide. The board of directors also discussed
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;&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;&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;&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

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


<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, as well as
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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;&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;&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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August&nbsp;2006, the board of directors of Spatializer was presented with and carefully
considered a revised 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 its wholly owned subsidiary, DTS BVI, a
British Virgin listed corporation, 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, 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.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;18, 2006, the parties executed and delivered the Asset Purchase Agreement. A
special stockholders meeting was called for January&nbsp;24, 2007 to approve sale of assets and to
authorize the dissolution of the Company. Proxies were mailed on or about December&nbsp;1, 2006. The
meeting was adjourned without a final vote in the Board&#146;s view of the best interest of the
stockholders. The meeting was reconvened on February&nbsp;21, 2007. The vote required to approve the
asset sale and dissolution was a majority of the shares outstanding on the record date. The
dissolution proposal was contingent upon approval of the asset sale. A total of 15,334,520 shares
voted on the asset sale proposal, of which 14,407,084 shares were voted in favor, 823,182 shares
voted against and 104,284 votes abstained. Although the votes cast on the proposal to sell the
assets was overwhelmingly in favor thereof, the requisite vote was not obtained. As a result, the
proposal was not approved and the Board is considering its options
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our financial statements, beginning on page 27 hereof, contain information relating to our
revenues, loss and total assets for the fiscal year ended December&nbsp;31, 2006.
</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;<B>Desper Products, Inc. &#151; Virtual Audio Signal Processing Technologies</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DPI developed a suite of proprietary advanced audio signal processing technologies for the
entire spectrum of applications falling under the general category of virtual audio. The objective
in each product category is to create or simulate the effect of a multi-speaker sonic environment
using two ordinary speakers (or headphones) for playback. The market for virtual audio is segmented
into six broad categories of technology as identified in the listing below. Each of these
technologies utilizes different underlying scientific principles in accomplishing its design
objectives and is targeted to a specific class of consumer electronics or multimedia computer
depending on the intended product use and functional capability of the product.
</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="30%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Technology</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Product Categories</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Audio Enhancement</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> 3-D Stereo
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Stereo TV&#146;s, Stereo
Components and Systems,
Car Audio, Laptop and
Desktop Multimedia
Computers, Set-top Boxes
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Surround sound
enhancement from an
ordinary stereo
(two-channel)
signal</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer ((environ))<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Cell Phones and Mobile Multimedia
Players
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Widens sound stage and improves
stereo separation from two-channel
ring tones, compressed audio, FM
and TV broadcast and games.</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer N-2-2 Ultra<SUP style="font-size: 85%; vertical-align: text-top"> TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">DVDP, DVDR, PVR, AV Receivers,<BR>
Multimedia PCs, DTV,STB
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Creation of spatially accurate home
theater surround sound from two
channel sources</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer enCompass AV<SUP style="font-size: 85%; vertical-align: text-top"> TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Products incorporating
multi-channel audio
sources like Dolby
ProLogic II<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>: AV<BR>
Receivers
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Creation of
spatially accurate
multi-speaker
cinematic audio
experience from
two-channel audio
information</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer Audio Alchemy<SUP style="font-size: 85%; vertical-align: text-top"> TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Computers and Recordable DVD
utilizing DVD/MPEG and decoding, Cell
phone handsets.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Static noise reduction combined
with stabilization of dynamic audio
range</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer Vi.B.E.<SUP style="font-size: 85%; vertical-align: text-top"> TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Mobile Multimedia Players, Cell
Phones, DVD Players/Recorders, DTV,
Stereo Components and Systems, Car
Audio, Laptop and Desktop Multimedia
PCs and Headphones.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Simulation of low frequency
response from speakers with poor
low frequency capability</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer DRC<SUP style="font-size: 85%; vertical-align: text-top"> TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Laptop and Desktop Multimedia
Computers, Cell Phones and Portable
Multimedia Players
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Prevents over-driving speakers,<BR>
headphones or ear buds while<BR>
maximizing the dynamic audio output</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer Natural Headphone<SUP style="font-size: 85%; vertical-align: text-top"> TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Headphones, Mobile
Phones, Mobile Multimedia
Players
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Creation of
spatially accurate
<I>multi- speaker
cinematic audio</I>
experience from
headphones
utilizing discrete
multi-channel audio
information</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Spatializer PCE<SUP style="font-size: 85%; vertical-align: text-top"> TM</SUP>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">DTV, Mobile Phones, Mobile Multimedia<BR>
Players, Multimedia PCs, Headphones
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Creation of more recognizable and
&#147;cleaner&#148; music or dialog from all
media sources</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</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>Licensed Products</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our current technology product applications are directed to (1)&nbsp;speaker enhancement, (2)
stereo surround sound enhancement, (3)&nbsp;mobile entertainment enhancement and (4)&nbsp;noise reduction.
</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="3%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>3D Stereo. </I></B>Based upon proprietary methods of stereo signal processing, our
<I>Spatializer 3&#151;D Stereo </I>technology is designed to create a vivid and expansive three-
dimensional surround sound listening experience from any stereo source input using only two
ordinary speakers. Along with professional audio quality and coherent stable sonic imaging,
the technology includes our unique DDP&#153; (Double Detect and Protect&#153;) algorithm. DDP
continuously monitors the underlying stereo signal and dynamically optimizes spatial
processing, avoiding deleterious sonic artifacts common in other systems and provides &#147;set
and forget&#148; ease of use for consumers. First introduced in July&nbsp;1994 by DPI, in the form of
a 20 pin analog integrated circuit (IC)&nbsp;from Matsushita Electronics Corporation (&#147;MEC&#148;), the
technology is now incorporated into low-cost, standard process ICs by three chip foundries
(Matsushita, ESS Technologies, Inc. and OnChip Systems) for easy and inexpensive
implementation in any consumer electronics or computer products utilizing stereo audio. The
technology is currently available in both analog and digital formats. Matsushita introduced
a new Spatializer IC design in 1999, offering the <I>Spatializer 3-D Stereo </I>effect in a
simplified, lower cost package. In early 2002, we introduced a new algorithm-based
technology which provides a virtual surround sound effect from a two channel input for
DSP-based environments. In 2003, we introduced Spatializer ((environ)), especially designed
for cellular phones with two, closely spaced speakers to enhance both ring tones and music.</TD>
</TR>

<TR>
    <TD 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="3%" nowrap align="left"><B>2.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>N-2-2 Ultra Digital Virtual Surround</I></B>. In September&nbsp;1996, DPI introduced
<I>Spatializer N-2-2, </I>which we consider a &#147;core&#148;, and &#147;enabling&#148; technology for Dolby
Digital-based home theater products and personal computers. In mid-2001, DPI introduced
<I>Spatializer N-2-2 Ultra </I>as the latest generation of this core audio technology. The audio
standards for multi-channel digital audio(based upon geographic region) are multi-channel
audio formats (Dolby Digital<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> (AC-3) and MPEG-2) which carry up to eight (or more) discrete
(independent)&nbsp;channels of audio &#151; the front left and right channels, a center channel (for
vocal tracks), two rear surround channels and a Low Frequency Effects (LFE or &#147;sub-woofer&#148;)
channel for sound effects. The <I>Spatializer N-2-2Ultra </I>software- based algorithms permit
spatially accurate reproduction of this multi-channel audio over any ordinary stereo system
using two rather than the five or six speakers normally required in traditional home theater
setups. <I>Spatializer N-2-2Ultra </I>runs in real-time on general purpose Digital Signal
Processing (&#147;DSP&#148;) hardware platforms like those offered by LSI, Acer Labs, Inc., NEC,
Motorola, MediaTek and Zoran; may be integrated with host based software-only MPEG-2 or DVD
decoders (like WinDVD and PowerDVD, offered by InterVideo and Cyberlink, respectively, for
the Intel<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> Pentium<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> series of microprocessors); and can be ported to any of the principal
audio codecs or media processor/accelerator platforms performing Dolby Digital (AC-3) or
MPEG-2 audio decoding. <I>Spatializer N-2-2Ultra </I>has been approved by Dolby Laboratories and
qualifies Spatializer licensees to use the newly created Dolby Digital VIRTUAL&#153; trademark on
products incorporating the technology. We believe our <I>Spatializer N-2-2 </I>Ultra process has
helped to widen and accelerate the market for DVD acceptance, because it delivers the full
cinematic audio experience to ordinary consumers without the additional expense and
complication of multi-speaker home theater playback systems. The Company holds a patent on
this technology.</TD>
</TR>

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

<TR>
    <TD 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="3%" nowrap align="left"><B>4.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>VSP-11 </I></B>First introduced by DPI in early 2002, Spatializer VSP-11 (Virtual
Sound Processor 11) is a stand-alone application program for Microsoft Windows 95, 98, ME,
2000 and XP platforms that utilizes Spatializer proprietary psychoacoustic techniques to
allow consumers to enjoy the benefits of the renowned Spatializer audio enhancement
technologies on leading media players, soft DVD players and file sharing programs. This
means that Spatializer VSP-11 is a universal audio enhancement software package that will
enhance output from the Microsoft<I><SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> </I>Media Player, Real Player<I><SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP></I>, Real Jukebox<I><SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP></I>, WinAmp<I><SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP></I>,
WinDVD<I><SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP></I>, PowerDVD<I><SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP></I>, among others, without any special modification. It will run in
conjunction with any sound card, as well as with USB audio.</TD>
</TR>


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

<TR>
    <TD 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="3%" nowrap align="left"><B>6.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Spatializer </B><B><I>PCE</I></B>, introduced in October&nbsp;2001, makes high frequencies clearer, crisper and
more brilliant while low frequencies are more dramatic, tighter and have more impact.
Spatializer<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> PCE gives the manufacturer an inexpensive way to dramatically improve the sound
of low-end loudspeakers, such as the kind found in televisions, boom boxes and computers.
Spatializer PCE is also ideal for improving the quality of Internet audio, which can sound
rather lackluster and dull due to compression or low bit rates. It can be applied prior to
encoding audio streams, and can just as easily enhance the playback of the decompressed
audio. It can improve the clarity, intelligibility and impact of both dialog and music.
Spatializer PCE works by both modifying and smoothing non-linear phase response and by
creating psycho-acoustic cues. Typical equalization techniques cause phase distortion
(non-zero group delay) due to non-linear phase response. Spatializer PCE has a nearly-linear
phase response, which results in a near-zero group delay. This improves the &#147;naturalness&#148;,
or transparency of the dialog or music by not adding to phase distortion already present in
many playback systems. This technology is patent pending. Spatializer PCE can be custom
tailored for two or an array of speaker configurations. The technology, without a surround
sound effect, can enhance single speaker applications as well.</TD>
</TR>

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

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

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

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In addition, we offered three whole product solutions with multiple Spatializer technologies that
comprehensively address the unique audio delivery challenges inherent in each targeted platform.
The Spatializer HD Class is comprised of three new products specifically targeted at home audio,
cellular telephones and other mobile applications and personal computers. The Spatializer
technologies in each package operate in a complementary fashion, such that the concurrent
technologies deliver a more powerful and effective audio experience than that possible from a
single solution. Further, each technology has been optimized and customized for the targeted
application and is designed to overcome the audio challenges presented by small form factor,
transducer limitations and even cost constraints.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Spatializer UltraMobile HD&#153; delivers higher definition digital audio to mobile audio systems
through the multiple and complementary use of Spatializer Natural Headphone, Spatializer Vi.B.E.
and Spatializer PCE. UltraMobile HD improves the performance of low cost headphones or ear buds, as
well as from compressed audio by opening up the sound field while improving bass performance. In
cellular telephone applications, Spatializer ((environ)) delivers maximum performance from
micro-speakers that are mounted closely together and helps compensate for the more limited dynamic
range as compared with standard size speakers. When applied to stereophonic ring tones, Spatializer
((environ)) creates a startling and expressive sound field when such speakers are utilized in
cellular handsets.
</DIV>


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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Spatializer UltraTV HD&#153; delivers higher definition digital audio performance to digital
televisions, DVD players and DVD Recorders. HDTV signals can realistically be retrieved only in
limited ways, leading to customer disappointment. The Spatializer UltraTV HD processor is designed
to compensate for these shortcomings in digital home entertainment for the millions of households
without home theater systems. Realistic surround sound, near-sub-woofer effects and crisp dialog is
made possible through two speakers, rather than through expensive arrays of external speakers.
Another unique aspect of this product is that it is designed specifically for playback through
television speakers and can be custom tailored to the frequency aspects of a manufacturer&#146;s speaker
set<B>.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Spatializer UltraPC HD&#153; helps ease the transition of the personal computer from business tool
to a comprehensive component of the digital home entertainment experience. Spatializer UltraPC HD
includes Spatializer N-2-2 Ultra that delivers surround sound through only two speakers,
Spatializer Natural Headphone for personal surround sound, Spatializer VirtuaLFE&#153; that processes
the sub-woofer channel for a low frequency effect through ordinary speakers and Spatializer PCE for
dialog clarity. Each of these technologies has been optimized for small speaker or headphone
playback and can be custom tuned to a manufacturer&#146;s specific speaker set.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Until 2000, we licensed our technologies primarily through semiconductor manufacturing and
distribution licenses (&#147;Foundry Licenses&#148;) with semiconductor foundries. In turn, the foundries
manufacture and distribute integrated circuits ICs (integrated circuits) or DSPs (digital signal
processors) incorporating Spatializer technology to consumer electronics and multimedia computer
OEMs (original equipment manufacturers).
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2000, we began offering foundries the option of entering into a non-royalty bearing
distribution agreement with us. Under this business model, the foundry offers Spatializer
technology as an optional feature, promotes our technology in their sales materials and cooperates
with the Spatializer sales force in closing license agreements for Spatializer technology with the
OEM customer. This business model provides the foundry with an additional selling feature at no
additional cost to the foundry. The OEM can obtain use of the technology directly from Spatializer
without any additional mark-up from the foundry.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The terms of all of our licenses are negotiated on an individual basis requiring the payment
of a per unit running royalty according to sliding scales based upon cumulative volume. Some of our
licenses call for the payment of an up-front license issuance fee either in lieu of, or in addition
to the running royalty. Other agreements require the OEM customer, rather than the foundry, to pay
the royalty. Per unit royalties are generally reportable and payable 45&nbsp;days after the end of the
quarter following shipment from the foundry to the OEM or, in the case of a distribution agreement,
by the OEM to its accounts.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;OEMs who desire to incorporate these DSPs or ICs into their products are required to enter
into a license (&#147;OEM Licenses&#148;) with us before they may purchase the ICs in quantity. Foundry
Licenses generally have limited the sale of DSPs or ICs with Spatializer technology to OEMs who
have entered into an OEM License with us. OEM licenses generally provide for the payment of a
further per unit royalty by the OEM for OEM products incorporating a Spatializer IC (&#147;Licensed
Products&#148;) payable in the quarter following shipment by the OEM of its Licensed Products.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have signed an Asset purchase Agreement with DTS and have been attempting to secure
stockholder approval of the sale, as outlined in the second paragraph of the Overview section
above. Licensing activities are suspended
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>IC/DSP Foundry Licenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company, through its wholly-owned subsidiary, Desper Products, Inc.,
entered into a major multi-technology licensing agreement with Samsung Electronics, Co. Ltd. on
August&nbsp;22, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, we have entered into non-exclusive Foundry Licenses for our Virtual
Audio Signal Processing technologies with Matsushita Electronics Corporation (&#147;MEC&#148;), Samsung
Electronics, Sigmatel, ESS Technology, Inc. (&#147;ESS&#148;), OnChip Systems, Inc. (&#147;OnChip&#148;), LSI Logic,
Inc. (&#147;LSI&#148;), Acer Labs, Inc. (&#147;Ali&#148;), MIPS Technologies, NJRC, Tvia, Inc., Texas Instruments,
Cirrus Logic, NEC and MediaTek. Foundry Licenses generally require the payment of per unit running
royalties based upon a sliding scale computed on the number of Spatializer ICs or DSPs sold.
</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;As of December&nbsp;31, 2006, more than 50&nbsp;million ICs, programmable processors and DSPs
incorporating Spatializer audio signal processing technology had been manufactured and sold.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>OEM Licensees and Customers</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, our technology has been incorporated in products offered by more than
105 separate OEM Licensees and customers on various economic and business terms. Some of these OEM
Licenses required a license issuance fee and/or a separate per unit royalty, while others were
licensed under the Logo Usage Agreement (&#147;LUA&#148;) or were authorized customers under bundled royalty
licenses with the IC foundries. The OEM Licensees and customers offer a wide range of products,
which include DVD players and recorders, cellular phones, portable digital audio players,
programmable processors, multimedia desktop personal computers, notebook computers and digital
televisions.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2006 two major customers, Sharp and Funai, not presented in order of importance, each
accounted for 10% or more of our total revenues. One OEM accounted for 49% and one accounted for
20% of our royalty revenues during 2006. Four other accounts comprised more than 5%, but less than
10% of revenues. All other OEM&#146;s accounted for less than 5% of royalty revenues individually. The
following table is a partial list of the OEM Licensees and authorized customers as of December&nbsp;31,
2006:
</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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Acer Labs</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Apple Computer</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Funai</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>InterVideo</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>JVC</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>LG Electronics</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Logitech</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>LSI</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Matsushita Electronics</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Micronas</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Mitsubishi Image and Information Works</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Motorola</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>NEC</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Orion</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Panasonic TV</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Samsung</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Sanyo Corp.</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Sharp Corp.</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Sigmatel</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Texas Instruments</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Theta Digital</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Toshiba DVD</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Toshiba TV</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Zoran</I></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have extensive relationships with OEM licensees and customers outside the United States.
Japanese and Korean based entities accounted for 91% and 2% of our total revenues, respectively, in
2006; 62% and 34% of our total revenues, respectively, in 2005; and 70% and 25% of our total
revenues, respectively, in 2004. The products incorporating our technology are, in turn, sold
throughout the world, in market segments and amounts that are consistent with the overall general
world markets for consumer electronics and software.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Customers, Revenues and Expenses</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We generate revenues in our audio business from royalties pursuant to our Foundry, OEM, and
other licenses, and from non-recurring engineering fees to port our technologies to specific
licensees&#146; applications. Our revenues, which totaled $334,000 in 2006,
were derived almost entirely from Foundry and OEM license fees and royalties.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have sought to maximize return on our intellectual property base by concentrating our
efforts in higher margin licensing and software products and eliminating our hardware product
operations. Licensing operations have been managed internally by our personnel and through use of
an international sales representative force.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2006, revenues declined substantially as compared with the prior year. Revenues from
Samsung and Matsushita wound down as contracts expired and the Company&#146;s marketing activities were
dormant. This was identified in late 2005, based on future third party product plans and
discussions with these customers. It became apparent that revenues from these two accounts were not
sustainable at current levels in the future. As a result, and due to the resignations of two
directors and the CEO, our board of directors determined in late December&nbsp;2005 to offer the
Company&#146;s assets for sale or to sell perpetual non-exclusive licenses of our intellectual property
(with a subsequent sale of the residual assets) and to position the Company to exit the audio
licensing business and to wind up and dissolve.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We competed with a number of entities that produce various audio enhancement processes,
technologies and products, some utilizing traditional two-speaker playback, others utilizing
multiple speakers, and others restricted to headphone listening. These
</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">include the consumer
versions of multiple speakers, matrix and discrete digital technologies developed for theatrical
motion picture exhibition (like Dolby Digital<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>, Dolby ProLogic<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>, and DTS<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>), as well as other
technologies designed to create an enhanced stereo image from two or more speakers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal competitors in the field of virtual audio are SRS Labs, Inc., Dolby
Laboratories, Inc., Sonaptic and Qsound Labs, Inc. In addition, some DSP foundries and OEMs have
proprietary virtual audio technologies that they regularly offer to OEMs at no cost. These
companies have, or may have, substantially greater resources than us to devote to further
technologies and new product developments.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pressure on OEMs to reduce their costs, particularly in the DVD market, is intense. The
marketplace is also susceptible to undisciplined competitors who, from time to time, may offer
below market prices to generate short term revenue and larger market penetrations even if it does
not provide for viable margins. In the future, our products and technologies also may compete with
audio technologies and product applications developed by other companies including entities that
have business relationships with us. Factors that affect our ability to compete include product
quality, performance and features, conformance to existing and new standards, price, customer
support and marketing and distribution strategies.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We were unable to compete in this market, even though we offered a single source, complete
suite of patented and proprietary 3D Stereo, interactive positional, virtual surround sound,
headphone and speaker virtualization technologies. We lacked sufficient financial resources to
compete, were closely dependent on third party licensee marketing plans which generally presented a
longer or uncertain revenue stream than our cash resources could support and found the market less
receptive to our value proposition than we had expected.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our research and development expenditures in 2006, 2005 and 2004 were approximately 23%, 30%
and 34% of total operating expenses, respectively. These expenses consist of salaries and related
costs of employees and consultants engaged in ongoing research, design and development activities
and costs for engineering materials and supplies.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, we had no employees in our R&#038;D group, based on our board of
directors&#146; decision to offer our assets for sale. We discontinued our technology development in
December&nbsp;2005 and support efforts in May&nbsp;2006 when the sole engineer resigned.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Intellectual Property and Proprietary Information</B>
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There can be no assurance that these measures will be successful, or that competitors will not
be able to produce a non-infringing competitive product or service. In addition, the laws of
certain countries in which our products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect our products and intellectual property rights to the
same extent as the laws of the United States, or at all. There can be no assurance that third
parties will not assert infringement claims against us, or that if required to obtain any third
party licenses as a result of an infringement dispute, we will be able to obtain such licenses.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Due to our dependence on the consumer electronics market, we have experienced seasonal
fluctuations in sales and earnings. In particular, we believe that there has been seasonality
relating to the Christmas season in the third and fourth quarters, which generally are our
strongest quarters, as well as the first quarter, which is generally our weakest quarter. We
attempted to diversify our key market segments in the consumer electronics industry in an effort to
even out our seasonal fluctuation. Overall, seasonality does not have a material effect on our
business.
</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>Employees</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We began 2006 with two full -time employees and decreased our staff to one part-time employee
by December&nbsp;31, 2006. At year-end, there was one part-time employee engaged in general
administration. None of our employees are represented by a labor union or are subject to a
collective bargaining agreement.
</DIV>

<DIV align="left">
<A name="303"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1A. </B><B><I>Risk Factors</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section&nbsp;21E of the Securities Exchange Act of 1934, as amended, and Section&nbsp;27A of the Securities
Act of 1933, as amended, reflecting management&#146;s current expectations. Examples of such
forward-looking statements include our expectations with respect to our strategy. Although we
believe that our expectations are based upon reasonable assumptions, there can be no assurances
that our financial goals or any transactions described herein will be realized. Such
forward-looking statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or implied by such
forward-looking statements. Numerous factors may affect our actual results and may cause results to
differ materially from those expressed in forward-looking statements made by or on behalf of our
company. For this purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words,
&#147;believes,&#148; &#147;anticipates,&#148; &#147;plans,&#148; &#147;expects&#148; and similar expressions are intended to identify
forward-looking statements. The important factors discussed under the caption &#147;Factors That May
Affect Future Results&#148; in Item&nbsp;7. Management&#146;s Discussion and Analysis of Financial Condition and
Results of Operations, herein, among others, would cause actual results to differ materially from
those indicated by forward-looking statements made herein and represent management&#146;s current
expectations and are inherently uncertain. Investors are warned that actual results may differ from
management&#146;s expectations. We assume no obligation to update the forward-looking information to
reflect actual results or changes in the factors affecting such forward-looking information.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Our Board of Directors has Determined it is in the Company&#146;s and its Stockholders Best Interests to
Attempt to Sell the Company&#146;s Assets.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have experienced a loss from operations in each of the last four fiscal years. After
exploring other exit strategies and opportunities, our Board of Directors engaged Strategic Equity
Group in October&nbsp;2005 to explore strategic partners or purchases. 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
four 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. Thus, in December&nbsp;2005, the Board of Directors concluded 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 with the assistance of Strategic Equity
Group. Although the Company negotiated an agreement for the sale of its assets, such transaction
required stockholder approval. Such transaction was voted on by Stockholders and did not pass at a
meeting held in February&nbsp;2007, causing us to reconsider our options. There is no assurance that a
subsequent attempt to obtain stockholder consent
will be successful. 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"><I>We Are Unable to Achieve or Sustain Profitability in the Future or Obtain Future Financing and Our
Business Operations Will Fail</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have experienced a loss from operations and a net loss in each of the last four years.
While our objective and full effort had been on managing a profitable business, due to the market
conditions and factors outlined in previous Annual Reports on Form 10-K and their impact on
fluctuations in operating expenses and revenues, we no longer believe that we can generate a
positive profit position in any given future period. We do not expect that we can 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"><I>There is No Guarantee That There Will be Funds Available for Distribution to Stockholders if We
Cannot Get Stockholder Approval for the Asset Sale, if the Approval is Untimely or if Claims Arise
Post-Sale During the 275-Day Warranty Period</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the asset sale is not approved, there will be minimal, if any funds available for
distribution to the stockholders. The Asset
</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">Purchase Agreement with DTS specifies an expiration
date of June&nbsp;27, 2007, after which DTS has no further obligation to buy the assets. Since, the
majority of stockholders failed to vote to approve the sale, we will have to resolicit the vote.
This effort may be unsuccessful. Further, there is no assurance that DTS would extend the deadline
for the closing if the time required to solicit went past June&nbsp;27, 2007. While management has been
marshalling assets, the company might simply exhaust its funds trying to find another purchaser of
its assets. Further, should an unforeseen defect in our representations and warranties during the
275-day post closing period arise, DTS could ask us for compensation that could reduce the amount
of funds available for distribution. Nevertheless, management believes that approval of the asset
sale offers the best prospects for some distribution of funds to our stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The Market For Our Stock May Not Be Liquid And The Stock Price May Be Subject To Volatility</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our stock is quoted on the OTC Bulletin Board, where low trading volume and high volatility is
often experienced. While a few firms make a market in our stock, the historically low trading
volume and relatively few market makers of our stock makes it more likely that a severe fluctuation
in volume, either up or down, will significantly impact the stock price. There can be no assurance
that these market makers will continue to quote our stock and a reduction in such market makers
would negatively impact trading liquidity. Further, with our constrained resources and increased
cost and time associated with implementation of Sarbanes-Oxley, it may not be possible for us to
remain listed on the OTC Bulletin Board in the future as a fully reporting company. Lastly,
uncertainty surrounding the proposed asset sale may limit the liquidity of our stock. This and the
existing limited market and volume in the trading of our stock, may result in our stockholders
having difficulty selling our common stock. The trading price of our Common Stock has been, and
will likely continue to be, subject to wide fluctuations in response to quarterly variations in our
operating results, status of the proposed asset sale, possible claims arising from such sale,
general market fluctuations and other events and factors, some of which may be beyond our control.
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The Lack of Personnel Has Created a Deficiency in the Segregation of Duties That Has Been
Disclosed as a Material Weakness</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Due to the Company&#146;s present circumstances, there are only one remaining part-time employee
(Chairman) and a contract bookkeeper that are responsible for maintenance of the accounting records
and other aspects of internal control. Thus, segregation of duties is limited, and there is limited
oversight of the remaining employee. Although the financials are reviewed by it&#146;s registered public
accounting firm quarterly and disbursements are initiated by the bookkeeper and then signed by the
Chairman, the lack of personnel has created a material weakness that the Company, due to limited
operations, cannot rectify at this time.
</DIV>






<DIV align="left">
<A name="304"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1B. </B><B><I>Unresolved Staff Comments</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Not applicable.

</DIV>
<DIV align="left">
<A name="305"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;2</B>. <B><I>Properties</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our corporate office and research center in San Jose, California, was the primary location for
our audio technology division, Desper Products, Inc. We occupied approximately 1,300 square feet
with an annual rent on a full service basis of approximately $25,500 in calendar 2005 and $26,275
in calendar 2006. The lease expired on December&nbsp;31, 2006 and, based upon the decision to try to
sell the Company&#146;s assets, was not renewed. We leased our space at rental rates and on terms which
management believed were consistent with those available for similar space in the applicable local
area. Such property was well maintained and adequate to support our requirements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our executive office was located in Westlake Village, California, where we occupied
approximately 100 square feet at an annual rent of approximately $5,300. The lease term on this
space expired on June&nbsp;30, 2005 and was renewable on a month to month
basis thereafter. This space in the Los Angeles area was used to facilitate business and
contacts with the entertainment community as well as with our accountants, lawyers and directors.
This space was vacated and the month to month lease terminated in February&nbsp;2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We leased an apartment in San Jose, California for use by the chief executive officer when
away from the executive office. The annual rent on this apartment was approximately $16,800. The
lease was on a month-to-month basis and was terminated in January&nbsp;2006.
</DIV>

<DIV align="left">
<A name="306"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;3. </B><B><I>Legal Proceedings</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From time to time we may be involved in various disputes and litigation matters arising in the
normal course of business. As of the date of this Annual Report on Form 10-K, we are not involved
in any legal proceedings that are expected to have a material adverse effect on our consolidated
financial position, results of operations or cash flows. However, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material
adverse impact on our results of operations of the period in which the ruling occurs. Our estimate
of the potential impact on our financial position or overall results of operations for the above
legal proceedings could change in the future. At present, there are no active legal proceedings.
</DIV>

<DIV align="left">
<A name="307"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4. </B><B><I>Submission of Matters to a Vote of Security Holders</I></B>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->14<!-- /Folio -->
</DIV>

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

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




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There
were no matters submitted to a vote of security holders either through solicitation
of proxies in the fourth quarter of fiscal year ended
December&nbsp;31, 2006.
</DIV>

<DIV align="left">
<A name="308"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;5. </B><B><I>Market for Registrant&#146;s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Common Stock was listed and commenced trading on the NASDAQ SmallCap market on August&nbsp;21,
1995 under the symbol &#147;SPAZ&#148;. In January&nbsp;1999, the Common Stock was delisted by the NASDAQ SmallCap
Market due to our inability to maintain listing requirements. Our Common Stock immediately
commenced trading on the OTC Bulletin Board under the same symbol. The following table sets forth
the high and low bid price of our Common Stock as reported on the OTC Bulletin Board for fiscal
years 2005 and 2006. The quotations listed below reflect interim dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
</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 nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Period:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>High (U.S. $)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Low (U.S. $)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.06</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.03</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.01</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.02</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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;25, 2007 the closing price reported by the OTC Bulletin Board was U.S. $0.021.
Stockholders are urged to obtain current market prices for our Common Stock. Computershare Investor
Services, LLC is our transfer agent and registrar.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no sales of unregistered securities by the Company during the year ended December
31, 2006 nor any repurchases by the Company of any of our Common Stock during the fourth quarter of
2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To our knowledge, there were approximately 200 holders of record of the stock of the Company
as of March&nbsp;1, 2007. Our
transfer agent has indicated that beneficial ownership is in excess of 2,400 stockholders.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not paid any cash dividends on our Common Stock and have no present intention of
paying any dividends. Our current policy is to retain earnings, if any, for operations in
connection with winding up of our business. Our future dividend policy will be determined from
time to time by the Board of Directors.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company did not repurchase any of its equity securities during the fourth quarter of the
fiscal year ended December&nbsp;31, 2006.
</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="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="309"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;6. </B><B><I>Selected Financial Data</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following selected consolidated financial data should be read in conjunction with our
Consolidated Financial Statements and related Notes and with &#147;Management&#146;s Discussion and Analysis
of Financial Condition and Results of Operations&#148;, included in Item&nbsp;7. The selected financial data
shown below are derived from our consolidated financial statements that have been audited by the
Company&#146;s independent certified public accountants, Farber Hass Hurley McEwen LLP for the years
ended December&nbsp;31, 2005, 2004, 2003 and 2002 and Ramirez International Financial &#038; Accounting
Services, Inc. for the year ended December&nbsp;31, 2006. The consolidated financial statements for the
years ended December&nbsp;31, 2004, 2005 and 2006 and the reports thereon are included elsewhere in this
Report.
</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="18" style="border-bottom: 1px solid #000000"><B>Fiscal Year 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" style="border-bottom: 1px solid #000000"><B>December 31, 2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Consolidated Statement of
Operations Data:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,106</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">333</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost Of Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(131</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(122</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(111</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(106</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross Profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">995</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">332</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Operating Expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,711</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,631</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,146</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,177</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(686</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other Income (Expense), Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Income (Loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(495</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(157</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(82</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(353</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic Income (Loss) Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted Income (Loss) Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted Average Common Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,406,939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,309,171</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,363</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,990,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</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: 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"><B>Consolidated Balance Sheet Data</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">590</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">871</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">551</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">229</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Working Capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">242</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,746</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">897</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">464</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Redeemable Preferred Stock</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Advances From Related Parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Shareholders&#146; Equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,429</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">798</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">717</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">377</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left">
<A name="310"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;7. </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"><B>Executive Overview</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $333,000 for the year ended December&nbsp;31, 2006 compared to $1,192,000 for
the year ended December&nbsp;31, 2005, a decrease of 72%. Revenues are almost entirely comprised of
royalties pertaining to the licensing of Spatializer<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> audio signal processing algorithms. A key
issue discussed is the wind-down of revenue streams in fiscal 2006 due to the discontinuation of
operations. Revenues also reflect dormant licensing activity in 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss was $353,000 for the year ended December&nbsp;31, 2006 compared to net loss of $82,000 for
the year ended December&nbsp;31, 2005. Net loss for the current period is primarily the result of lower
revenue, partially offset by lower overhead. A key issue discussed is management&#146;s efforts to
reduce overhead in view of declining revenue, and to marshal cash.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, we had $229,000 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 $242,000 at December&nbsp;31, 2006 as compared with working capital of $560,000 at December
31, 2005.
</DIV>


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

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

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We ceased operations in 2006 and are winding the company down based on a proposed sale of our
intellectual property and other assets, which requires majority stockholder approval. While votes
received were overwhelmingly in favor of the asset sale, a required majority of stockholders failed
to vote affirmatively. The Board is considering its options.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Approach to MD&#038;A</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The purpose of MD&#038;A is to provide our shareholders and other interested parties with
information necessary to gain an understanding of our financial condition, changes in financial
condition and results of operations. As such, we seek to satisfy three principal objectives:
</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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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 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="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We believe the best way to achieve this is to give the reader:</TD>
</TR>

</TABLE>
</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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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="4%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" 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: 6pt"><B>Operating Environment</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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
Risk Factors elsewhere in this report
</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="1%" 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 its 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="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We Are Unable to Achieve or Sustain Profitability in the Future or Obtain Future
Financing and Our Business Operations Will Fail</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="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>There is No Guarantee That There Will be Funds Available for Distribution to
Stockholders if We Cannot Get Stockholder Approval for the Asset Sale, if the Approval is
Untimely or if Claims Arise Post-Sale During the 275-Day Warranty Period</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="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Market For Our Stock May Be Not Remain Liquid And The Stock Price May Be Subject To
Volatility</TD>
</TR>

</TABLE>
</DIV>

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

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

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">consummation of any such
transaction and the determination to wind up and dissolve is subject to stockholder approval.
Although the Company has negotiated an agreement for the sale of assets, there is no assurance
that such transaction will be approved by stockholders or consummated. Such approval was not
received at the February&nbsp;21, 2007 Special Meeting of Stockholders, requiring us to evaluate the
Company&#146;s options. 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 and a net loss in each of the last four years. While our
objective and full effort has been on managing a profitable business, due to the market conditions
and factors outlined in this Annual Report on Form 10-K 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. 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 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 no
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 liquidation of the business.
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The first critical accounting policy relates to revenue recognition. Royalty revenues are
recognized upon shipment of products
</DIV>


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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">incorporating the related technology by the original equipment
manufacturers (OEMs) and foundries. These revenues are reported to us by our licensees in formal,
written royalty reports, which serve as the basis for our quarterly revenue accruals. Infrequently,
certain written reports are received after our required reporting deadlines, sometimes due to
contractual requirements. In such cases, management tries to obtain verbal reports or informal
reports from the Licensee. In the absence of such information, management may utilize conservative
estimates based on information received or historical trends. In such isolated cases, management
strives to under-estimate such revenues to err on the side of caution. In the event such estimates
are used, the revenue for the following quarter is adjusted based on receipt of the written report.
In addition, any error in Licensee reporting, which is very infrequent, is adjusted in the
subsequent quarter when agreed by both parties as correct.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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) are 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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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 to fair value first, followed by
the other long-lived assets. 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 negotiated purchase price for the sales of
its assets, that the fair value of its assets exceeds the recorded net carrying value.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company&#146;s significant operating
losses raise substantial doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
</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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s 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 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;&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 balances compared to the
prior years and in relation to ongoing profit or loss can show the ability of the Company to
withstand business variations. The difference between Current Assets and Current Liabilities is
referred to as Working capital and measures how much in liquid assets a company has available to
build its business. 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 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 their useful lives. Fluctuations in
receivables and payables also explain why the net change in cash is not equal to the net 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: 6pt"><B>Results of Operations</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion and analysis relates to our results of operations for the year ended
December&nbsp;31, 2006 compared to the year ended December&nbsp;31, 2005, and the year ended December&nbsp;31,
2005 compared to the year ended December&nbsp;31, 2004. The following discussion should be read in
conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this
report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>For the Year Ended December&nbsp;31, 2006, Compared to the Year Ended December&nbsp;31, 2005</B>
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues decreased to $333,000 for the year ended December&nbsp;31, 2006 compared to $1,192,000 for
the year ended December&nbsp;31, 2005, an decrease of 72%. Revenues are almost entirely comprised of
royalties pertaining to the licensing of Spatializer<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> audio signal processing algorithms.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The decrease in revenue resulted partially from the absence of recognition of deferred revenue
in the current year, as compared to 2005, in which a royalty advance received during 2004 was
recognized. In addition, programs were not renewed or extended due to the termination of operations
of the Company in January&nbsp;2006. Existing revenues are derived from legacy licensing programs and
are expected to wind down.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit decreased to $332,000 for the year ended December&nbsp;31, 2006 compared to $1,086,000
in the comparable period last year, an decrease of 69%. Gross margin was 99% of revenue in the year
ended December&nbsp;31, 2006 compared with 91% of revenue for the comparable period last year. The
decrease in gross profit resulted from lower revenues in fiscal 2006, partially offset by higher
margins. We maintain a high margin since revenues are from licensing and royalty activities, which
have little or no associated direct manufacturing or selling costs other than commissions paid to
our independent representatives that solicit and oversee the particular accounts. All development
costs are expensed as engineering and development expenses in the period they are incurred. In
2006, all major relationships with distributors were terminated and no commissions were earned or
payable.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses for the year ended December&nbsp;31, 2006 decreased to $686,000 (206% of sales)
from $1,177,000 (99% of sales) for the year ended December&nbsp;31, 2005, a decrease of 42%. The
decrease in operating expenses resulted primarily from decreases in general and administrative
expense, sales and marketing expense, and research and development expense due to the suspension of
operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>General and Administrative</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative expense decreased to $527,000 for the year ended December&nbsp;31, 2006
from $670,000 for the year ended December&nbsp;31, 2005, a decrease of 21%. The decrease is primarily
due to discontinued CEO travel and general operating costs, partially offset by increased legal
and accounting expenses related to public filings, in part in response to the additional
requirements imposed on public companies by the Sarbanes-Oxley Act. General operating costs include
rent, telephone, legal, public filing, office supplies and stationery, postage, depreciation and
similar costs.
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Research and Development</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and development costs decreased to $158,000 for the year ended December&nbsp;31, 2006,
compared to $354,000 for the year ended December&nbsp;31, 2005, a decrease of 55%. The decrease in
research and development expense was due to 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: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Sales and Marketing</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and marketing costs decreased to $1,000 for the year ended December&nbsp;31, 2006, compared
to $152,000 for the year ended December&nbsp;31, 2005, an decrease of 99%. The decrease in such expenses
resulted from cessation of all licensing and marketing activities in January&nbsp;2006 due to the
suspension of operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Net Income (Loss)</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The net loss was $353,000 for the year ended December&nbsp;31, 2006, compared to net loss of
$82,000 for the year ended December&nbsp;31, 2005. The increased net loss for the current period is
primarily the result of lower revenue, partially offset by lower overhead.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>For the Year Ended December&nbsp;31, 2005, Compared to the Year Ended December&nbsp;31, 2004</B>
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues increased to $1,192,000 for the year ended December&nbsp;31, 2005 compared to $1,106,000
for the year ended December&nbsp;31, 2004, an increase of 8%. Revenues are almost entirely comprised of
royalties pertaining to the licensing of Spatializer<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> audio signal processing algorithms.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The increase in revenue resulted from a greater recognition of deferred revenue in the current
year, as compared to the prior year, in which a royalty advance was received. In addition, revenues
increased from royalties on a third party semiconductor used in cellular phones, as compared to the
prior year. This was partially offset by declining revenues from two accounts whose products using
our technology reached end of life. Their new models do not utilize our technology.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit increased to $1,086,000 for the year ended December&nbsp;31, 2005 compared to $995,000
in the comparable period last year, an increase of 9%. Gross margin was 91% of revenue in the year
ended December&nbsp;31, 2006 compared with 90% of revenue for the comparable period last year. The
increase in gross profit resulted from higher revenues in fiscal 2006. We maintain a high margin
since revenues are from licensing and royalty activities, which have little or no associated direct
manufacturing or selling costs other than commissions paid to our independent representatives that
solicit and oversee the particular accounts. All development costs are expensed as engineering and
development expenses in the period they are incurred.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses for the year ended December&nbsp;31, 2005 increased to $1,177,000 (99% of sales)
from $1,146,000 (105% of sales) for the year ended December&nbsp;31, 2004, an increase of 3%. The
increase in operating expenses resulted primarily from increases in general and administrative
expense and sales and marketing expense. General and Administrative expenses increased due to
higher legal and audit expenses. Sales and marketing expenses increased due to higher travel
expenses resulting from more overseas licensing trips.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>General and Administrative</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative expense increased to $670,000 for the year ended December&nbsp;31, 2005
from $615,000 for the year ended December&nbsp;31, 2004, an increase of 9%. The increase is primarily
due to increased legal and accounting expenses related to public filings, in part in response to
the additional requirements imposed on public companies by the Sarbanes-Oxley Act, and to increased
travel costs by the CEO. General operating costs include rent, telephone, legal, public filing,
office supplies and stationery, postage, depreciation and similar costs.
</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;<B><I>Research and Development</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and Development costs decreased to $354,000 for the year ended December&nbsp;31, 2005,
compared to $393,000 for the year ended December&nbsp;31, 2004, a decrease of 10%. The decrease in
research and development expense was due to the commencement of the use of lower cost applications
engineering consultants in India in the second half of 2004 and the elimination of an in-house
applications engineering position in early 2005. The number of projects completed by the Indian
engineering firm were higher in 2005 as compared to 2004, partially offsetting the savings from the
eliminated in-house engineering staff position.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We continued efforts to identify, validate, and develop new product ideas at DPI. Specific
engineering efforts were directed toward the launch of Spatializer ((environ)) 3G and applications
engineering to port our technology to leading processor platforms.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Sales and Marketing</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and Marketing costs increased to $152,000 for the year ended December&nbsp;31, 2005, compared
to $138,000 for the year ended December&nbsp;31, 2004, an increase of 10%. The increase in such expenses
resulted from higher international travel in search of new licensing arrangements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Net Income (Loss)</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss was $82,000 for the year ended December&nbsp;31, 2005; ($0.00) basic per share, compared
to net loss of $157,000, ($0.00) per share basic and diluted, for the year ended December&nbsp;31, 2004.
The reduction in net loss for the current period is primarily the result of higher revenue,
partially offset by higher overhead.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, we had $229,000 in cash and cash equivalents as compared to $551,000 at
December&nbsp;31, 2005. The decrease in cash primarily resulted from the net loss. We had working
capital of $242,000 at December&nbsp;31, 2006 as compared with working capital of $560,000 at December
31, 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash used by operating activities was $305,907 for the year ended December&nbsp;31, 2006, as
compared to net cash used by operating activities of $256,568 for the year ended December&nbsp;31, 2005
and net cash provided by operating activities of $343,939 for the year ended December&nbsp;31, 2004. The
decrease in cash flows from operations for the year ended December&nbsp;31, 2006 was primarily a result
of the net lossand a decrease in accrued liabilities, partially offset by a decrease in accounts
receivable.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We use cash in investing activities primarily to secure patent and trademark protection for
our proprietary technology and brand name. Cash used in investing activities totaled $15,013,
$8,145 and $20,587, respectively, in the years ended December&nbsp;31, 2006, 2005, and 2004. All
expenditures for on-going research and development are expenses and therefore included in the Net
Loss.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash flows used in financing activities totaled $773, $55,809 and $41,994 for the years
ended December&nbsp;31, 2006, 2005 and 2004, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Future payments due under operating lease obligations as of December&nbsp;31, 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="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="18" style="border-bottom: 1px solid #000000"><B>Payments due by period</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Less than</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>More than</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Contractual obligations</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1 year</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1-3 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>3-5 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>5 years</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-Term Debt Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital Lease Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating Lease Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->22<!-- /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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event the Company is to be would 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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future cash flow must 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 such assets. 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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The fluid, competitive and dynamic nature of the market brought 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;&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, on a short-term or 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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On January&nbsp;10, 2006, the Company announced that it would hold an open auction for the 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. We signed an agreement for the sale
of the assets with DTS. At the reconvened stockholder meeting on February&nbsp;21, 2007, while those
shares voted were overwhelmingly in favor of the asset sale and possible dissolution of the
Company, a required majority of outstanding shares did not approve the asset sale or possible
dissolution of the Company. The Board is considering its options.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, we had net operating loss carryforwards for Federal income tax purposes
of approximately $26,800,000 which are available to offset future Federal taxable income, if any,
through 2015. Approximately $21,700,000 of these net operating loss carryforwards are subject to an
annual limitation of approximately $1,000,000.
</DIV>


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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In September&nbsp;2006, the Financial Accounting Standards Board (&#147;FASB&#148;) issued SFAS No.&nbsp;157,
&#147;Fair Value Measurements&#148; . SFAS 157 replaces the different definitions of fair value in the
accounting literature with a single definition. It defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 is effective for fair-value measurements already
required or permitted by other standards for financial statements issued for fiscal years beginning
after November&nbsp;15, 2007 and interim periods within those fiscal years. The Company has not yet
determined the impact, if any, of adopting the provisions of SFAS 157 on its financial position,
results of operations and cash flows.
</DIV>

<DIV align="left">
<A name="311"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;7A. </B><B><I>Quantitative and Qualitative Disclosures About Market Risk</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have not been exposed to material future earnings or cash flow fluctuations from changes in
interest rates on our short-term investments at December&nbsp;31, 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>


<P align="center" style="font-size: 10pt"><!-- Folio -->23<!-- /Folio -->
</DIV>

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



<DIV align="left">
<A name="312"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;8. </B><B><I>Financial Statements and Supplementary Data</I></B>
</DIV>

<DIV align="left">
<A name="313"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>To the Board of Directors of Spatializer Audio Laboratories, Inc.:</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have audited the accompanying consolidated balance sheet of Spatializer Audio Laboratories,
Inc. and subsidiaries ( &#147;Company&#148;) as of December&nbsp;31, 2006 and the related consolidated
statements of operations, shareholders&#146; equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company&#146;s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Spatializer Audio Laboratories, Inc. and subsidiaries
as of December&nbsp;31, 2006, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United States of America.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements, the Company&#146;s
significant operating losses raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">/s/ RAMIREZ INTERNATIONAL<BR>
Financial &#038; Accounting Services, Inc.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Irvine, California<BR>
March&nbsp;19, 2007

</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->24<!-- /Folio -->
</DIV>

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

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>To the Board of Directors of Spatializer Audio Laboratories, Inc.:</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have audited the accompanying consolidated balance sheet of Spatializer Audio Laboratories,
Inc. and subsidiaries (The &#147;Company&#148;) as of December&nbsp;31, 2005 and the related consolidated
statements of operations, shareholders&#146; equity, and cash flows for the years ended December&nbsp;31,
2005 and 2004. These consolidated financial statements are the responsibility of the Company&#146;s
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company&#146;s internal control over financial reporting. Accordingly we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Spatializer Audio Laboratories, Inc. and subsidiaries
as of December&nbsp;31, 2005, and the results of its operations and its cash flows for the years ended
December&nbsp;31, 2005 and 2004 in conformity with accounting principles generally accepted in the
United States of America.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements, the Company&#146;s
significant operating losses raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">/s/ FARBER HASS HURLEY &#038; MCEWEN LLP
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Camarillo, California<BR>
February&nbsp;24, 2006

</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->25<!-- /Folio -->
</DIV>

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<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="left">
<A name="314"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>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" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>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:105px; text-indent:-15px">ASSETS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current Assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">228,940</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,828</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 Other Current Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,073</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:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total Current Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">328,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">739,970</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">3,477</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 Held for Sale</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">131,258</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: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"><!-- 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:45px; text-indent:-15px">Total Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">463,576</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">896,921</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- 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:45px; text-indent:-15px">LIABILITIES AND STOCKHOLDERS&#146; EQUITY</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" 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">Notes Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,670</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">32,136</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">3,169</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">41,900</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">200</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">0</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total Current Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">87,075</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,519</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- 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">Stockholders&#146; Equity (Deficit):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- 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:75px; text-indent:-15px">Common shares, $0.01 par value;
65,000,000 shares authorized;
48,763,383 shares issued and
outstanding at December&nbsp;31, 2006
and 2005, respectively</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:75px; text-indent:-15px">Additional Paid-In Capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,441,755</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:75px; text-indent:-15px">Accumulated Deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(46,535,026</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: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:90px; text-indent:-15px">Total Stockholders&#146; Equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">376,501</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">717,402</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">Total Liabilities and Stockholders&#146; Equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">463,576</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: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="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to consolidated financial statements
</DIV>



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


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


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

<DIV align="center" style="font-size: 10pt"><B>AND SUBSIDIARIES</B></DIV>


<DIV align="left">
<A name="315"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>CONSOLIDATED STATEMENTS OF OPERATIONS</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="64%">&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="10" style="border-bottom: 1px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>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>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Revenues:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Royalty Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">333,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,192,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,105,923</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">897</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,062</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,395</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>
</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">332,304</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,086,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">994,528</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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating Expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">General and Administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">526,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">670,124</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">615,412</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and Development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157,739</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">354,138</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">393,004</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales and Marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,241</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">152,473</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">137,889</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>
</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">685,845</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,176,735</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,146,305</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>
</TR>
<TR valign="bottom">
    <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">(353,541</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(90,350</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(151,777</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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest Income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,230</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,982</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest Expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,266</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,269</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,295</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other Income (Expense), Net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,251</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR 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>
</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">5,715</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,313</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>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loss Before Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(347,826</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(82,389</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(157,090</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income Taxes</DIV></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">874</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(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>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net Loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(352,626</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(81,515</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(157,490</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: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Basic and Diluted Loss per Share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(.00</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: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Weighted-Average Shares Outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,990,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,363</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left: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>
    <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="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to consolidated financial statements
</DIV>


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

</DIV>

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

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




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

<DIV align="left">
<A name="316"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</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="64%">&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="10" style="border-bottom: 1px solid #000000"><B>Year Ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>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>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash Flows from Operating Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net Loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(352,626</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(81,515</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjustments to Reconcile Net Loss to Net Cash Provided (Used) by Operating
Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,926</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,942</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,303</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,915</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Stock and Options Issued for Services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Net Compensation Expense on Vested Options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,725</TD>
    <TD>&nbsp;</TD>
    <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 Change in Assets and Liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accounts Receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">170,479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,699</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Prepaid Expenses, Deposits and Other Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,031</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,836</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(35,510</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accounts Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,941</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(57,678</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,407</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accrued Expenses and Other Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(109,612</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,274</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,581</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred Revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(391,395</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">391,395</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Cash Provided (Used) by Operating Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(305,907</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(256,568</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">343,939</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash Flows from Investing Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchase of Property and Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,277</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,007</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Intangible Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,013</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,868</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,580</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Cash Used by Investing Activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,013</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,145</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20,587</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash Flows from Financing Activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notes Payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(773</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(55,809</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66,252</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notes and Amounts Due to (from)&nbsp;Related Parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(108,246</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Cash Used by Financing Activities.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(773</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(55,809</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(41,994</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase (Decrease) in Cash and Cash Equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(321,693</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(320,522</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">281,358</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents, Beginning of Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">550,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">871,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">589,797</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and Cash Equivalents, End of Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">228,940</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">550,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">871,155</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Supplemental Disclosure of Cash Flow Information:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash Paid During the Year for:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,266</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,295</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Income Taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to consolidated financial statements
</DIV>


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


</DIV>

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


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




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

<DIV align="left">
<A name="317"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY (DEFICIT)</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="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&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="6"><B>10% Series B Convertible</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Common</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Preferred Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Common Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Additional</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Par</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Par</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Paid-In-</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Stockholders&#146;</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Capital</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Deficit</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Equity</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,015,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">470,159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,428,461</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(45,943,395</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">955,225</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cancellation of Unissued Performance Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,500</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(405</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,975,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">469,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,428,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(46,100,885</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">797,735</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of Series&nbsp;B-1 Pfd
to Common Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,788,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,182</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(81,515</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(81,515</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,763,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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 style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Compensation Expense on
Vested Options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,725</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(352,626</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(352,626</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance, December&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD nowrap align="right">-0-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">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">46,441,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(46,535,026</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">376,501</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">See accompanying notes to consolidated financial statements
</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">




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

<DIV align="left">
<A name="318"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B>

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 1%"><B>(1)&nbsp;Ability to Continue as a Going Concern, Sale of All or Substantially All of the Assets of
Spatializer Audio Laboratories, Inc. and Desper Products, Inc. and Dissolution of Spatializer</B>
</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. 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 a California corporation incorporated in
June&nbsp;1986.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has incurred substantial operating losses in each of the last four years. License
contracts with two of the Company&#146;s largest customers expired on terms in 2006. Those customers
have informed the Company that the contracts will not be renewed nor replaced with other licenses.
The Company curently has no on-going commercial operations other than seeking to sell its assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Spatializer has been under acute market pressure since 2002. 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.
</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. <U><B>This called into
question the ability of the Company to operate as a going concern. </B></U> 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 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
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>

<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 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. 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)&nbsp;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.
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>

<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. During a period commencing on or about January&nbsp;12, 2006 through March&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 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 of $1&nbsp;million 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. 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
2006.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 August&nbsp;2006, the board of directors of Spatializer was presented with and carefully
considered a revised 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;A special stockholders meeting was called for January&nbsp;24, 2007 to approve sale of assets and
the authorize the possible dissolution of the Company. Proxies were mailed on or about December&nbsp;1,
2006. The meeting was adjourned without a final vote in the Board&#146;s view of the best interest of
the stockholders. The meeting was reconvened on February&nbsp;21, 2007, where it was announced that
while approval of the asset sale and possible dissolution has received overwhelming affirmative
votes of those votes cast, the majority of outstanding shares voting affirmatively was short of the
majority required by our by-laws. As a result, the Board is considering its options and the offer
to purchase the assets remains open.
</DIV>

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


<P align="center" style="font-size: 10pt"><!-- Folio -->31<!-- /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;<B>Basis of Consolidation &#151; </B>The consolidated financial statements include the accounts of
Spatializer Audio Laboratories, Inc. and its wholly-owned subsidiary, Desper Products, Inc. All
significant intercompany balances and transactions have been eliminated in consolidation. Corporate
administration expenses are not allocated to subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Revenue Recognition &#151; </B>The Company recognizes revenue from product sales upon shipment to the
customer. License revenues are recognized when earned, in accordance with the contractual
provisions. Royalty revenues are recognized upon shipment of products incorporating the related
technology by the original equipment manufacturers (OEMs) and foundries. The Company recognizes
revenue in accordance with SEC Staff Accounting Bulletin 104.
</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 December&nbsp;31, 2006 and 2005, substantially
all cash and cash equivalents were on deposit at one financial institution.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, two major customers, not presented in order of importance, each
accounted for 10% or more of our total accounts receivable: Sharp and Orion Corporation. One
customer accounted for 81% and one accounted for 10% of our total accounts receivable at December
31, 2006. At December&nbsp;31, 2005, three major customers, not presented in order of importance, each
accounted for 10% or more of our total accounts receivable: Matsushita, Sharp and Funai
Corporation. One customer accounted for 52%, another accounted for 22% and one accounted for 14% of
our total accounts receivable at December&nbsp;31, 2005
</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>

<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 93%, 95% and 95% of total sales
in the years ended December&nbsp;31, 2006 and 2005 and 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Major Customers &#151; </B>During the year ended December&nbsp;31, 2006, two customers accounted for 49% and
20%, respectively, of the Company&#146;s net sales. During the year ended December&nbsp;31, 2005, three
customers accounted for 42%, 23% and 12%, respectively, of the Company&#146;s net sales. During the
year ended December&nbsp;31, 2004, four customers accounted for 29%, 25%, 21% and 13%, respectively, of
the Company&#146;s net sales.
</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>Advertising Costs &#151; </B>Costs incurred for producing and communicating advertising are expensed
when incurred and included in selling, general and administrative expenses. Consolidated
advertising expense amounted to $0, $18,931and $4,289 in 2006, 2005 and 2004, respectively.
</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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Earnings Per Share &#151; </B>The Company determines earnings per share in accordance with Statement of
Financial Accounting Standards No.&nbsp;128, <I>Earnings Per Share </I>(&#147;SFAS 128&#148;). Basic earnings (loss)&nbsp;per
share is computed by dividing net income (loss)&nbsp;available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since the Company generated a net loss in 2006, 2005 and 2004, outstanding stock options and
warrants would have been anti-dilutive and are not applicable to this calculation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Stock Option Plan &#151; </B>During the years ended December&nbsp;31, 2005 and 2004, the
Company determined the effects of stock based compensation in accordance with SFAS No.&nbsp;123,
<I>Accounting for Stock-Based Compensation ,as amended </I>which permitted entities to recognize expense
using the &#147;fair-value&#148; method over the vesting period of all employee stock-based awards on the
date of grant. Alternatively, SFAS No.&nbsp;123 allowed entities to continue to utilize the &#147;intrinsic
value&#148; method for equity instruments granted to employees and provide pro forma net income (loss)
and pro forma earnings (loss)&nbsp;per share disclosures for employee stock option grants after 1994 as
if the fair-value-based method defined in SFAS No.&nbsp;123 has been applied. The Company elected to
continue to utilize the &#147;intrinsic value&#148; method for employee stock option grants and provide the
pro forma disclosure provisions of SFAS No.&nbsp;123 (Note 7)
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On January&nbsp;1, 2006 the Company adopted SFAS 123R &#147;Share Based Payments, using the modified
prospective transition method to account for changes to the method of accouting for options
outstanding at the effective date. Estimated compensation cost of $11,725 related to vested options
outstanding as of January&nbsp;1, 2006, net of those cancelled or expired during 2006, has been
recognized as additional paid-in capital. The statements of operations for periods prior to the
effective date have not been restated.
</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>&#151; The Company adopted the
provisions of SFAS No.&nbsp;121, <I>Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, </I>on January&nbsp;1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the carrying amounts
of the assets exceed the fair value of the assets (see Note 4). Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Segment Reporting </B>&#151; The Company adopted SFAS 131, <I>Disclosures about Segments of an Enterprise
and Related Information </I>(&#147;SFAS No.&nbsp;131&#148;), in December&nbsp;1997. MDT has been considered a discontinued
operation since September&nbsp;1998. As of December&nbsp;31, 2006, the Company has only one operating
segment, DPI, the Company&#146;s Audio Signal Processing business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Income Taxes </B>&#151; 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>In September&nbsp;2006, the Financial Accounting Standards Board
(&#147;FASB&#148;) issued SFAS No.&nbsp;157, &#147;Fair Value Measurements&#148; . SFAS 157 replaces the different
definitions of fair value in the accounting literature with a single definition. It defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. SFAS 157 is effective for
fair-value measurements already required or permitted by other standards for financial statements
issued for fiscal years beginning after November&nbsp;15, 2007 and interim periods within those fiscal
years. The Company has not yet determined the impact, if any, of adopting the provisions of SFAS
157 on its financial position, results of operations and cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Use of Estimates </B>&#151; 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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Fair Value of Financial Instruments </B>&#151; The 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 December&nbsp;31, 2006
approximated fair value due to their short maturity or nature.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->33<!-- /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>(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, 2006 and 2005, consists 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="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="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">$</TD>
    <TD align="right">337,145</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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">7,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total Property and Equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">637,531</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">634,054</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">$</TD>
    <TD align="right">3,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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, 2006 and 2005 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="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="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">Capitalized Patent, Trademarks and Technology Costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">540,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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">409,450</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">$</TD>
    <TD align="right">131,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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>


<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="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">131,258</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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="left">$</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">131,258</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</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 was indebted to the Premium Finance, Inc., an unrelated insurance premium finance
company, in the amount of $9,670 at December&nbsp;31, 2006. 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 nine 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"><I>During the year ended December&nbsp;31, 2005, shares were issued or converted as follows:</I>
</DIV>


<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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Options to purchase 75,000 and 100,000 shares of common stock previously granted to an employee, at
exercise prices of $0.27 and $0.05, respectively, were cancelled upon his resignation from the
Company.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->34<!-- /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">Options to purchase a total of 500,000 shares of common stock were granted to the CEO related to
the extension of his employment agreement. These options vested half on issuance and half in
November, 2005, if the executive is in the employ of the Company. These options may be exercised at
a price of $0.10 per share through February, 2010. These options had no value at December&nbsp;31, 2005.
</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"><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>

<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, 4,876,338 as of
December&nbsp;31, 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="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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Weighted-Average</B></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>Exercisable</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Exercise Price</B></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="right">$</TD>
    <TD align="right">0.18</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">200,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</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="right">&nbsp;</TD>
    <TD align="right">(600,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.43</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,381,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,635,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</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="right">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</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="right">&nbsp;</TD>
    <TD align="right">(325,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.31</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,726,666</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,810,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</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>&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>
    <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="right">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</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="right">&nbsp;</TD>
    <TD align="right">(976,666</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,060,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Options outstanding at December&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,750,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,750,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</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>&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>
    <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;At December&nbsp;31, 2006 there were no additional shares available for grant under the Plan,
since the Plan had expired in 2005. The per share weighted-average fair value of stock options
granted during 2005 and 2004 was $0.02 and $0.09, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions: 2005- expected
dividend yield 0%, risk-free interest rate of 4.5%, expected volatility of 150% and an expected
life of 5&nbsp;years 2004- expected dividend yield 0%, risk-free interest rate of 4.1%, expected
volatility of 150% and an expected life of 5&nbsp;years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Through December&nbsp;31, 2005, as permitted by SFAS No.&nbsp;123, the Company applied the &#147;intrinsic
value&#148; method outlined in APB Opinion No.&nbsp;25 in accounting for its Plan and, accordingly, no
compensation cost was recognized for the fair value of its stock options
</DIV>

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

</DIV>

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

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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">in the consolidated financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No.&nbsp;123, the Company&#146;s net
loss would have been increased to the pro forma amounts indicated 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="76%">&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="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">NET INCOME (LOSS):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As Reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(81,515</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(157,490</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro Forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(89,715</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(172,770</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BASIC AND DILUTED LOSS:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As Reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro Forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective January&nbsp;1, 2006, the Company adopted SFAS 123R &#147;Share Based Payments, using the
modified prospective transition method to account for changes to the method of accouting for
1,750,000 vested options outstanding at the effective date. Estimated compensation cost related to
vested options outstanding as of January&nbsp;1, 2006 was recognized as additional paid-in capital.
During the year ended December&nbsp;31, 2006, 1,060,000 vested options expired or were cancelled,
resulting in a reduction of compensation cost and additional paid-in capital. Net compensation cost
recorded for the year ended December&nbsp;31, 2006 was $11,725; net loss for the year was increased by a
corresponding amount, or a basic and diluted loss per share of $0.00. The grant-date fair value of
vested options was estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield &#151; 0%; risk-free interest rate of 4.5%,
expected volatility of 100% and an expected life of 3&nbsp;years
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Options to purchase 600,000 shares of common stock were cancelled in the quarter ended March
31, 2006 to two former directors as a result of their resignation form the Board of Directors, per
the Plan requirements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Options to purchase 210,000 shares of common stock previously granted to two directors and two
employees, at an exercise price of $0.30 expired.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, the number of options exercisable and fully vested was 1,750,000. The
weighted-average exercise price of those options was $0.09; the weighted average remaining
contractual term was 3&nbsp;years; and the aggregate intrinsic value was zero per share.
</DIV>

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

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company files a consolidated return for U.S. income tax purposes. Income tax expense for
the years ended December&nbsp;31, 2006, 2005 and 2004 consisted 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="64%">&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="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>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">State franchise tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Federal taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,274</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(0</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(874</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">400</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;Certain revenues received from customers in foreign countries are subject to withholding taxes
that are deducted from outgoing funds at the time of payment. These taxes range from approximately
10% to 16.5% and are recorded as net royalty revenue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income tax expense for the years ended December&nbsp;31, 2006, 2005 and 2004 differed from the
amounts computed by applying the U.S. federal income tax rate of 34&nbsp;percent to loss before income
taxes primarily due to the generation of additional net operating loss carry forwards for which no
tax benefit has been provided.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets at December&nbsp;31, 2006 is composed primarily of the net loss carry forwards. The
net change in the total valuation allowance for the year ended December&nbsp;31, 2006 was insignificant.
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not
</DIV>

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

</DIV>

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

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



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Management considers projected
future taxable income and tax planning strategies in making this assessment. Based upon the level
of historical taxable losses, management believes it is more likely than not the Company will not
realize the benefits of these deductible differences and has established a valuation allowance to
fully reserve the deferred tax assets at December&nbsp;31, 2006. Additionally, the ultimate
realizability of net operating losses may be limited by change of control provisions under Section
382 of the Internal Revenue Code.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, the Company had net operating loss carry forwards for Federal income tax
purposes of approximately $26,800,000 which are available to offset future Federal taxable income,
if any, through 2015. Approximately $21,700,000 of these net operating loss carry forwards are
subject to an annual limitation of approximately $1,000,000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(9)&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 other 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 one non-cancelable operating lease as of December&nbsp;31, 2006.
Future minimum rental payments for this operating lease is approximately $1,200 through December,
2007. Rent expense amounted to approximately $33,000, $25,000 and $ 23,000 for the years ended
December&nbsp;31, 2006, 2005 and 2004, respectively, and related primarily to leases for office space.
These leases expired during 2006 and were not renewed.
</DIV>

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


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company had a 401(k) profit sharing plan covering substantially all employees, subject to
certain participation and vesting requirements. The Company was permitted to make discretionary
contributions to this plan, but had never done so over the life of this plan. The amount charged to
administrative expense for the Plan in 2006, 2005 and 2004 was approximately $2,000 per annum. This
plan was dissolved in early 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(11)&nbsp;Quarterly Financial Data (unaudited)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a summary of the quarterly results of operations for the years ended December
31, 2006 and 2005:
</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="52%">&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="15" style="border-bottom: 1px solid #000000"><B>Quarter Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>June 30</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>September 30</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">100,488</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">92,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">67,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">72,101</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross Margin</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">90,299</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">83,580</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">60,970</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">97,455</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="right">$</TD>
    <TD align="right">(173,391</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(62,989</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(61,798</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(54,448</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic (Loss) Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&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="15" style="border-bottom: 1px solid #000000"><B>Quarter Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>June 30</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>September 30</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net Revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">331,950</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">428,912</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">270,914</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">160,670</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross Margin</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">298,078</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">386,022</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">258,162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">144,122</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 align="right">$</TD>
    <TD align="right">10,014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">57,566</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">36,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(186,514</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic (Loss) Per Share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(0.00</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(12)&nbsp;Subsequent Events and Management Plans (unaudited)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In February&nbsp;2007, a licensee exercised its right to purchase additional usage of our
technology, under an original license signed in August&nbsp;2004. As a result, we received approximately
$563,000 after commissions and local country and city income tax.
</DIV>

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

</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="319"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;9.
</B><B><I>Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In February&nbsp;2007, Farber Hass Hurley McEwen LLP resigned as the independent auditors for the
Company and Ramirez International Financial &#038; Accounting Services, Inc. was engaged as the
independent auditors for the Company. Such matters were previously disclosed in a From 8-K filed
with the Securities and Exchange Commission with date of earliest event reported of February&nbsp;8,
2007. The change in independent auditors was not in connection with any disagreement of the type
described in paragraph (a)(1)(iv) of Item 304(a) of Regulation&nbsp;S-K or any reportable event as
described in paragraph (a)(1)(v) of said Item&nbsp;304(a).
</DIV>
<DIV align="left">
<A name="320"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;9A. </B><B><I>Controls and Procedures</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We carried out an evaluation of the effectiveness of our disclosure controls and procedures,
as defined in Rules&nbsp;13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934. Due to the Company&#146;s present
circumstances, there are only one remaining part-time employee and a
contract bookkeeper that are responsible for maintenance of the
accounting records and other aspects of internal control. Thus,
segregation of duties is limited, and there is limited oversight of
the remaining employee. While the contract bookkeeper initiates
disbursements, while the employee signs the checks, lack of
segregation of duties, forced by the circumstances, must be deemed a
material weakness in internal controls, Nevertheless, based on
that evaluation, the Chairman of the Board, acting as the principal executive and principal
financial officer of the Company, concluded that our disclosure controls and procedures as of the
end of the period covered by this report were effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission&#146;s rules and forms. There were no changes in our internal control
over financial reporting that occurred during the quarter ended December&nbsp;31, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
</DIV>
<DIV align="left">
<A name="321"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;9B. </B><B><I>Other Information</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="322"></A>
</DIV>

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

<DIV align="left">
<A name="323"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;10. </B><B><I>Director, Executive Officers and Corporate Governance</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Directors and Officers</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">HENRY R. MANDELL. Chairman since February&nbsp;2000; Chief Executive Officer from February&nbsp;2000 through
January&nbsp;6, 2006; Interim Chief Executive Officer from September&nbsp;1998 to February&nbsp;2000; Secretary
since September&nbsp;1998; Chief Financial Officer from March&nbsp;1998 through January&nbsp;6, 2006; Senior Vice
President, Finance from March&nbsp;1998 until September&nbsp;1998. Executive Vice President and Chief
Financial Officer of The Sirena Apparel Group, Inc. from November&nbsp;1990 to January, 1998. Senior
Vice President of Finance and Administration for Media Home Entertainment, Inc. from April&nbsp;1985 to
November&nbsp;1990. Director of Finance and Accounting for Oak Media Corporation from June&nbsp;1982 to
April&nbsp;1985. Senior Corporate Auditor for Twentieth Century Fox Film Corporation from June&nbsp;1981 to
June&nbsp;1982. Mr.&nbsp;Mandell was a Senior Auditor for Arthur Young and Company from August&nbsp;1978 to June
1981, where he qualified as a Certified Public Accountant. Mr.&nbsp;Mandell is currently the President
and Chief Operating Officer of several operating entities in the apparel industry doing business as
Ed Hardy and Christian Audigier
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">CARLO CIVELLI. Director since March&nbsp;1993. Previously, Mr.&nbsp;Civelli was our VP Finance &#151; Europe from
August&nbsp;1991 to March&nbsp;1995. Has extensive experience in financing emerging public companies and has
been instrumental in funding approximately 50 new ventures of the past 20&nbsp;years which include
Breakwater Resources, Callinan Mines, Granges Exploration, Namibian Minerals, Napier International
Tech, Norst Interactive, DRC Resources, DMX Digital Music. Managing Director of Clarion Finanz AG,
Zurich, Switzerland, for more than the last ten years. Director and Financial Consultant to
Clarion Finanz AG.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Section&nbsp;</B><B>16(a)</B><B> Beneficial Ownership Reporting Compliance</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Based solely upon a review of Forms 3 and 4 furnished to us during the fiscal year ended December
31, 2006, we are not aware of any director, officer or beneficial owner of more ten percent (10%)
of the Common Stock of the Company who failed to file on a timely basis any reports required by
Section 16(a) of the Securities Exchange Act of 1934.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->38<!-- /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;<B>Code of Ethics</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We adopted a Code of Ethics that applies to all of our directors, officers and employees, including
our Chief Executive Officer, our Chief Financial Officer and other senior financial officers. At
present, the Company&#146;s only employee is Henry R. Mandell who is serving as Chairman of the Board
and Secretary. The Company will provide a copy of our code of ethics to any person, free of
charge, upon written request sent to our principal corporate office at 2060 East Avenida de Los
Arboles, # D190, Thousand Oaks, California 91362-1376.
</DIV>






<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Corporate Governance</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">During the fiscal year ended December&nbsp;31, 2005, Gilbert Segel served as the sole member of the
Audit Committee until his resignation from the Board of Directors on and effective as of December
19, 2005, Mr.&nbsp;Segel was considered independent, as defined in the NASD listing standards, and met
the criteria for independence set forth in the rules promulgated under the Securities Exchange Act
of 1934, as amended (the &#147;Exchange Act&#148;). After Mr.&nbsp;Segel&#146;s resignation in 2005, no members were
nominated or appointed to the Audit Committee. Accordingly, the Audit Committee held no meetings
in fiscal 2006. At present, the entire Board is acting in lieu of the Audit Committee.
</DIV>

<DIV align="left">
<A name="324"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;11. </B><B><I>Executive Compensation</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Compensation Discussion and Analysis</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Henry Mandell is the sole employee of the Company and serves as both the Chairman of the Board and
the Secretary of the Company. On December&nbsp;19, 2005, Henry Mandell gave notice that he was
resigning from all positions held by him with the Company, other than as a director, Chairman of
the Board and Secretary thereof, effective as of January&nbsp;6, 2006. Effective as of January&nbsp;6, 2006,
the Company entered into an agreement with Mr.&nbsp;Mandell to continue his employment with the Company
as Chairman and Secretary. Under the terms of that agreement, Mr.&nbsp;Mandell continues to provide
certain specified services to the Company, which services may be provided in person, by telephone,
by email or otherwise as Mr.&nbsp;Mandell sees fit, such services to be rendered at such hours and/or on
weekends as he may determine. Those services include without limitation supervising the
preparation of the Company&#146;s financial statements and records, reviewing and authorizing day to day
disbursements, supervising all of the Company&#146;s licensing and business activities, handling
stockholder communications and serving as the contact person with the Company&#146;s financial advisor.
He is permitted to accept, and has accepted, other employment during the term of the agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As an incentive for Mr.&nbsp;Mandell to continue in the employ of the Company during the term of the
agreement, and in consideration for foregoing certain severance pay to which he otherwise may have
been entitled, the Company agreed to pay him a lump sum payment of $35,733.33, which amount was
paid concurrently with the execution of the agreement. He is entitled to a monthly salary of
$5,000 during the term of the agreement, a bonus of $10,000 for his assistance in the preparation
of the Company&#146;s Form 10-K of the Company 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 for each proxy. Additionally, should the
Company be sold or enter into certain specified extraordinary transactions during the term of the
agreement, Mr.&nbsp;Mandell is entitled to an additional bonus equal to 3.5% of the total consideration,
not to exceed $150,000. During the term of the agreement, he will also be entitled to employee
benefits and reimbursement of reasonable, actual and necessary business expenses. These amounts
were determined by Mr.&nbsp;Mandell and Mr.&nbsp;Civelli based on the amount of time expected to be expended
by Mr.&nbsp;Mandell in pursuing the winding up of the Company&#146;s business operations and the financial
status of the Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The agreement contains certain non-competition, non-solicitation and confidentiality provisions.
The agreement terminated certain provisions of Mr.&nbsp;Mandell&#146;s then existing extended 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).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The agreement was scheduled to terminate by its terms upon the earlier of the consummation of
certain extraordinary transactions, the expiration, termination or non-renewal of the directors&#146;
and officers&#146; insurance policy of the Company under which Mr.&nbsp;Mandell is covered as a director and
officer of the Company and June&nbsp;30, 2006. The agreement was extended through the earlier of the
date of dissolution of the Company and June&nbsp;30, 2007. The Company 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>



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


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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The monthly income was agreed to be paid in order that the Company would have an employee to
oversee the sale of the assets of the Company, manage remaining business relationships and the
supervise the dissolution of the Company or any other transaction in connection with the wind down
of the business operations of the Company. The additional sums for preparation of the Form 10-Qs
and Form 10-Ks were to compensate Mr.&nbsp;Mandell for the additional responsibilities to be borne by
him in connection therewith. The proposed bonus, which will be paid based on a percentage of the
amount received for the sale of the assets or other specified extraordinary transactions, is
intended to incentivize Mr.&nbsp;Mandell to continue the efforts to sell the Company and to maximize
value for the stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company is trying to minimize its cash outflow, maximize value for the stockholders and wind
down its current business operations. As such, it is no longer trying to incentivize employees with
long-term compensation plans or stock option grants or other forms of equity ownership. Although
the Company does not intend to increase Mr.&nbsp;Mandell&#146;s compensation package, any such determination
would be made by the Board, consisting of Messrs.&nbsp;Mandell and Civelli.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Officer Compensation</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table sets forth information concerning the compensation of Mr.&nbsp;Mandell, the only
executive officer of the Company during fiscal 2006:
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SUMMARY COMPENSATION TABLE</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="35%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>All Other</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Compensation</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Name and Principal Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Year</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Salary($)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Awards($)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>($)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Total ($)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">

<TD align="center"><DIV style="margin-left:15px; text-indent:-15px"><B>Henry R. Mandell, Chairman and Secretary</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">90,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">19,000</TD>
    <TD nowrap>&nbsp;(1)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">109,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">214,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">16,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">238,200</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"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">214,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,820</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">14,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">232,020</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Cost of health insurance premiums</TD>
</TR>

</TABLE>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For a description of Mr.&nbsp;Mandell&#146;s employment agreement, see the description thereof set forth
under &#147;Compensation Discussion and Analysis&#148; above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table sets forth information concerning unexercised options held by Mr.&nbsp;Mandell as of
December&nbsp;31, 2006. All options held by Mr.&nbsp;Mandell are fully vested. Mr.&nbsp;Mandell did not receive
any equity incentive plan awards during the fiscal year ended December&nbsp;31, 2006.
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END<BR>
Option Awards</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="26%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Number of Securities</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Number of Securities</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Underlying</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Underlying</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Unexercised</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Unexercised</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Weighted Average</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Options(#)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Options(#)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Option Exercise</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Option Expiration</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exercisable</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Unexercisable</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Price($)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Date</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD nowrap align="center"><DIV style="margin-left:15px; text-indent:-15px">1,500,000</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.094</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">06/07-2/10</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Mr.&nbsp;Mandell did not exercise any options during the fiscal year ended December&nbsp;31, 2006 and all
options held by Mr.&nbsp;Mandell were fully vested prior to January&nbsp;1, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In the event the assets of the Company are sold or the Company enters into other specified
extraordinary transactions, Mr.&nbsp;Mandell will be entitled to a lump sum cash payment from the
Company in an amount equal to 3.5% of the total consideration, not to
exceed $150,000.
</DIV>

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

</DIV>

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

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Director Compensation</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None of the Company&#146;s directors received any cash compensation, stock option awards or other
arrangements for services provided in their capacity as directors during the fiscal year ended
December&nbsp;31, 2006.
</DIV>

<DIV align="left">
<A name="325"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Item&nbsp;12. </B><B><I>Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth information (except as otherwise indicated by footnote) as to
shares of common stock owned as of March&nbsp;7, 2007 or which can be acquired within sixty days of
March&nbsp;7, 2007 by (i)&nbsp;each person known by management to beneficially own more than five percent
(5%) of Spatializer&#146;s outstanding common stock, (ii)&nbsp;each of Spatializer&#146;s directors, and officers,
and (iii)&nbsp;all executive officers and directors as a group. On March&nbsp;12, 2007, there were
48,763,383 shares of common stock outstanding.
</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="68%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">AMOUNT AND NATURE OF</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">PERCENT OF</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">

<TD nowrap align="left" style="border-bottom: 1px solid #000000"><DIV style="margin-left: 75px">NAME
OF BENEFICIAL OWNER</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">BENEFICIAL OWNERSHIP</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">CLASS</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Jay Gottlieb(1)(2)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,846,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">9.1</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">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Carlo Civelli(1)(3)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,763,780</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">11.75</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">Henry R. Mandell(1)(4)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,162,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">4.4</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">
    <TD><DIV style="margin-left:15px; text-indent:-15px">All directors and executive officers
as a group (2 persons)(1)(3)(4)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,976,655</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">16.15</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>The persons named in the table have sole voting and investment power with respect to all
shares shown to be beneficially owned by them, subject to community property laws, where
applicable, and the information contained in the footnotes to this table.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Based on Amendment No.&nbsp;3 to the Schedule&nbsp;13G filed by Mr.&nbsp;Gottlieb with the Securities and
Exchange Commission on February&nbsp;12, 2007. Mr.&nbsp;Gottlieb&#146;s address is 27 Misty Brook Lane, New
Fairfield, Connecticut 06812.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>Carlo Civelli controls Clarion Finanz AG, a non-reporting investment company. Holdings of Mr.
Civelli and Clarion Finanz AG are combined, and include all shares of Spatializer held of
record or beneficially by them, and all additional shares over which he either currently
exercises full or partial control, without duplication through attribution. Includes 300,000
options to acquire common stock held by Mr.&nbsp;Civelli, all of which are vested and currently
exercisable. Mr.&nbsp;Civelli&#146;s address is Gerberstrasse 5 8023, Zurich, Switzerland. (4)
Includes 1,500,000 options held by Mr.&nbsp;Mandell, all of which are vested and are exercisable at
various prices from $0.05 to $0.12. The options have varying expiration dates of which the
final such expiration date is February&nbsp;21, 2010.</TD>
</TR>

</TABLE>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table sets forth certain information relating to the equity compensation plans of the
Company as of December&nbsp;31, 2006:
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Equity Compensation Plan Information</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="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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of securities</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number of securities</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>remaining available for</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>to be issued</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted-average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>future issuance under</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>upon exercise of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>exercise price of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>equity compensation plans</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>outstanding options,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>outstanding options,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(excluding securities</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">

<TD nowrap align="left" style="border-bottom: 1px solid #000000"><DIV style="margin-left: 110px"><B>Plan category</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>warrants and rights</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>warrants and rights</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>reflected in column (a))</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(a)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(b)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(c)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity compensation
plans approved by security
holders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">1,750,000</TD>
    <TD nowrap>(1)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">0.09 </TD>
    <TD nowrap>(1)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity compensation plans not
approved by security holders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,750,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.09</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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

</DIV>

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

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


<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Represents options to acquire the Company&#146;s Common Stock under the Company&#146;s 1995 Stock Option
Plan and 1996 Incentive Plan approved by the Company&#146;s stockholders in 1995 and 1996, respectively.
The 1995 Plan authorizes grants of options to purchase authorized but unissued common stock in an
amount of up to 10% of total common shares outstanding at each calendar quarter or 4,876,338 as at
December&nbsp;31, 2006. Stock options are granted with an exercise price equal to the stock&#146;s fair
market value at the date of grant. Stock options have five-year terms and vest and become fully
exercisable as determined by the committee on date of grant. The 1996 Plan supplements the 1995
Plan by allowing for stock appreciation, incentive shares and similar accruals aggregating not more
than the equivalent of 500,000 shares and the regrant of any Performance Shares that become
available for regrant. See Note 2. Since the Plan expired in 2005, there can be no new issues of
options.</TD>
</TR>

</TABLE>


<DIV align="left">
<A name="326"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;13. </B><B><I>Certain Relationships and Related Transactions, and Director Independence</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company and Henry R. Mandell, the Chairman and Secretary of the Company and the Company&#146;s
sole employee, are parties to an employment agreement entered into in January&nbsp;2006. Under the terms
of that agreement, if the Company is sold or enters into certain specified extraordinary
transactions during the term hereof, Mr.&nbsp;Mandell will be entitled to receive a lump sum cash
payment equal to 3.5% of the total consideration, not to exceed $150,000, in addition to any
amounts he may receive as a stockholder upon any distribution to stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As the Company has only one employee and two directors, neither of whom would be considered
&#147;independent&#148;, the Company has no formal policy in place as to the procedure for approving any
transactions between the Company and its related persons (including officers, directors and
stockholders). In the event that the Company should undertake any transaction that would require
disclosure under this section, the Company may consider, in light of all then existing facts and
circumstances, whether stockholder approval thereof should be sought. The Board did not seek
approval or ratification of the employment agreement with Mr.&nbsp;Mandell based in large part on the
circumstances of the Company at the time such agreement was executed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company does not currently have any director that would be considered independent under
the definition thereof under any national securities exchange or any inter-dealer quotation
system
</DIV>
<DIV align="left">
<A name="327"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;14. </B><B><I>Principal Accountant Fees and Services</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following summarizes the fees paid to Farber Hass Hurley McEwen LLP, the principal
accountant for the audit of the Company&#146;s annual financial statements for the fiscal year ended
December&nbsp;31, 2005 and review of the Company&#146;s financial statements included in Form 10-Qs during
fiscal 2006 and to Ramirez International Financial &#038; Accounting Services, Inc. the principal
accountant for the audit of the Company&#146;s annual financial statements for the fiscal year ended
December&nbsp;31, 2006:
</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" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>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>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Audit Fees (1)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">34,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,900</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Audit Related Fees (2)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</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">Tax Fees (3)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,895</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">All Other Fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left: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 Fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">41,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,300</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>


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

</DIV>

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

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


<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Audit Fees are fees for professional services rendered for the annual audit, the reviews of
the Company&#146;s financial statements included in Form 10-Qs and services normally provided in
connection with statutory and regulatory filings.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Audit Related Fees are for assurance and related services that are reasonably related to the
performance of the fiscal 2005 audit and not reported under Audit Fees.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>Tax Fees are fees for professional services rendered for tax compliance, tax planning and tax
advice.</TD>
</TR>

</TABLE>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Although the Audit Committee had not adopted policies and procedures for the pre-approval of audit
and non-audit services rendered by the Company&#146;s independent auditors, the charter of the Audit
Committee requires that the Audit Committee pre-approve the engagement of the auditor to perform
all proposed audit, review and attest services, as well as engagements to perform any proposed
permissible non-audit services. The pre-approval of services was delegated to the Company&#146;s Chief
Financial Officer with the decision to be reported to the Audit Committee and ratified at its next
scheduled meeting. One hundred percent of the auditors&#146; fees were pre-approved by the Audit
Committee during 2005. In 2006, the Audit Committee had no members nor a Chief Financial Officer.
Thus, the Company&#146;s Board of Directors has and will be responsible for serving in the capacity of
the Audit Committee and approving audit and non-audit services to be rendered by the Company&#146;s
independent auditor until such time, if any, as members may be appointed to the Audit
Committee.
</DIV>

<DIV align="left">
<A name="328"></A>
</DIV>

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

<DIV align="left">
<A name="329"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;15. </B><B><I>Exhibits and Financial Statement Schedules</I></B>
</DIV>


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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;8.
</DIV>

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

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

</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following Exhibits are filed as part of, or incorporated by reference into, this Report:
</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="8%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Description</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<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">2.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Arrangement Agreement dated as of March&nbsp;4, 1994 among Spatializer-Yukon, DPI and
Spatializer-Delaware (Incorporated by reference to the Company&#146;s Registration Statement
on Form&nbsp;S-1,Registration No 33-90532, effective August&nbsp;21, 1995.)</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">2.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Asset Purchase Agreement dated as of September&nbsp;18, 2006 among the Company, Desper
Products, Inc., DTS, Inc. and DTS-BVI (incorporated by reference to Exhibit&nbsp;10.9 to the
Company&#146;s Quarterly Report on Form&nbsp;10-Q for the quarter ended September&nbsp;30, 2006.)</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">3.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Incorporation of Spatializer-Delaware as filed February&nbsp;28, 1994.
(Incorporated by reference to the Company&#146;s Registration Statement on Form&nbsp;S-1,
Registration No.&nbsp;33-90532,effective August&nbsp;21, 1995.)</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">3.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Amended and Restated Bylaws of Spatializer-Delaware. (Incorporated by reference to the
Company&#146;s Registration Statement on Form&nbsp;S-1,Registration No.&nbsp;33-90532, effective
August&nbsp;21, 1995.)</TD>
</TR>
<TR valign="bottom"><!-- 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">3.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Designation of Series&nbsp;B 10% Redeemable Convertible Preferred Stock of
the Company as filed December&nbsp;27, 1999 (Incorporated by reference to the Company&#146;s
Annual Report on Form10-K, for the period ended December&nbsp;31, 1999.)</TD>
</TR>
<TR valign="bottom"><!-- 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">3.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Amendment of Certificate of Incorporation of the Company as filed on
February&nbsp;25, 2000 (Incorporated by reference to the Company&#146;s Annual Report on Form
10-K, for the period ended December&nbsp;31, 1999.)</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">3.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Designation of Series&nbsp;B-1 Redeemable Convertible Preferred Stock as
filed December&nbsp;20, 2002 (Incorporated by reference to the Company&#146;s Annual Report on
Form&nbsp;10-K, for the period ended December&nbsp;31, 2002.)</TD>
</TR>
<TR valign="bottom"><!-- 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">3.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Elimination of Series&nbsp;A Preferred Stock as filed December&nbsp;26, 2002
(Incorporated by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for the period
ended December&nbsp;31,2002.)</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">3.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate of Elimination of Series&nbsp;B Preferred Stock as filed December&nbsp;26,2002
(Incorporated by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for the period
ended December&nbsp;31,2002.)</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">4.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Performance Share Escrow Agreements dated June&nbsp;22, 1992 among Montreal Trust Company of
Canada, Spatializer-Yukon and certain shareholders with respect to escrow of 2,181,048
common shares of Spatializer-Yukon. (Incorporated by reference to the Company&#146;s
Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532,effective August&nbsp;21,
1995.)</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">4.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Modification Agreement for Escrowed Performance Shares. (Incorporated by reference to
the Company&#146;s Definitive Proxy Statement dated June&nbsp;28, 1996 and previously filed with
the Commission.)</TD>
</TR>
<TR valign="bottom"><!-- 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">4.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Exchange Agreement effective December&nbsp;26, 2002 entered into by holders of
Series&nbsp;B Preferred Stock in connection with exchange of same for Series&nbsp;B-1 Preferred
Stock (Incorporated by reference to the Company&#146;s Annual Report on Form&nbsp;10-K, for the
period ended December&nbsp;31, 2002.)</TD>
</TR>
<TR valign="bottom"><!-- 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">10.1*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Spatializer-Delaware Incentive Stock Option Plan (1995 Plan). (Incorporated by
reference to the Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.
33-90532, effective August&nbsp;21,1995.)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->44<!-- /Folio -->

</DIV>

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

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

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="8%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Description</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<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">10.2*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Spatializer-Delaware 1996 Incentive Plan. (Incorporated by reference to the Company&#146;s
Proxy Statement dated June&nbsp;25, 1996 and previously filed with the Commission.)</TD>
</TR>
<TR valign="bottom"><!-- 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">10.3*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Stock Option Agreement (Incorporated by reference to Exhibit&nbsp;10.3 to the
Company&#146;s Annual Report on Form&nbsp;10-K for the period ended December&nbsp;31, 2005.)</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">10.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">License Agreement dated June&nbsp;29, 1994 between DPI and MEC. (Incorporated by reference
to the Company&#146;s Registration Statement on Form&nbsp;S-1, Registration No.&nbsp;33-90532,
effective August&nbsp;21,1995.)</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">10.5*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated November&nbsp;12, 2005, between the Company and Henry Mandell, as
amended. (Incorporated by reference to Exhibit&nbsp;10.5 to the Company&#146;s Annual Report on
Form&nbsp;10-K for the period ended December&nbsp;31, 2005.)</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">10.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Related Party Promissory Note to the Successor Trustee of the Ira A. Desper Marital
Trust dated November&nbsp;1, 2003. (Incorporated by reference to Exhibit&nbsp;10.6 to the
Company&#146;s Annual Report on Form&nbsp;10-K, for the period ended December&nbsp;31, 2005.)</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">10.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lease for Office and Research Center in San Jose, CA. (incorporated by reference to )</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">10.8
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lease for Executive Office in Westlake Village, CA. (incorporated by reference to)</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">10.9
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">License Agreement between Spatializer Audio Laboratories, Inc., Desper Products, Inc.
and Samsung Electronics, effective August&nbsp;22, 2005. (Incorporated by reference to the
Company&#146;s Quarterly Report on Form&nbsp;10-Q for the period ended September&nbsp;30, 2005.)</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">10.10*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated January&nbsp;6, 2006, between the Company and Henry Mandell.
(Incorporated by reference to Exhibit&nbsp;10.10 to the Company&#146;s Annual Report on Form&nbsp;10-K
for the period ended December&nbsp;31, 2006.)</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">10.11&#149;*
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Amendment to Employment Agreement between the Company and Henry Mandell</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">21.1&#149;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Subsidiaries of the Company</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">23.1&#149;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Ramirez International
Financial and Accounting Services, Inc.</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">23.2&#149;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Farber Hass Hurley McEwen, LLP, Independent Registered Public Accounting Firm</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">31.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate pursuant to Section&nbsp;302 of the Sarbanes-Oxley Act of 2002</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">32.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certificate pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002 (Certification
will not be deemed &#147;filed&#148; for purposes of Section&nbsp;18 of the Securities Exchange Act of
1934, as amended)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">&#149;</TD>
    <TD>&nbsp;</TD>
    <TD><U>
 Filed Herewith.</U></TD>
</TR>

<TR style="font-size: 3pt" 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="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Indicates management contracts or compensatory plans required
to be filed as an exhibit to this report.</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->45<!-- /Folio -->

</DIV>

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


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





<DIV align="left">
<A name="330"></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">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Dated: March&nbsp;26, 2007

</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">SPATIALIZER AUDIO LABORATORIES, INC.<BR>
<BR>
<BR>
(Registrant)<BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left"><U>/s/ Henry R. Mandell</U>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Henry R. Mandell&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left"><I>Chairman &#038; Secretary</I>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="30%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Signature</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Title</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Date</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">/s/ Carlo Civelli
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March&nbsp;26, 2007</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="1" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Carlo Civelli</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">/s/ Henry R. Mandell
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director, Chairman and
Secretary (Principal
executive
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">March&nbsp;26, 2007</TD>
</TR>
<TR style="font-size: 1px">
    <TD colspan="1" valign="top" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Henry R. Mandell</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"> officer and
principal financial
officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->46<!-- /Folio -->

</DIV>

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


<DIV align="left" style="margin-top: 12pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left"><FONT style="font-family: Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>Mark this box with an X if you have made changes to your name or address details above.</TD>
</TR>
</TABLE>
</DIV>

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


<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt">The board of directors recommends a vote FOR the proposal described under proposal 1,<BR>
proposal 2 and Proposal 3.</DIV>

<P><DIV style="position: relative; float: left; width: 48%">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head --><TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="60%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="10%">&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">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>For</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Against</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Abstain</B></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">1.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">To approve the sale
of all or
substantially all
of the assets of
Spatializer and
Dasper Products,
Inc., a wholly
owned subsidiary of
Spatializer, to
DTS, Inc. and DTS
BVI, Limited
pursuant to the
Asset Purchase
Agreement.
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>For</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Against</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Abstain</B></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">To approve the
amendment to
Spatializer&#146;s
Certificate of
Incorporation
increasing the
authorized number
of shares of Common
Stock from
65,000,000 shares
to 300,000,000
shares.
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B></TD>
</TR>
<!-- End Table Body --></TABLE>
</DIV>

</DIV>
<DIV style="position: relative; float: right; width: 48%">

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

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
</DIV>
</DIV>
<BR clear="all"><BR>
<P><DIV style="position: relative; float: left; width: 48%">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head --><TR valign="bottom">
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="60%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="10%">&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">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>For</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Withhold</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>Abstain</B></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">3.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">To approve the
authorization for
the board of
directors to effect
a reverse stock
split of
Spatializer&#146;s
Common Stock at a
specific ratio to
be determined by
the board of
directors within a
range from
one-for-five to
one-for-fifty.
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B></TD>
</TR>
<!-- End Table Body --></TABLE>
</DIV>

</DIV>
<DIV style="position: relative; float: right; width: 48%">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head --><TR valign="bottom">
    <TD width="90%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">For planning purposes, please
mark this box if
you plan to attend
the Speical
Meeting:
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top"><B><FONT style="font-family: Wingdings">&#111;</FONT></B></TD>
</TR>
<!-- End Table Body --></TABLE>
</DIV>

</DIV>
<BR clear="all"><BR>

<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt"><B>Authorized Signatures &#151; Sign Here &#151; This section must be completed for your instructions to
be executed.</B></DIV>


<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt">NOTE: Please sign exactly as your name appears herein. Joint owners should each sign
personally. A corporation should sign full corporate name by duly authorized officers and affix
corporate seal. When signing as attorney, executor, administrator, trustee, or guardian, give full
title as such.</DIV>

<DIV align="LEFT">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head --><TR valign="bottom">
    <TD width="17%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top">Date (mm/dd/yyyy)
</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">Signature 1 &#151; Please keep signature within the box
</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">Signature 2 &#151; Please keep signature within the box</TD>
</TR>
<!-- End Table Body --></TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT style="font-family: Wingdings"><B>&#111;</B></FONT><FONT style="font-family: Wingdings"><B>&#111;</B></FONT>/<FONT style="font-family: Wingdings"><B>&#111;</B></FONT><FONT style="font-family: Wingdings"><B>&#111;</B></FONT>/<FONT style="font-family: Wingdings"><B>&#111;</B></FONT><FONT style="font-family: Wingdings"><B>&#111;</B></FONT>
<FONT style="font-family: Wingdings"><B>&#111;</B></FONT><FONT style="font-family: Wingdings"><B>&#111;</B></FONT>
</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"><A HREF="#tocpage">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;<B>Proxy &#151; SPATIALIZER AUDIO LABORATORIES, INC.</B>
</DIV>

<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt"><B>SPECIAL MEETING OF STOCKHOLDERS TO BE HELD &#95;&#95;&#95;, 2007
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS</B></DIV>


<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt">The undersigned hereby appoints Henry R. Mandell as proxy and attorney-in-fact of the undersigned,
with full power of substitution, to represent and vote, as designated below, all shares of common
stock of Spatializer Audio Laboratories, Inc. (&#147;Spatializer&#148;) which the undersigned is entitled to
vote at the Special Meeting of Stockholders of Spatializer to be held on &#95;&#95;&#95;, &#95;&#95;&#95;,
2007 at 4:00 p.m. at the offices of Reed Smith LLP, 1901 Avenue of the Stars, Suite&nbsp;700, Los
Angeles, California 90067, and at any adjoumments or postponements thereof.</DIV>


<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt"><B>THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED &#147;FOR&#148; EACH OF PROPOSAL 1, PROPOSAL 2
AND PROPOSAL 3 AND IN THE DISCRETION OF THE PROXY HOLDER WITH RESPECT TO ANY OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING.</B></DIV>


<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt">PLEASE RETURN PROMPTLY IN ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE U.S.</DIV>


<DIV align="left" style="margin-left: 0%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt">(Continued on reverse side)</DIV>



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