SPATIALIZER AUDIO LABORATORIES INC, DEF 14A, 1998-06-01

SPATIALIZER AUDIO LABORATORIES INC
DEF 14A, 1998-06-01
SEMICONDUCTORS & RELATED DEVICES

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [ ]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12

SPATIALIZER AUDIO LABORATORIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
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[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
previously paid. Identify the previous filing by registration statement
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(1) Amount Previously Paid:

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<PAGE> 2

LOGO

20700 VENTURA BOULEVARD
SUITE ONE THIRTY FOUR
WOODLAND HILLS, CA 91364
TEL 818.227.3370
FAX 818.227.9750

May 22, 1998

Dear Stockholder:

The Company's Annual Meeting of Stockholders will be held on Thursday, June
25, 1998 at 10:00 a.m. at the Warner Center Hilton Hotel located at 6360 Canoga
Avenue, Woodland Hills, California 91364. I hope that you will be able to attend
in person. Following the formal business of the Meeting, management will be
providing an update on our business operations and will be available to respond
to your questions.

This year the agenda for the Annual Meeting includes the election of
Directors, the approval of the issuance of Common Stock underlying our new
Series A, 7% Convertible Preferred Stock issued in the private placement in
April 1998. The Proposal with respect to the issuance of Common Stock is being
submitted to you, as a technical matter, to ensure our compliance with the
broadened corporate governance policies adopted by NASDAQ in 1997. YOUR VOTE IS
IMPORTANT TO US.

Please sign, date and return your completed proxy promptly so your Company
stock can be represented, even if you plan to attend the Annual Meeting in
person. As Chairman, I want you to know that the Board endorses each of the
nominees for Director and the Proposal related to the Common Stock issuance.

Additional copies of our Annual Report and Form 10-K are available upon
request by contacting Investor Relations at (818) 227-3370 or by visiting our
website www.spatializer.com.

On behalf of the Company, I want to express our appreciation to the members
of the Board of Directors and to the members of Management and to thank each of
you as stockholders for your continued support of our endeavors. Each of you has
contributed to our development.

Sincerely,
SPATIALIZER AUDIO LABORATORIES, INC.

STEVEN D. GERSHICK
Chairman of the Board
President and CEO
<PAGE> 3

SPATIALIZER AUDIO LABORATORIES, INC.
20700 VENTURA BOULEVARD
SUITE ONE THIRTY FOUR
WOODLAND HILLS, CA 91364

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

Notice is hereby given that Spatializer Audio Laboratories, Inc. (the
"Company") will hold its Annual Meeting of Stockholders on Thursday, June 25,
1998 at 10:00 a.m., at the Warner Center Hilton Hotel located at 6360 Canoga
Avenue, Woodland Hills, California 91364, for the following purposes:

1. Proposal I: To re-elect James D. Pace and Gilbert N. Segel each to the
Board of Directors for three (3) year terms expiring in 2001.

2. Proposal II: To consider and vote upon the ratification of the issuance
of the shares of Common Stock, par value $0.01 per share ("Common
Stock") to be issued to the holders of up to 100,000 Series A, 7%
Convertible Preferred Stock ("Series A Preferred Stock") issued in
connection with the private placement of up to $5 million undertaken by
the Company in April 1998 ("April 1998 Placement") to the extent that
such issuance requires stockholder approval pursuant to the governance
requirements of Rule 4310(c)(25)(H) of the NASDAQ Stock Rules which, in
substance, requires stockholder approval of the issuance of shares of
Common Stock if the amount to be issued exceeds 20% of the outstanding
shares of Common Stock and the shares are to be issued at less than the
greater of book or market value. Proposal II is being submitted to
stockholders, as a technical matter, to assure NASDAQ compliance in the
event that the applicable Conversion Prices (as described in the
accompanying Proxy Statement) of the Series A Preferred Stock result in
the issuance of more than 20% of the outstanding shares of the Company's
Common Stock.

3. To act upon other matters that may properly come before the meeting.

The Board of Directors has fixed April 30, 1998 as the Record Date for the
determination of the stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournment or postponement of the Annual Meeting.

At the Annual Meeting, each share of Common Stock represented at the
meeting will be entitled to one (1) vote on each matter properly brought before
the Annual Meeting.

Your attention is directed to the accompanying Proxy Statement.
Stockholders who do not expect to attend the Annual Meeting in person are
requested to date, sign and mail the enclosed proxy as promptly as possible in
the enclosed envelope.

BY ORDER OF THE BOARD OF DIRECTORS

Steven D. Gershick
President and Chief Executive Officer

Dated: May 22, 1998

YOUR BOARD OF DIRECTORS HAS REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF PROPOSAL II AND THE RATIFICATION OF THE APRIL 1998 PLACEMENT. THE
BOARD BELIEVES THAT PROPOSAL II IS FAIR TO, AND IN THE BEST INTEREST OF, THE
COMPANY AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED PROPOSAL II AND
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ITS APPROVAL.

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 ANNUAL 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 ANNUAL MEETING.
<PAGE> 4

PROXY STATEMENT
------------------------

ANNUAL MEETING OF STOCKHOLDERS
JUNE 25, 1998

The accompanying proxy is solicited by the Board of Directors of
Spatializer Audio Laboratories, Inc. (the "Company") for use at the 1998 Annual
Meeting of Stockholders of the Company (the "Annual Meeting") to be held on
Thursday, June 25, 1998 at the Warner Center Hilton Hotel located at 6360 Canoga
Avenue, Woodland Hills, California 91364 at 10:00 a.m., and at any adjournments
or postponements of the Annual Meeting. This proxy statement and accompanying
proxy will be mailed beginning on or about May 28, 1998 to give holders of
Common Stock of the Company of record on April 30, 1998 (the "Record Date") an
opportunity to vote at the Annual Meeting.

1. Proposal I: To re-elect James D. Pace and Gilbert N. Segel each to the
Board of Directors for three (3) year terms expiring in 2001;

2. Proposal II: To consider and vote upon the ratification of the issuance
of the shares of Common Stock to be issued to the holders of the Series A
Preferred Stock on conversion of the Series A Preferred Stock issued in
connection with the April 1998 Placement to the extent that such issuance
requires stockholder approval pursuant to the governance requirements of Rule
4310(c)(25)(H) of the NASDAQ Stock Market Rules which, in substance, requires
stockholder approval of the issuance of Common Stock if the amount exceeds 20%
of the outstanding shares of Common Stock of the Company and the shares are to
be issued at less than the greater of book or market value. Proposal II is being
submitted to stockholders, as a technical matter, to assure NASDAQ compliance in
the event that the applicable Conversion Prices (as described herein) of the
Series A Preferred Stock result in the issuance of more than 20% of the
outstanding shares of the Company's Common Stock.

3. To act upon other matters that may properly come before the meeting.

VOTING

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 election of all listed
nominees, in favor of Proposal II, and at their discretion on any other matters
that may properly come before the Meeting. In situations where brokers are
prohibited from exercising discretionary authority for beneficial owners who
have not returned proxies to the brokers (so-called "broker non-votes"), 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. The approval of Proposal II requires the affirmative vote of a
majority of the shares of Common Stock represented at the Meeting. Therefore, a
failure by a stockholder to return a proxy and indicate their vote on Proposal
II will, in effect, be treated as a non-vote on Proposal II, since shares cannot
be counted as voting "FOR" the Proposal II if a proxy is not returned.

A STOCKHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
STOCKHOLDER) TO ATTEND AND ACT FOR HIM AND ON HIS BEHALF AT THE MEETING OTHER
THAN THE PERSONS 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 NAMES OR MAY SUBMIT ANOTHER
PROXY.

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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.

REVOCABILITY OF PROXIES

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, a proxy may be revoked by instrument in writing executed by
the stockholder or by his attorney authorized in writing or, if the stockholder
is a corporation, under its corporate seal or by an officer or attorney thereof
duly authorized, and deposited at the executive office of the Company located at
20700 Ventura Boulevard, Suite 134, Woodland Hills, California 91364, or at
Harris Trust Company of California located at 601 South Figueroa, 49th Floor,
Los Angeles, California 90017, at any time up to and including the last business
day preceding the day of the meeting, or any adjournment thereof, or with the
chairman of the meeting on the day of the meeting. Attendance at the Annual
Meeting will not in and of itself constitute revocation of a proxy.

OUTSTANDING COMMON STOCK

Holders of record of Common Stock at the close of business on April 30,
1998 ("Record Date") will be entitled to receive notice of and vote at the
meeting. The Company is authorized to issue 50,000,000 shares of Common Stock,
par value of $0.01 US per share ("Common Stock") and 1,000,000 Preferred Shares,
par value of $0.01 US per share ("Preferred Stock"). On the Record Date, there
were 21,423,345 shares of Common Stock and 60,000 shares of Preferred Stock
issued and outstanding. The holders of Common Stock are entitled to one (1) vote
for each share held. All matters presented to the meeting require approval by
simple majority of votes cast at the meeting.

SOLICITATION

The Company 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, officers and a small number of regular employees of the Company
personally or by mail, telephone or telegraph, but such persons will not be
specially compensated for such service. 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. The Company may reimburse persons representing beneficial owners for
their costs of forwarding the solicitation material to such owners.

YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR MARKED PROXY PROMPTLY SO YOUR
SHARES CAN BE REPRESENTED, EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING IN
PERSON.

PROPOSAL 1

NOMINATION AND ELECTION OF DIRECTORS

The Company has nine positions on its Board of Directors; and there are
currently seven Directors and two vacancies on the Board of Directors. The Board
of Directors is classified into three classes, Directors in each class being
elected to serve for three years. Of the current Board, three Directors have
terms expiring in 2000; two Directors have terms expiring in 1999; and two
Directors have terms expiring in 1998. At this Annual Meeting, Management
intends to nominate James D. Pace and Gilbert N. Segel to be elected for three
year terms expiring in 2001.

The elected Directors will continue in office until such Director's
successor is elected and has been qualified, or until such Director's earlier
death, resignation or removal. The Bylaws state that in any election of
Directors, the persons receiving a plurality of the votes cast, up to the number
of Directors to be elected in

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such election, shall be deemed to be elected. Shares represented by proxies
marked "withhold authority" for one or more nominees will be counted as a
negative vote.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NAMED NOMINEE.

NOMINEES AND CONTINUING DIRECTORS

The Board of Directors believes that a classified Board of Directors with
staggered terms helps to assure the continuity and stability of the Board of
Directors and the business strategies and policies of the Company. Since the
Company's Common Stock is listed on the NASDAQ SmallCap Market and the Company
is based in California, Management must regularly consider whether Section 2115
of the California Corporation Code applies to various aspects of the Company's
corporate governance including confirmation of all directors annually, even
though the Company is a Delaware corporation and its Bylaws contemplate
staggered terms for the Company's Directors. In 1998, the Company is not subject
to the provisions of Section 2115 provisions because more than fifty percent of
the Company's securities are held of record by persons with addresses outside of
California.

At this Annual Meeting, James D. Pace and Gilbert N. Segel are to be
nominated as Directors for three year terms ending in 2001. In the event that
either of the nominees is unable to serve as a Director, the Proxy Holders will
vote for the election of substitute nominees, if any, designated by the Board of
Directors.

The following table sets forth certain information with respect to the
nominees, the continuing Directors and certain executive officers:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Nominees for terms ending in 2001:
James D. Pace..................... 42 Director -- 2/95 to date.
Member of Compensation Committee -- 2/95 to date.
Gilbert N. Segel.................. 65 Director -- 5/95 to date.
Member of Audit Committee -- 5/95 to date.
Member of Compensation Committee -- 5/95 to date.
Continuing Directors with terms
ending in 2000:
Jerold H. Rubinstein.............. 59 Director -- 8/91 to date.
Member of Audit Committee -- 8/91 to date.
Stephen W. Desper................. 55 Director -- 7/92 to date.
Chairman of the Board -- 7/92 to 12/95
Vice Chairman of the Board -- 12/95 to date.
Principal Holder
Steven D. Gershick................ 43 Director -- 7/92 to date.
Chairman of the Board (12/95 to date) and President
and Chief Executive Officer (7/92 to date) of the
Company
President (3/97 -- 1/98) and Chief Executive Officer
(10/91 to date) of DPI
President (9/97 to date ) and Chief Executive Officer
(6/96 to date) of MDT
Continuing Directors with terms
ending in 1999:
Carlo Civelli..................... 49 Director -- 3/93 to date.
Vice President Finance, Europe -- 8/91 to 3/95.
Principal Holder
Scot E. Land...................... 43 Director 4/97 to date.
Other Executive Officers:
Michael Bolcerek.................. 35 President of DPI -- 1/98 to date.
Chief Financial Officer/V.P. Finance -- 6/97 to 3/98.
Henry R. Mandell.................. 41 Chief Financial Officer/Senior V.P.
Finance/Secretary -- 3/98 to date.
</TABLE>

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James D. Pace. Director since February, 1995. Director of DPI since July,
1992. For more than the last five years, Mr. Pace has specialized in the
introduction and distribution of new technologies into the professional
recording and film industries. He is an electronics engineer with broad
experience in recording and live sound reinforcement.

Gilbert N. Segel. Director since May, 1995. Mr. Segel has spent more than
thirty (30) years as an independent business manager representing musical
artists, film actors and entertainment industry entrepreneurs. Since 1985, he
has concentrated on his personal investments and served as a director of various
private business and charitable enterprises. Mr. Segel is the brother-in law of
Mr. Rubinstein.

Jerold H. Rubinstein. Director since August, 1991. Mr. Rubinstein has been
Chairman and Chief Executive Officer of XTRA Music since July 1997 and was
formerly Chairman and Chief Executive Officer DMX, Inc. (previously
International Cablecasting Technologies, Inc.) from 1986 to July 1997. Prior to
that he was co-owner and chairman of United Artists Records; chairman of ABC
Records, Inc.; co-founder and chairman of Bel-Air Savings and Loan of Los
Angeles; and co-founder and partner of JRC Oil, a Colorado oil and gas
exploration company. Mr. Rubinstein is an attorney and certified public
accountant and is a Director of Earthshell, Inc., and US Global Investors, both
of which are listed on the NASDAQ Stock Market. Mr. Rubinstein is the brother-in
law of Mr. Segel.

Stephen W. Desper. Vice Chairman of the Board. Mr. Desper is an acoustician
and acoustic design and noise control engineer who has devoted his full time
efforts for more than five years to developing and refining the Spatializer(R)
audio technology. Prior to that, he had more than 20 years experience as a
recording engineer, including as the Director of Engineering for The Beach Boys
Organization. From December, 1991 to December, 1995, he was Chairman of the
Company and since then he has been Vice Chairman. He was also the senior
inventor and President of DPI from June, 1986 to October, 1991 and was the Vice
President and Director of Research of DPI form October, 1991 to December, 1996.

Steven D. Gershick. Chairman of the Board, President and Chief Executive
Officer. Mr. Gershick has been a Director of the Company since July, 1992 and
Chairman since December, 1995. He was a Certified Public Accountant associated
with KPMG Peat Marwick from May, 1977 through June, 1980 and from 1981 through
September, 1991, was the principal of a Certified Public Accounting firm
specializing in business consulting and entertainment business management. Since
October 1, 1991, he has been the CEO of DPI and was President from October, 1991
to June, 1996. From March, 1997 to January, 1998, he resumed his role as
President of DPI. Since June, 1996, he also served as the CEO of MDT and has
been President of MDT since September, 1997. Since December, 1991, he has been
President and CEO of the Company.

Carlo Civelli. Director since March, 1993. Mr. Civelli, who was VP
Finance-Europe of the Company from August, 1991 to March, 1995, has extensive
experience in financing emerging public companies. He has been the Managing
Director of Clarion Finanz AG, Zurich, Switzerland, for more than the last ten
years and is also a Financial Consultant to Clarion Finanz AG.

Scot E. Land. Director since April, 1997. Mr. Land has been Managing
Director of EnCompass Group, Inc. since 1997 and was a Senior Technology Analyst
with Microsoft Corporation 1994 to 1997. From 1993 to 1994, Mr. Land was Vice
President of First Marathon Securities, Toronto, Canada with responsibilities in
Research and Investment Banking, specializing in High Technology. During this
same time, Mr. Land was an advisor to Microsoft Corporation on matters related
to strategic planning and competitive product assessment. From 1988 to 1993, Mr.
Land was President and CEO of InVision Technologies, Foster City, California.
Mr. Land is on the Board of Directors of several private technology companies
and non-profit organizations.

Michael Bolcerek. President of DPI since January, 1998. Mr. Bolcerek was
Chief Financial Officer and Vice President of Finance of the Company from June,
1997 to March, 1998. Prior to joining the Company, he was Controller of Nokia
Display Products, Inc., from 1995 to 1996, Treasurer and Acting Chief Financial
Officer for Axil Computer, Inc., from 1994 to 1995, Assistant Treasurer for NeXT
Computer, Inc., from 1992 to 1993, and Manager of U.S. Treasury Operations for
NeXT Computer, Inc., from 1991 to 1992. Prior to joining NeXT, he worked for
Oracle Corporation in various management positions from 1987 to 1991.

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<PAGE> 8

Henry R. Mandell. Chief Financial Officer, Senior Vice President of Finance
and Secretary since March, 1998. Prior to joining the Company, Mr. Mandell was
Executive Vice President and Chief Financial Officer of The Sirena Apparel
Group, Inc. from November, 1990 to January, 1998, Senior Vice President of
Finance and Administration for Media Home Entertainment, Inc. from April, 1985
to November, 1990, Director of Finance and Accounting for Oak Media Corporation
from June, 1982 to April, 1985, and Senior Corporate Auditor for Twentieth
Century Fox Film Corporation from June 1981 to June 1982. Mr. Mandell was a
Senior Auditor at Arthur Young and Company from August, 1978 to June, 1981,
where he qualified as a Certified Public Accountant.

BENEFICIAL OWNERS

The following table sets forth information (except as otherwise indicated
by footnote) as to shares of Common Stock owned as of March 31, 1998, or which
can be acquired in sixty days, by (i) each person known by Management to
beneficially own more than five percent (5%) of the Company's outstanding Common
Stock, (ii) each of the Company's Directors and nominees for election as
Directors, and (iii) all executive officers, Directors and nominees for election
as Directors as a group:

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP CLASS
--------------------------------------- -------------------- ----------
<S> <C> <C>
DIRECTORS
Carlo Civelli(2)(5).................................... 4,020,958 16.9%
Stephen W. Desper(3)(5)................................ 1,980,845 8.3%
Steven D. Gershick(5).................................. 1,126,144 4.7%
James D. Pace(4)(5).................................... 326,997 1.4%
Jerold H. Rubinstein(5)................................ 250,000 1.1%
Gilbert N. Segel(5).................................... 220,000 *
Scot E. Land........................................... 63,947 *
NAMED EXECUTIVE OFFICERS
Irwin Zucker(5)........................................ 46,667 *
Eric Rene Bos.......................................... 8,333 *
Robert Montelius....................................... 8,333 *
Theodore Tanner(5)..................................... 35,000 *
All directors and executive officers as a group (13
persons)(5)(6)....................................... 8,137,224 34.3%
</TABLE>

- ---------------
* Indicates that the percentage of shares beneficially owned does not exceed
one percent (1%) of the class.

(1) Each of the persons named can be reached at the Company's offices at 20700
Ventura Boulevard, Suite 134, Woodland Hills, California, 91364, except for
Carlo Civelli, whose address is Seefeldstrasse 214, 8034 Zurich,
Switzerland. 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.

(2) 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 the Company held of record or beneficially by either,
and all additional shares over which he either currently exercises full or
partial control, without duplication through attribution.

(3) Does not include 37,853 shares held by Sparkle Co. on behalf of the Estate
of Stephen Desper's deceased father, Ira Desper, as to which Mr. Desper
disclaims any direct or indirect beneficial interest or control.

(4) Does not include 134,497 shares held by Jeffrey C. Evans, a director of DPI,
and co-owner with Mr. Pace of Audio Intervisual Design and Developing
Technologies Distributors. Mr. Pace disclaims any direct or indirect
beneficial interest or control of Mr. Evans' shares.

(5) Includes an aggregate of 4,365,912 escrowed performance shares held as of
March 31, 1998 as follows: Carlo Civelli, 1,321,336 shares; Jerold H.
Rubinstein, 142,500 shares; Stephen W. Desper,

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<PAGE> 9

1,833,192 shares; Steven D. Gershick, 800,987 shares; James D. Pace, 120,647
shares; Gilbert N. Segel, 104,500 shares; Irwin Zucker, 28,500 shares;
Theodore Tanner, 14,250 shares.

(6) Includes options to purchase 1,056,800 shares exercisable at various prices
from $0.85 to $3.26 per share, and expiring on various dated from February,
2000 to January, 2003.

TRANSACTIONS WITH MANAGEMENT AND OTHERS

Except for severance paid to Mr. Desper for a six month period following
his resignation from Director of Research in December, 1996, and a cash
placement fee of $100,000 and 50,000 placement agent Warrants issued to Mr.
Civelli in connection with the April 1998 Placement, no insider and no security
holder who is known to the Company to own more than five percent (5%) of the
Common Stock and no member of the immediate family of any of the officers or
directors has or has had any material interest, direct or indirect, in any
transaction in which the amount involved exceeds U.S. $60,000 since the
commencement of the Company's last completed fiscal year or in any proposed
transaction which in either such case has materially affected or will materially
affect the Company.

At the 1996 Annual Meeting the stockholders approved, subject to regulatory
consent, a proposal to modify the terms of the performance share escrow
arrangements for certain founders, officers and directors. On December 30, 1996,
the Company received final consent from the British Columbia Securities
Commission ("BCSC") to a modification arrangement ("Modification") which was
less favorable to the holders of performance shares than the proposal approved
by the stockholders. The Company has implemented the Modification as consented
to by the BCSC.

Under the Modification, 5% of the performance shares were released June 22,
1997 and the remainder are scheduled to be released automatically as follows: 5%
on June 22, 1998; 10% on June 22, 1999; 20% on June 22, 2000; 30% on June 22,
2001; and 30% on June 22, 2002. In addition to the automatic releases,
performance shares can be released based on the cash flow release criteria
contained in the original June 22, 1992 escrow agreement although, to maintain a
stable market in the Company's stock, in any year not more than 30% of the
shares will be released, based on the cash flow criteria.

In addition, under the Modification, the performance shares will vest if
the individual holder has not voluntarily terminated his or her service to the
Company prior to the applicable vesting dates. Any individual who is
involuntarily terminated by the Company will be entitled to an automatic
acceleration of the unvested performance shares. The Board, in its discretion,
may allow an individual who has voluntarily terminated his or her services to
the Company to retain a portion or all of any unvested performance shares.

To the knowledge of management, none of the directors or officers of the
Company have been involved in any other securities transactions in the last
fiscal year (excluding grants and exercises of Employee and Director Incentive
Options as described below).

INDEBTEDNESS TO RELATED PARTIES

The Company's only indebtedness to related parties in 1997 was a loan
payable to the estate of Stephen Desper's deceased father, Ira A. Desper. The
amount payable to the estate at December 31, 1997 was U.S. $112,500.

On April 14, 1998, the Company issued an unsecured promissory note to
Clarion Finanz A.G.( the investment company controlled by Carlo Civelli) for the
principal amount of $650,000. The note matures on December 31, 1998, and bears
interest at the rate of 10% per annum. Both principal and interest are due upon
maturity.

COMPENSATION OF DIRECTORS

None of the Company's Directors received any cash compensation or other
arrangements for services provided in their capacity as Directors. However, the
Company has granted stock options to Directors in that capacity. Under the 1995
Stock Option Plan, each director who is not an employee of the Company is
entitled

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<PAGE> 10

to an automatic annual grant of an option to purchase 50,000 shares of Common
Stock, which are granted as options are available for grant under the 1995 Stock
Option Plan. Employee Directors may receive such a grant at the discretion of
the Board of Directors.

ACTIVITIES OF THE BOARD OF DIRECTORS AND ITS COMMITTEES

Members of the Board of Directors are elected by the holders of the Common
Stock of the Company and represent the interests of all stockholders. The Board
of Directors meets periodically to review significant developments affecting the
Company and to act on matters requiring Board approval. Although the Board of
Directors delegates many matters to others, it reserves certain powers and
functions to itself.

During fiscal 1997, the Board of Directors of the Company, which consisted
of seven (7) members, had three formal meetings and took action by unanimous
written consent on twelve additional occasions. All incumbent Directors of the
Company were present at, or participated in taking actions for, seventy-five
percent (75%) or more of the total number of meetings of the Board of Directors
of the Company and the Committees on which he served.

COMMITTEES OF THE BOARD OF DIRECTORS

As of March 31, 1998, standing committees of the Board of Directors of the
Company included an Audit Committee and a Compensation and Stock Option
Committee.

AUDIT COMMITTEE

The Audit Committee of the Company's Board of Directors currently consists
of Messrs. Rubinstein and Segel, each of whom is a non-employee Director of the
Company. This committee is directed to review the scope, cost and results of the
independent audit of the Company's books and records, the results of the annual
audit with Management and the internal auditors and the adequacy of the
Company's accounting, financial, and operating controls; to recommend annually
to the Board of Directors the selection of the independent auditors; to consider
proposals made by the Company's independent auditors for consulting work; and to
report to the Board of Directors, when so requested, on any accounting or
financial matters. The Audit Committee of the Board of Directors held one
meeting during fiscal 1997.

COMPENSATION AND STOCK OPTION COMMITTEE

The Compensation and Stock Option Committee of the Company (the
"Compensation Committee") currently consists of Messrs. Pace and Segel, each of
whom is a non-employee director of the Company and a "disinterested person" with
respect to the plans administered by such committee, as such term is defined in
Rule 16b-3 adopted under the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (collectively, the "Exchange Act"). The
Compensation Committee reviews and approves annual salaries, bonuses and other
forms and items of compensation for senior officers and employees of the
Company. Except for plans that are, in accordance with their terms or as
required by law, administered by the Board or another particularly designated
group, the Compensation Committee also administers and implements all of the
Company's stock option and other stock-based and equity-based benefit plans
(including performance-based plans), recommends changes or additions to those
plans, and reports to the Board of Directors on compensation matters. The
Compensation Committee held five meetings in 1997. To the extent required by
law, a separate committee of disinterested parties administers the 1996
Incentive Plan. No Compensation Committee interlock relationships existed in
1997.

REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
GENERAL

The Company's Compensation Committee is responsible for formulating and
overseeing the general executive and employee compensation policies for the
Company. Its responsibilities include determination of

7
<PAGE> 11

the compensation of senior executive officers and administration of the annual
and long-term incentive plans and stock option plans of the Company unless such
plans, in accordance with their terms, are administered by the Board or another
particularly designated group. Specific decisions relating to compensation
earned by or awarded to the senior officers of the Company, including the chief
executive officer and the other four highest paid executive officers
(collectively, the "Named Executive Officers") are governed by the Compensation
Committee. The Compensation Committee was formed in June, 1995.

The Compensation Committee has adopted the following policy framework on
which it intends to base the Company's compensation program and its decisions:

- Efforts should be made to achieve base salaries for the senior executives
which are competitive with compensation at the Company's peer group of
companies, not withstanding the significantly larger revenues at many of
the entities in the peer group.

- Annual incentives should consider Company performance and individual
contribution. Efforts should be made to establish parity among
individuals with similar responsibilities and performance.

- The long-term incentive program should be performance-based and emphasize
stock options to ensure that long-term compensation primarily depends on
increases in stock price. Other awards, including restricted stock,
performance units or a combination may be utilized to provide incentives
that might otherwise be reflected in stock option grants.

- Stock option grants (or other performance-based long-term incentives that
may be awarded in the future) should be competitive with peer practices
to allow the Company to attract and retain senior personnel and to
reflect the Company's operating growth and performance.

- The relative mix of annual and long-term incentives should reflect levels
within the organization, so that senior executives receive a greater
proportion of long-term incentives and others receive compensation that
emphasizes annual compensation and incentives.

To implement these policies, the Compensation Committee will take into
account current market data and compensation trends for similar enterprises,
compare corporate performance of the Company to the performance of a selected
peer group, gauge achievement of corporate and individual objectives and
consider the overall effectiveness of the Company's compensation programs.

To assist in formulating its operating framework, in December, 1995 the
Compensation Committee engaged an independent executive compensation consultant
to assess the current competitive position of the Company's executive
compensation program and to assist the Company in implementing an ongoing long-
term incentive program. The Compensation Committee has continued the engagement
on an annual basis to review these matters and the application of the policies
on a current basis. The consultant prepared comparisons of current compensation
levels between the Company and a peer group of eight (8) publicly traded
companies. In addition, broader published compensation surveys of compensation
levels for executives holding similar positions at comparable industrial
entities or organizations were used to establish competitive norms. The survey
indicated that actual cash compensation (salary plus annual incentives) of the
Named Executive Officers were below total cash compensation levels of the peer
group, but when compared to other companies of comparable size in the high
technology and electronics industries, the total cash compensation levels of the
top three Company executives were near the 50th percentile of the companies
surveyed. Subject to cost of living adjustments, current compensation levels for
the executive officers are comparable to those discussed in the independent
executive compensation consultant's report.

ANNUAL COMPENSATION

The Compensation Committee annually reviews base salary levels of
executives and employees annually, subject to any provisions or limitations
included in their Employment Agreements and in the context of the above
policies. The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to
the Internal Revenue Code of 1986, as amended (the "Code"). Section 162(m)
creates a new limit on the deductibility of compensation paid to certain
officers. With respect to the Company, the covered officers are the Chief

8
<PAGE> 12

Executive Officer and the next four most highly compensated persons in office at
the end of the year. Compensation paid to these officers in excess of $1,000,000
per person, that is not performance-based, cannot be claimed by the Company as a
tax deduction. It is the Compensation Committee's intention to continue to
utilize performance-based compensation and to conform such compensation to these
limits. In order to conform to these new limitations, the Company is seeking
stockholder approval of the material terms of the performance goals under the
Plan.

CEO COMPENSATION

The Compensation for Steven Gershick, CEO of the Company, was determined in
accordance with the guidelines discussed above. Based on the performance of the
Company and the compensation of the CEOs at several peer companies, an annual
bonus of $43,750 was paid in 1997 and base salary was set at $175,000.

CONCLUSION

The Compensation Committee believes that the policies and concepts
discussed above will be an effective strategy since a significant portion of
compensation to the Named Executive Officers will be based on the operating
results of the Company, the commensurate results for its stockholders, and the
need to attract and retain senior management, technical and operating personnel
as the Company matures and the technology and market conditions change and
evolve. At the same time, it is intended that the policies will encourage
responsible management for both long-term and short-term results and will
further the interests of the Company's stockholders. In implementing its
policies, the Compensation Committee intends to base its review on the
experience of its members, on Company and management information, and on
discussions with and information compiled by various independent compensation
consultants and other appropriate sources.

Submitted by the Compensation Committee of the Company's Board of
Directors,

James D. Pace
Gilbert N. Segel

9
<PAGE> 13

PERFORMANCE GRAPH FOR THE COMPANY'S COMMON STOCK

The following Performance Graph reflects a comparison of the performance of
the Company's Common Stock to the common stock of other peer group companies and
to the NASDAQ Market Index:

<TABLE>
<CAPTION>
Measurement Period Spatializer Audio NASDAQ Market
(Fiscal Year Covered) Laboratories, Inc. Peer Group Index Index
<S> <C> <C> <C>
8/22/95 $ 100 $ 100 $ 100
12/31/95 89.74 69.50 100.02
12/31/96 74.36 68.15 124.29
12/31/97 30.77 71.38 152.03
</TABLE>

Assumes $100 Invested on August 22, 1995
Assumes Dividend Reinvested
Fiscal Year Ending December 31, 1997

The peer group, for purposes of the above graph, consists of other
comparable technology companies. The peer group was expanded in 1996 to include
a competitor in the advanced audio technology industry that went public during
1996.

10
<PAGE> 14

EXECUTIVE COMPENSATION

The following table sets forth separately, for the last three complete
fiscal years, each component of compensation paid or awarded to, or earned by,
the Chief Executive Officer ("CEO") of the Company and each of the other most
highly compensated executive officers who were serving as executive officers at
the end of the last fiscal year (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------
AWARDS PAYOUTS
------------------------ -------
SECURITIES
UNDER
OPTIONS/ RESTRICTED
ANNUAL COMPENSATION SARS STOCK
NAME AND PRINCIPAL ----------------------------- GRANTED AWARDS LTIP
POSITION YEAR SALARY BONUS OTHER (#) ($) PAYOUTS
------------------ ----- -------- -------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven D. Gershick....... 12/97 $175,000 $ 44,250 $ 9,000 50,000 N/A N/A
Chairman of the Board, 12/96 $150,000 $ 37,500 $ 8,607 50,000 See note 6 N/A
President and CEO 12/95 $150,000 $ 37,500 $ 8,100 150,000(3) N/A N/A
Irwin Zucker(1).......... 12/97 $140,000 $ 13,000 $ 9,000 N/A N/A N/A
Vice President, 12/96 $ 70,000 $ 37,500 $ 5,007 50,000(5) See note 6 N/A
Strategic Development
for MDT
Eric Rene Bos(1)......... 12/97 $120,000 $136,500 N/A N/A N/A N/A
Vice President, Product 12/96 $ 60,000 $ 26,500 $10,000 $ 25,000(5) N/A N/A
Development for MDT
Robert Montelius(1)...... 12/97 $120,000 $136,500 N/A N/A N/A N/A
Vice Presidnet, 12/96 $ 60,000 $ 26,500 $10,000 $ 25,000(5) N/A N/A
Engineering for MDT
Theodore Tanner(2)....... 12/97 $ 98,770 $ 13,000 $ 6,000 15,000(4) N/A N/A
Vice President, 12/96 $ 64,675 $ 15,500 N/A 45,000(4) See note 6 N/A
Engineering for DPI
</TABLE>

- ---------------
(1) Messrs. Zucker, Bos and Montelius all became employees upon the Company's
acquisition of MultiDisc Technologies, Inc. in June, 1996.

(2) Mr. Tanner became an employee of DPI in March, 1996.

(3) The exercise price for these options was adjusted to the closing market
price on April 1, 1997.

(4) The exercise price for these options was adjusted to the closing market
price on July 18, 1997.

(5) The exercise price for these options was adjusted to the closing market
price on December 12, 1997.

(6) On September 2, 1996, Steven D. Gershick, Theodore Tanner and Irwin Zucker
received performance shares which were transferred from prior holders based
on a previous understanding that those shares were held for their benefit.
Based on the market closing price of $4.25 on September 2, 1996, the value
of the shares they received was as follows: Mr. Gershick, $636,405; Mr.
Tanner, $63,640; and Mr. Zucker, $127,281. On June 22, 1997, 5% of the
5,776,700 originally issued performance shares were released from escrow in
accordance with the escrow arrangement. As a result, as of December 31,
1997, 5,445,115 of the originally issued performance shares remained
outstanding which, based on the $1.50 year end closing price of the stock,
were valued at $8,167,673. Unless released earlier based on cumulative
positive cash flow of $.6285 Cdn. per share, the remainder of these shares
will vest based on the following schedule: 5% June, 1998; 10% June, 1999;
20% June, 2000; 30% June 2001; and, 30% June, 2002.

11
<PAGE> 15

OPTION/STOCK APPRECIATION RIGHT ("SAR") GRANTS DURING THE
MOST RECENTLY COMPLETED FINANCIAL YEAR

The following table, presented in accordance with the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the Regulations thereunder,
sets forth stock options granted under the Company's Stock Option Plan ("the
Stock Option Plan") during the most recently completed financial year to each of
the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK
----------------------------------------------------------------------- PRICE APPRECIATION
% OF TOTAL MARKET VALUE OF FOR
SECURITIES OPTIONS/ SECURITIES OPTION TERM
UNDER SARS UNDERLYING -------------------
OPTIONS/ GRANTED TO EXERCISE OR OPTIONS/SARS ON
SARS EMPLOYEES IN BASE PRICE DATE OF GRANT EXPIRATION
GRANTED FISCAL YEAR ($/SECURITY) ($/SECURITY) DATE 5%($) 10%($)
---------- ------------ ------------ --------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven D. Gershick.... 50,000 6.4 % $1.50/share $1.50/share 4/01/02 $3,750 $7,500
Irwin Zucker.......... N/A N/A N/A N/A N/A N/A N/A
Eric Rene Bos......... N/A N/A N/A N/A N/A N/A N/A
Robert Montelius...... N/A N/A N/A N/A N/A N/A N/A
Theodore Tanner....... 15,000 1.9 % $1.31/share(1) $1.31/share (1) 4/01/02 $ 983 $1,965

ALTERNATIVE TO
REALIZABLE
VALUE: GRANT
DATE VALUE
--------------
GRANT DATE
PRESENT VALUE
($)
-------------
<S> <C>
Steven D. Gershick.... $0
Irwin Zucker.......... N/A
Eric Rene Bos......... N/A
Robert Montelius...... N/A
Theodore Tanner....... $0
</TABLE>

- ---------------
(1) Repriced from $1.50 per share effective July 18, 1997.

AGGREGATED OPTIONS/SAR EXERCISES IN LAST FINANCIAL YEAR
AND FINANCIAL YEAR-END OPTION/SAR VALUES

The following table (presented in accordance with the Exchange Act and the
Regulations) sets forth details of all exercises of stock options/SARs during
the most recently completed financial year by each of the Named Executive
Officers and the financial year-end value of unexercised options/SARs on an
aggregated basis:

<TABLE>
<CAPTION>
SECURITIES AGGREGATE UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS/SARS AT OPTIONS/SARS AT FISCAL YEAR END
NAME EXERCISE REALIZED FISCAL YEAR-END ($)EXERCISABLE/UNEXERCISABLE
---- ----------- --------- --------------- ---------------------------------
<S> <C> <C> <C> <C>
Steven D. Gershick........ N/A N/A 333,000 $53,784/$0
Irwin Zucker.............. N/A N/A 50,000 $0/$0
Eric Rene Bos............. N/A N/A 25,000 $0/$0
Robert Montelius.......... N/A N/A 25,000 $0/$0
Theodore Tanner........... N/A N/A 60,000 $2,850/$8,550
</TABLE>

12
<PAGE> 16

TEN-YEAR OPTION/SAR REPRICINGS

The following table (presented in accordance with the Exchange Act and the
Regulations) sets forth details of all repricings of stock options/SARs during
the most recently completed financial year by each of the Named Executive
Officers:

<TABLE>
<CAPTION>
MARKET PRICE LENGTH OF
NUMBER OF SECURITIES OF STOCK AT EXERCISE PRICE ORIGINAL TERM
UNDERLYING TIME OF AT TIME OF NEW REMAINING AT
OPTIONS/SARS REPRICING OR REPRICING OR EXERCISE DATE OF REPRICING
NAME DATE REPRICED OR AMENDED AMENDMENT AMENDMENT PRICE OR AMENDMENT
---- -------- -------------------- ------------ -------------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Steven D. Gershick...... 4/1/97 150,000 $1.50 $3.90 $ 1.50 3 yrs 9 mths
Chairman of the Board,
President and CEO
Irwin Zucker............ 12/12/97 50,000 $1.875 $3.95 $1.875 3 yrs 9 mths
Vice President,
Strategic Development
for MDT
Eric Rene Bos........... 12/12/97 25,000 $1.875 $3.95 $1.875 3 yrs 9 mths
Vice President, Product
Development for MDT
Robert Montelius........ 12/12/97 25,000 $1.875 $3.95 $1.875 3 yrs 9 mths
Vice Presidnet,
Engineering for MDT
Theodore Tanner......... 7/18/97 20,000 $1.31 $4.73 $ 1.31 4 yrs 0 mths
Vice President, 7/18/97 25,000 $1.31 $3.26 $ 1.31 4 yrs 3 mths
Engineering for DPI 7/18/97 15,000 $1.31 $1.50 $ 1.31 4 yrs 9 mths
</TABLE>

EMPLOYMENT AGREEMENTS

Effective October 1991, DPI entered into a two-year employment agreement
(which continues thereafter from year to year unless terminated) with Steven
Gershick pursuant to which Mr. Gershick was designated as President and Chief
Executive Officer, at an annual salary of $125,000. Under his agreement, he
serves full time and may terminate his employment on 90-days written notice. The
Company may terminate the agreement for cause or at the end of the original or
any extended term on 90 days prior written notice. In the event of termination,
he is entitled to payment of six months to one year's salary, depending on the
term remaining on the date of any termination. The employment agreement provides
Mr. Gershick with the employee benefits generally available to other employees
of the Company and, in addition, entitles him to life insurance, disability
insurance and an automobile allowance. He is entitled to bonuses at the
discretion of the Board of Directors. His agreement contains confidentiality,
nondisclosure and invention provisions typical in the industry.

As of January 1, 1995, the annual salary for Steven D. Gershick was
increased to $150,000. As of January 1, 1997, the annual salary for Mr. Gershick
was again increased to $175,000. As of January 1, 1998 the annual salary for Mr.
Gershick was decreased to $65,000, with an additional annual salary of $175,000
to be paid to Mr. Gershick directly from MDT.

Effective June 1996, MDT entered into employment agreements through
December 1997 (which were automatically extended for one additional year unless
written notice was given by either party by June 1, 1997) with Eric Rene Bos and
Robert Montelius pursuant to which Mr. Bos was designated as Vice President of
Product Development and Mr. Montelius was designated as Vice President of
Engineering of MDT, at annual salaries of $120,000 each. Under their agreements,
they serve full time and may terminate their employment on 90-days written
notice. The Company may terminate their agreements for cause or at the end of
the original or any extended term with or without written notice. In the event
of termination, they are each entitled to one year's base salary, payable in
equal quarterly installments, in addition to lump-sum payments equal to their
base salary through the termination date of their agreement. The employment
agreement provides Messrs. Bos and Montelius with the employee benefits
generally available to other employees of the Company and, in addition, entitles
them to life insurance and disability insurance. In addition to being entitled
to bonuses at the discretion of the Board of Directors, they are each entitled
to a $5,000 bonus for each new

13
<PAGE> 17

patent application which MDT or the Company chooses to prosecute in which they
are an inventor. Their agreements contain confidentiality, nondisclosure and
invention provisions typical in the industry.

In May 1997, the Company notified Messrs. Bos and Montelius that it did not
intend to renew their agreements beyond December 1997. In September 1997, the
Company notified both parties that it would extend their agreements through June
1998.

Effective October 1996, DPI entered into an employment agreement through
December 1997 (which, by its terms, has been extended through December, 1998)
with Theodore Tanner pursuant to which he was designated as Vice President of
Engineering, at an annual salary of $85,000. Under his agreement, he serves full
time and may terminate his employment on 45-days written notice. The Company may
terminate the agreement for cause or at the end of the original or any extended
term with or without written notice. In the event of termination, he is entitled
to a lump-sum payment equal to his base salary through the termination date of
his agreement. The employment agreement provides Mr. Tanner with the employee
benefits generally available to other employees of the Company and, in addition,
entitles him to life insurance, disability insurance and automobile allowance.
In addition to being entitled to bonuses at the discretion of the Board of
Directors, he is entitled to a $5,000 bonus for each new patent application
which DPI or the Company chooses to prosecute in which he is an inventor. His
agreement contains confidentiality, nondisclosure and invention provisions
typical in the industry.

As of May 16, 1997, the annual salary for Mr. Tanner was increased to
$100,000. As of July 1, 1997, the annual salary for Mr. Tanner was again
increased to $110,000.

PROPOSAL II

A PROPOSAL TO AUTHORIZE THE ISSUANCE OF SHARES OF COMMON STOCK, IN EXCESS
OF 20% OF THE CURRENTLY ISSUED AND OUTSTANDING SHARES OF COMMON STOCK OF THE
COMPANY, WHICH SHARES OF COMMON STOCK ARE ISSUABLE UPON CONVERSION OF THE SERIES
A PREFERRED STOCK OF THE COMPANY AND UPON EXERCISE OF THE WARRANTS ISSUED OR
RESERVED FOR ISSUANCE PURSUANT TO THE APRIL 1998 PLACEMENT.

IF PROPOSAL II IS NOT APPROVED BY THE STOCKHOLDERS, THE COMPANY'S NASDAQ
LISTING WOULD BE JEOPARDIZED AND THE INVESTORS IN THE APRIL 1998 PLACEMENT COULD
DECLINE TO PROVIDE THE REMAINING PORTIONS OF THE APRIL 1998 PLACEMENT AND ELECT
NOT TO PARTICIPATE IN ANY OTHER FUNDING FOR THE MDT PROJECT, SINCE THEY
ANTICIPATE A CONTINUED NASDAQ SMALLCAP LISTING. THE DECREASED FUNDING WOULD HAVE
A MATERIAL ADVERSE EFFECT ON THE IMPLEMENTATION OF THE MDT STRATEGY. A
DE-LISTING ON THE NASDAQ SMALLCAP MARKET WOULD RESULT IN THE COMPANY'S COMMON
STOCK TRADING ONLY ON THE NASDAQ OTC BULLETIN BOARD, WHICH WOULD MATERIALLY
REDUCE AND ADVERSELY EFFECT THE MARKET ACCESS, VISIBILITY AND TRADING MARKET FOR
THE COMPANY AND ITS STOCKHOLDERS.

CERTAIN ASPECTS OF PROPOSAL II AND THE DETAILS OF THE RIGHTS OF THE SERIES
A PREFERRED STOCK, AS SET FORTH IN THE CERTIFICATE OF DESIGNATION, ARE
SUMMARIZED BELOW. THE SUMMARY IS QUALIFIED BY REFERENCE TO THE CERTIFICATE OF
DESIGNATION WHICH IS ATTACHED AS APPENDIX 1 AND INCORPORATED HEREIN BY
REFERENCE.

BACKGROUND OF SUBMISSION OF PROPOSAL

On April 14, 1998, the Company entered into the $5 million April 1998
Placement of which $3 million has been funded and 60,000 shares of a new Series
A, 7% Convertible Preferred Stock (previously defined as "Series A Preferred
Stock") were issued at a stated price of $50 per share to four investors and
40,000 shares were reserved for issuance based on the requirement that the
investors, or their designees provide $2 million in
14
<PAGE> 18

additional financing, as described below. In addition, up to 1,000,000 shares of
Common Stock have been reserved for issue on exercise of up to 1,000,000
warrants ("Warrants"), consisting of up to 750,000 investor Warrants and up to
250,000 agent Warrants issued in the April 1998 Placement. The Series A
Preferred Stock is convertible at the option of the holders during 1998 and
future periods, and in all events, is automatically convertible in 2001, into
the Company's Common Stock at a Conversion Price which is calculated as the
lower of a Fixed Conversion Price of $1.18 per share or a Floating Conversion
Price calculated as a discount from certain trading prices of the Company's
Common Stock on NASDAQ (see definitions below). Each of the Warrants entitles
the holder to receive one share of Common Stock for the Warrant; the placement
agent Warrants are exercisable at $1.09 per share and the investor Warrants are
exercisable at $1.27 per share (as described below).

Since the Company is listed on the NASDAQ SmallCap Market, it is subject to
the governance requirements adopted by NASDAQ in August 1997. These
requirements, among other things, require listed companies to obtain the consent
of their stockholders to any issuance of securities equaling 20% or more of the
entity's outstanding voting shares if the issuance involves a discount from
market or book value. As of April 14, 1998, the Company had 21,423,345 shares of
Common Stock outstanding; as a result, the issuance of more than 4,284,669
shares requires such approval. Assuming conversion of the Series A Preferred
Stock at the $1.18 Fixed Conversion Price, 2,542,373 shares of Common Stock will
be required for the $3 million funding and 4,237,288 shares will be required for
the $5 million funding, neither of which circumstances would require stockholder
approval. However, the average closing bid price of the Company's Common Stock
was approximately $0.93 for the measuring period specified in the April 1998
Placement. Therefore, application of the formula for establishing the Floating
Conversion Price to the recent trading prices of the Company's Common Stock on
NASDAQ (assuming immediate conversion rather than later conversion as
contemplated by the April 1998 Placement) could result in the issuance of up to
6,329,114 shares (more than 20%) of the Company's currently outstanding Common
Stock if the entire $5 million was converted at those levels and 3,797,468
shares if $3 million was converted at those levels.

The Board of Directors is seeking stockholder approval for the issuance of
Common Sock in excess of the 20% limitation, as a technical matter, to assure
full compliance with NASDAQ Rules which apply only in the event that the trading
prices of the Company's Common Stock remain at current levels when the Series A
Preferred Stock is priced for conversion. If the applicable Conversion Price for
the Series A Preferred is $1.18 per share, no submission of Proposal II to the
stockholders would have been required. In addition, it should be noted that $1
million of the Series A Preferred Stock issued for the $3 million already
invested in the April 1998 Placement, is not convertible until October 1998, at
the earliest, which may further reduce the likelihood that the NASDAQ Rules will
be implicated.

THE FUNDING

The Company has been seeking venture financing to separately fund the costs
of further research and development and the commercialization of the technology
being developed by the Company's wholly owned subsidiary, MultiDisc
Technologies, Inc. (previously defined as "MDT"). During Fall 1997, Management
sought approximately $6 million from a number of venture sources and the Board
of Directors considered a variety of proposals which would have resulted in
separate funding and possibly a separate corporate structure for MDT. Some of
the possible alternatives are still under consideration but none has been
approved by the Board of Directors.

Concurrently, Management and the Board of Directors sought other capital
sources which would provide immediate funding to meet the Company's needs
including the Company's commitment to cover the research and development costs
for the MDT technology to assure that MDT progressed, as promptly as feasible,
to a fully developed technology and was positioned to pursue commercial product
applications. In both these efforts, the Board of Directors has continued to
balance whether a separate investment and corporate identity for MDT or
independent funding within the current consolidated corporate structure would
provide the best opportunity to pursue the business plan and enhance stockholder
value for all the Company's stockholders.

15
<PAGE> 19

On April 13, 1998 the Board of Directors approved the April 1998 Placement
at the parent company level because, in its view, the funding provided the
immediate capital infusion of $3 million needed to fund budgeted operating
requirements and the MDT technology development through 1998 and provided
working capital to partially offset the continued capital drain on the Company
of MDT technology development. In addition to the $3 million funding which has
been completed in the April 1998 Placement, the investors committed to provide
the balance of $2 million of which $1 million is to be supplied by Clarion
Finanz AG or its designee and $1 million is to be provided, at the option of the
Company, by the other investors, resulting in a $5 million capital infusion in
1998. The investors in the April 1998 Placement also were granted certain rights
to provide up to $4 million of the approximately $6 million financing which the
Company is continuing to pursue to separately fund the commercial introduction
of the MDT CD/DVD server technology.

In approving the April 1998 Placement, the Board of Directors considered
the terms and pricing of the various proposals, the relative dilution from the
other proposals submitted to the Company, the willingness of the investors to
provide additional funding, the liquidity expectations of the investors and
their knowledge of the technology efforts of the Company, particularly with
respect to the MDT technology, and the potential investor diversity and access
to other capital markets and resources provided by the investor groups and their
advisors. The Board of Directors authorized the April 1998 Placement based on
its conclusion that it provided immediate additional funding on terms and
conditions that were consistent with or preferable to other alternatives and,
from a financial point of view, was likely to provide better stockholder value
and corporate stability than other proposals considered over the last months.
The Board of Directors concluded that the terms of the April 1998 Placement were
fair to and in the best interests of the Company and its stockholders.

BACKGROUND OF MDT TECHNOLOGY DEVELOPMENT AND NEED TO COMMERCIALIZE MDT
TECHNOLOGY

The Company is still developing its MDT technology on which the Company has
expended $5.6 million to fund MDT acquisition and development costs since June
1996. It is anticipated that the Company will need to commit substantial capital
beyond its current working capital reserves to complete development, begin
manufacturing and launch MDT's initial products.

The Company has not yet fully completed development and testing of its
Windows NT(R) Changer File System, Drivers, Graphical User Interface (GUI),
Database Manager, Control Panel Applet and supporting utilities, data interface,
and robotics interface components. There can be no assurance that MDT's software
components can be successfully completed and integrated, or that they can be
cost effectively migrated to other operating systems, or next generation data or
robotics interfaces as might be demanded by a rapidly changing market. Although
the Company has satisfactorily completed a number of MDT proof-of-concept
designs, and an initial technology demonstrator [TD Series] prototype which MDT
debuted at COMDEX in November, 1997, MDT has yet to have completed a fully
integrated device proving the efficacy of its designs, concepts, software and
other technologies.

TERMS OF THE APRIL 1998 PLACEMENT

On April 14, 1998, the Company entered into the $5 million April 1998
Placement, of which $3 million has been funded. In connection with the private
placement, the Company authorized 100,000 shares of a new Series A Preferred
Stock at a stated price of $50 per share and issued 60,000 shares for the $3
million investment completed in April. The balance of the $5 million is to be
funded after the annual stockholders meeting and after the effective date of a
Registration Statement covering the Common Stock into which the Preferred Stock
is convertible. In connection with the April 1998 Placement, the Company agreed
to issue 1,000,000 Warrants, exercisable for three years and entitling the
holders to acquire one share of the Company's Common Stock for each warrant. Of
the Warrants, 750,000 are being issued to investors (of which 450,000 were
issued in April) and 250,000 Warrants are being issued to placement agents (of
which 150,000 were issued in April). The investor Warrants are exercisable at
140% ($1.27) and the placement agent Warrants are exercisable at 120% ($1.09),
respectively, of $0.91, the average closing bid price of the Company's Common
Stock for the 10 days preceding the closing. In addition, Clarion Finanz AG, a
related party of the Company, received 50,000 of the placement agent Warrants
and $100,000 of the $300,000 paid as the 10% cash placement agent fee for
arranging $1 million of the $3 million current investment. Since the
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<PAGE> 20

Warrants are exercisable at prices above market value on the date of issuance,
the NASDAQ Rules do not require approval of the underlying Common Stock.

OTHER FINANCING REQUIREMENTS

In the April 1998 Placement, the investors were granted certain rights to
participate in the separate financing described above which is currently being
pursued by the Company to fund the commercial introduction of its MDT CD/DVD
server technology. Funds generated by these financing activities as well as cash
generated from the Company's existing operations is expected to be sufficient
for the Company to meet its operating obligations and the anticipated additional
research, development, and commercial prototype costs for the MDT business
during the next twelve months. However, if the separate MDT funding is not
completed, the Company will require additional capital, and need to identify
other debt, equity or strategic investment sources to complete the research,
development and commercial introduction of the MDT CD/DVD server technology and
for marketing costs related to such activities. If the Company is unsuccessful
in completing the MDT funding, management will be required to modify or delay
the timing of the additional MDT development and marketing activities.

TERMS OF SERIES A PREFERRED STOCK

The Series A Preferred Stock ranks: (i) prior to all of the Company's
Common Stock, par value $.01 per share ("Common Stock") and (ii) prior to any
class or series of capital stock of the Company hereafter created (unless such
future class specifically, by its terms, ranks on parity with the Series A
Preferred Stock), in each case as to distributions of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary (all
such distributions being referred to collectively as "Distributions"). The
Series A Preferred Stock will bear a 7% per annum cumulative dividend, payable
out of assets legally available therefor, at the Conversion Date (as defined
below) in cash or Common Stock at the Conversion Price (as defined below), at
the Company's option. No dividends shall be paid on the Common Stock or any
other subsequently issued stock.

In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A Preferred Stock shall
be entitled to receive a liquidation preference of $50.00 per share plus any
accrued and unpaid dividends, subject to adjustments for certain change of
control and normal corporate reclassifications and to pro rata distributions in
the event that assets are insufficient to fully fund the liquidation preference.
Holders of the Series A Preferred Stock have a right to convert their shares, at
their option on the earlier of (x) ninety (90) days after issuance or (y) on the
effective date of the above-referenced Registration Statement on Form S-3 (the
"Conversion Date") with such conversion to be based on a per share conversion
price ("Conversion Price") equal to the lesser of a price that reflects a
discount (the "Conversion Discount") to the average of any three (3) consecutive
closing bid prices for the Company's Common Stock within twenty (20) trading
days immediately prior to the conversion date (the "Floating Conversion Price")
or a price which is equal to one hundred thirty percent (130%) of the closing
bid prices of the Company's Common Stock for the ten (10) trading days
immediately preceding the date of issuance (the "Fixed Conversion Price")
provided that in determining the Conversion Price, the holder shall not count
any day on which its sales account for greater than twenty percent (20%) of the
volume of the Company's Common Stock and on which the holder has sales in the
last hour of trading. The Conversion Discount shall be equal to fifteen percent
(15%) if the Conversion Rights are exercised within one hundred twenty (120)
days of first issuance of the Series A Preferred Stock, shall be equal to
seventeen and one-half percent (17.5%) if the Conversion Rights are exercised
after one hundred twenty (120) days and prior to one hundred forty-nine days of
first issuance of the Series A Preferred Stock; and shall be equal to twenty
percent (20%) if the Conversion Rights are exercised after one hundred fifty
(150) days from first issuance of the Series A Preferred Stock. The time periods
are to be adjusted in the event that a Registration Statement becomes effective
prior to the 90th day and the applicable Conversion Discount shall increase by
five percent (5%) if the Company is de-listed on NASDAQ. In addition, the
percentage of shares that can be converted at any one time is limited during
such time periods and the holders cannot own more than 4.99% of the equity of
the Company after the Conversion.

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<PAGE> 21

The Company has filed a Registration Statement on Form S-3 to cover the
resale of the number of shares of Common Stock which are expected to be required
to accommodate the conversion rights of the Series A Preferred Stock and the
shares that underlie Warrants issued in connection with the April 1998
Placement, but subject to the applicable NASDAQ limits. Unless sooner converted,
and subject to certain conditions, the Series A Preferred Stock is subject to
mandatory conversion after three (3) years from the Closing Date, at which time
all shares of Series A Preferred Stock will automatically be converted at the
Conversion Price. In addition, to accommodate the NASDAQ requirements, the
holders have agreed that they will not convert Series A Preferred Stock until
required stockholder approval has been received to meet the applicable NASDAQ
requirement.

OTHER CAPITAL STOCK OF THE COMPANY

The authorized capital of the Company consists of 50,000,000 shares of
Common Stock (par value U.S. $.01) of which 21,423,345 were outstanding at April
15, 1998 and 1,000,000 shares of Preferred Stock (par value U.S. $.01) of which
60,000 shares of Series A Preferred Stock were issued and outstanding at April
15, 1998.

All of the issued shares of Common Stock of the Company are fully paid and
non-assessable and all of the shares of Common Stock rank equally as to voting
rights, participation in the distribution of the assets of the Company on a
liquidation, dissolution or winding-up and the entitlement to dividends. Each
share of Common Stock entitles the holder to one vote. In the event of the
liquidation, dissolution or winding-up of the Company or other distribution of
assets of the Company, the holders of the Common Stock will be entitled to
receive, on a pro-rata basis, all of the assets remaining after the Company has
paid its liabilities. Subject to the rights granted to holders of Preferred
Stock, and the limitations on Escrowed Performance Shares, holders of the Common
Stock are entitled to dividends only when and to the extent declared by the
Board of Directors.

Of the 21,423,345 shares of Common Stock currently issued and outstanding,
5,445,115 are classified as Escrowed Performance Shares, are held in escrow by
the Company's transfer agent, Harris Trust Company of California, and will vest
under the Modification as described earlier. See Transactions with Management
and Others.

The Company has Options outstanding which could result in the issuance of
up to 2,010,070 additional common shares of the Company and has Warrants
outstanding which could result in the issuance of up to 1,759,750 additional
shares of Common Stock of the Company. The Options have been granted to
officers, directors and employees and the Warrants have been issued in private
placements and as payment for services rendered. Warrants are non-transferable
and adjusted in the event of a share consolidation or subdivision or other
similar change to the Company's capital. See "Executive Compensation" in the
Company's Annual Report on Form 10-K or in its Proxy materials for further
information with respect to the Options.

The Board of Directors is authorized to issue, without stockholder action,
up to 1,000,000 shares of Preferred Stock of which 100,000 shares have been
designated as the Series A Preferred Stock, of which 60,000 shares are
outstanding, as described above. Preferred Stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, and may include voting rights (including the right to vote
as a series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions.

UNDER CERTAIN CONDITIONS, UPON CONVERSION OF THE SERIES A PREFERRED STOCK
AND EXERCISE OF THE WARRANTS ISSUED IN THE APRIL 1998 PLACEMENT, THE COMPANY MAY
BE REQUIRED TO ISSUE SHARES OF COMMON STOCK WHICH EXCEED, IN NUMBER, 4,284,669
SHARES OR MORE THAN 20% OF THE CURRENTLY OUTSTANDING COMMON STOCK OF THE
COMPANY.

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<PAGE> 22

PROJECT, SINCE THEY ANTICIPATE A CONTINUED NASDAQ SMALLCAP LISTING. THE
DECREASED FUNDING WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE IMPLEMENTATION OF
THE MDT STRATEGY. A DE-LISTING ON THE NASDAQ SMALLCAP MARKET WOULD RESULT IN THE
COMPANY'S COMMON STOCK TRADING ONLY ON THE NASDAQ OTC BULLETIN BOARD, WHICH
WOULD MATERIALLY REDUCE AND ADVERSELY EFFECT THE MARKET ACCESS, VISIBILITY AND
TRADING MARKET FOR THE COMPANY AND ITS STOCKHOLDERS.

THE BOARD OF DIRECTORS OF THE COMPANY CONCLUDED THAT THE APRIL 1998
PLACEMENT WAS FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS. THE BOARD OF DIRECTORS IS ALSO COMMITTED TO FULL COMPLIANCE WITH
THE RULES OF THE NASDAQ STOCK MARKET AND IT THEREFORE RECOMMENDS A VOTE "FOR"
PROPOSAL II TO ASSURE FULL COMPLIANCE WITH THE RULES OF THE NASDAQ STOCK MARKET
IN THE EVENT THAT, AS A CONTINGENT MATTER, THE COMPANY IS REQUIRED TO ISSUE IN
THE AGGREGATE MORE THAN 20% OF THE COMPANY'S COMMON STOCK TO FULFILL THE
CONVERSION AND WARRANT EXERCISE OBLIGATIONS IN THE APRIL 1998 PLACEMENT.

REQUIREMENTS AND PROCEDURES FOR SUBMISSION OF PROXY PROPOSALS AND NOMINATIONS OF
DIRECTORS BY STOCKHOLDERS

Any stockholder who intends to present a proposal to be included in the
Company's proxy materials to be considered for action at the 1999 annual meeting
of stockholders must satisfy the requirements of the Securities and Exchange
Commission and the proposal must be received by the Secretary of the Company on
or before December 12, 1998, for review and consideration for inclusion in the
Company's proxy statement and proxy card relating to that meeting.

The chairman of the annual meeting may decline to allow the transaction of
any business or the consideration of any nomination which was not properly
presented in accordance with these requirements. The requirements with respect
to nomination of persons for director do not affect the deadline for submitting
stockholder proposals for inclusion in the proxy statement, nor do they apply to
questions a stockholder may wish to ask at a meeting. If the Company changes the
date of the 1999 annual meeting of stockholders, stockholders will be notified
in accordance with the Company's By-Laws.

APPOINTMENT OF AUDITOR

The Board of Directors has appointed KPMG Peat Marwick LLP, of 21700 Oxnard
Street, Suite 1200, Woodland Hills, California, USA, 91367, as the auditor of
the Company to hold office for the ensuing year at a remuneration to be fixed by
the directors. KPMG Peat Marwick was first appointed as auditors effective July
27, 1994. The Company expects that a representative of KPMG Peat Marwick LLP
will be present at the Annual Meeting, will have the opportunity to make a
statement if he or she so desires, and will be available to respond to
appropriate questions.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Under the Exchange Act, the Company's directors, certain executive and
other officers, and any person holding more than ten percent (10%) of the
Company's Common Stock are required to report their ownership and any changes in
that ownership to the Securities and Exchange Commission (the "Commission") and
any exchange or quotation system on which the Common Stock is listed or quoted.
Specific due dates for these reports have been established and the Company is
required to report in this proxy statement any failure to file by directors and
officers and ten percent (10%) holders. Based solely on a review of the copies
of reports furnished to the Company as filed with the Commission, the Company
believes that its executive officers and directors have complied with the filing
requirements applicable to them for the year ended December 31, 1997.

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<PAGE> 23

ANNUAL REPORT

The Company will furnish without charge to each stockholder who so requests
in writing a copy of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 as filed with the Securities and Exchange
Commission. A copy of this report is included in this mailing. Requests for
additional copies of the Annual Report on Form 10-K should be sent to the
Company at 20700 Ventura Boulevard, Suite 134, Woodland Hills, California 91364,
Attention: Investor Relations.

OTHER MATTERS

The Board of Directors knows of no other business that will be presented
for consideration at the Annual Meeting. If other matters are properly brought
before the meeting, however, it is the intention of the persons named in the
accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.

DATED: May 22, 1998 BY ORDER OF THE BOARD

Steven D. Gershick
Chairman, President & CEO

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<PAGE> 24

APPENDIX 1

FORM OF CERTIFICATE OF DESIGNATION*
OF
SERIES A, 7% CONVERTIBLE PREFERRED STOCK
OF
SPATIALIZER AUDIO LABORATORIES, INC.

Pursuant to Section 151 of the General Corporation Law ("GCL") of the State of
Delaware, and the Bylaws of Spatializer Audio Laboratories, Inc., a Delaware
corporation (the "Company"), we, the undersigned being President and Secretary,
respectively, DO HEREBY CERTIFY, that the following resolution was duly adopted
by the Board of Directors on April 13, 1998:

RESOLVED, that pursuant to the authority conferred upon the Board of
Directors by the Company's Certificate of Incorporation and Bylaws, the Board of
Directors hereby provides for the issuance of a series of Preferred Stock of the
Company consisting of 100,000 authorized shares which shall have the voting
powers, designations, preferences and relative participating, optional or other
rights, if any, and the qualifications, limitations, or restrictions, set forth
in such Certificate of Incorporation, and in addition thereto, the following:

Section 1. Designation and Amount. The series of Preferred Stock hereby
created shall be designated as the "Series A Preferred Stock," shall have a par
value of $.01 per share and the number of shares constituting the Series A
Preferred Stock shall be 100,000 shares. The Series A Preferred Stock shall have
a stated value of $50.00 per share, with a 7% per annum dividend as set forth
herein.

Section 2. Rank. The Series A Preferred Stock shall rank: (i) prior to all
of the Company's Common Stock, par value $.01 per share ("Common Stock") and
(ii) prior to any class or series of capital stock of the Company hereafter
created (unless such future class specifically, by its terms, ranks on parity
with the Series A Preferred Stock), in each case as to distributions of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary (all such distributions being referred to collectively as
"Distributions").

Section 3. Dividends. The Series A Preferred Stock will bear a 7% per annum
cumulative dividend, payable out of assets legally available therefor, at the
Conversion Date (as defined below) in cash or Common Stock at the Conversion
Price (as defined below), at the Company's option. No dividends shall be paid on
the Common Stock or any stock issued pursuant to Section 9 prior to the payment
of dividends on Series A Preferred Stock.

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

Section 5. Liquidation Preference.

(a) In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of Series A Preferred
Stock shall be entitled to receive an amount per share equal to the sum of (i)
$50.00 for each outstanding share of Series A Preferred Stock (subject to
adjustments for Reclassifications (as defined herein), plus (ii) an amount equal
to all accrued and unpaid dividends which shall accrue through the Conversion
Date (the "Liquidation Preference"). If upon the occurrence of such event, the
assets and funds available to be distributed among the holders of the Series A
Preferred Stock shall be insufficient to permit the payment to such holders of
the full preferential amounts due to such holders, then the entire assets and
funds of the Company legally available for distribution shall be distributed
among the holders of the Series A Preferred Stock on a pro rata basis.

(b) Notwithstanding anything set forth above, holders of Series A Preferred
Stock shall not be entitled to receive more than the Liquidation Preference, as
adjusted to reflect any Reclassifications in the event of any

- ---------------

* As filed with the Secretary of State of the State of Delaware on April 16,
1998, to amend the original certificate filed April 14, 1998, to correct
certain technical provisions.
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<PAGE> 25

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

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

(a) Right to Convert.

(1) The holders may convert, in whole or in part, by notice ("Holder's
Notice") at their option on the earlier of (x) ninety (90) days after issuance
or (y) on the effective date of a Registration Statement on Form S-3
("Registration Statement"), filed with the Securities and Exchange Commission,
with such conversion to be based on a per share conversion price ("Conversion
Price") equal to the lesser of a price that reflects a discount (the "Conversion
Discount") to the average of any three (3) consecutive closing bid prices for
the Company's Common Stock within twenty (20) trading days immediately prior to
the conversion date (the "Floating Conversion Price") or a price which is equal
to one hundred thirty percent (130%) of the closing bid prices of the Company's
Common Stock for the ten (10) trading days immediately preceding the date of
issuance (the "Fixed Conversion Price") provided that in determining the
Conversion Price, the holder shall not count any day on which its sales account
for greater than twenty percent (20%) of the volume of the Company's Common
Stock and on which the holder has sales in the last hour of trading. The
Conversion Discount shall be equal to fifteen percent (15%) if the Conversion
Rights are exercised within one hundred twenty (120) days of first issuance of
the Series A Preferred Stock hereunder, shall be equal to seventeen and one-half
percent (17.5%) if the Conversion Rights are exercised after one hundred twenty
(120) days and prior to one hundred forty-nine days of first issuance of the
Series A Preferred Stock hereunder; and shall be equal to twenty percent (20%)
if the Conversion Rights are exercised after one hundred fifty (150) days from
first issuance of the Series A Preferred Stock hereunder. Additionally, if the
Registration Statement becomes effective prior to the ninetieth (90th) day
following the first issuance of Series A Preferred Stock by the Company, the
first Conversion Discount period and each subsequent Conversion Discount Period
set forth in the prior sentence shall be reduced by the number of days by which
the Registration Statement was effective prior to such ninetieth (90th) day. The
applicable Conversion Discount shall increase by five percent (5%) if the
Company receives formal, final notice from NASDAQ delisting the Company's Common
Shares with such increase effective on the effective date of such formal
delisting. Further the holder may exercise the Conversion Rights (the
"Conversion Restriction"), according to the following schedule:

<TABLE>
<CAPTION>
CONVERSION DATE FROM FIRST ISSUANCE PERCENTAGE TO BE CONVERTED
----------------------------------- --------------------------
<S> <C>
Less than 120 days 33%
120 to 149 days 66%
150 or more days 100%
</TABLE>

(2) Notwithstanding Section 6(a)(1), if the Common Stock of the Company
closes above the "Fixed Conversion Price" on a Conversion Date, no Conversion
Restriction shall apply. Additionally, if the Registration Statement becomes
effective prior to the ninetieth (90th) day following the first issuance of
Series A Preferred Stock by the Company, the period for the Conversion Dates
first issuance set forth above shall be reduced by the number of days by which
the Registration Statement was effective prior to such ninetieth (90th) day. The
maximum Conversion Rights to be exercised by the holders shall be limited so
that, after conversion, the holders do not beneficially own more than 4.99% of
the outstanding Common Stock of

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<PAGE> 26

the Company, provided this limitation will not be effective on the tenth (10th)
day following an event of default under the terms hereof, and notice from the
holder that the Company is in breach of any of its obligations under any of its
other transaction documents and such event of default is uncured for thirty (30)
days following the notice. However, if such event is remedied, the 4.99%
limitation will be reinstated.

(b) Filing of Registration Statement. Within thirty (30) days of the date
hereof, the Company shall amend its currently effective Registration Statement
on Form S-3 or shall file a new Form S-3 with respect to the Common Stock to
cover the Common Stock of the Company which would be issuable on conversion of
the Series A Preferred Stock and upon exercise of the Warrants issued in
connection with the Series A Preferred Stock, so that the holder shall have the
right, but not the obligation, to participate as a selling stockholder. To the
extent that the offering is an underwritten offering and the holder participates
as a selling stockholder, the holder shall enter into an underwriting agreement
(if applicable) and provide such other documents and standard indemnifications
with respect to the offer and sale of the Common Stock. The Company shall pay
all expenses reasonably incurred in connection with the offer and sale of the
Common Stock except for underwriting commissions or discounts, if any, which
shall be paid by holder.

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

To the Company: Spatializer Audio Laboratories, Inc.
20700 Ventura Blvd., Suite 134
Woodland Hills, CA 91364
Attention: Wendy Guerrero
Telephone: (818) 227-3370
Facsimile: (818) 227-9750

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

(d) Failure to Convert. In the event that the Company shall fail to deliver
the shares of Common Stock issuable on conversion of the Series A Preferred
Stock within five (5) business days of receipt by the Company of a valid Notice
of Conversion, the Company agrees to pay to the holder of the Series A Preferred
Stock delivering the Notice of Conversion, upon demand, in immediately available
cash funds, as liquidated damages for such failure and not as a penalty, for
each One Hundred Thousand Dollars of Series A Preferred Stock delivered for
conversion, $500 per day for each of the first ten (10) days and $1,000 per day
for each day thereafter on which the Common Stock is not delivered. The
obligations for liquidated damages shall be effective from the sixth day after
delivery of the Notes of Conversion.

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

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<PAGE> 27

(f) No Fractional Shares. If any conversion of the Series A Preferred Stock
would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion, shall be the next
higher number of shares.

(g) Mandatory Conversion. The Series A Preferred Stock. is subject to
mandatory conversion after three (3) years from the Closing Date, at which time
all shares of Series A Preferred Stock will automatically be converted at the
Conversion Price, upon the terms set forth in this section. Mandatory conversion
shall not occur in the event of the occurrence of one or both of the following
at the time of such mandatory conversion: (x) the Company is unable, or admits
in writing its inability, to pay its debts, or is not paying its debts generally
as they come due, or has made any assignment for the benefit of creditors; or
(y) the Company has commenced, or there has been commenced against the Company,
any case, proceeding, or other action seeking to have an order for relief
entered with respect to the Company, or to adjudicate the Company as a bankrupt
or insolvent.

(h) Reservation of Stock Issuable Upon Conversion. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all then outstanding shares of
Series A Preferred Stock.

(i) Adjustment to Conversion Rate.

(1) Adjustment to Fixed Conversion Price Due to Stock Split, Stock
Dividend, Etc. If at any time when the Series A Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, or other similar event, the Conversion Price shall
be proportionately reduced, or if the number of outstanding shares of Common
Stock is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Conversion Price shall be proportionately
increased. In such event the Company shall notify the Transfer Agent of such
change on or before the effective date thereof.

(2) Adjustment Due to Merger, Consolidation, Etc. If, prior to the
conversion of all Series A Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities of the Company or another entity, or
other property, then the holders of Series A Preferred Stock shall, upon being
given at least 30 days advance written notice of such transaction, thereafter
have the right to purchase and receive upon conversion of Series A Preferred
Stock, upon the basis and upon the terms and conditions specified herein and in
lieu of the shares of Common Stock immediately theretofore issuable upon
conversion, such shares of stock and/or securities or other property as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore purchasable and receivable upon the
conversion of Series A Preferred Stock held by such holders had such merger,
consolidation, exchange of shares, recapitalization or reorganization not taken
place, and in any such case appropriate provisions shall be made with respect to
the rights and interests of the holders of the Series A Preferred Stock to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Rate and of the number of shares issuable upon
conversion of the Series A Preferred Stock) shall thereafter be applicable, as
nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the conversion thereof. The Company shall not effect
any transaction described in this subsection unless (1) holder has been given at
least thirty (30) days advance written notice of such transaction, and (2) the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument the obligation to deliver to the holders of the Series A Preferred
Stock such shares of stock and/or securities or other property as, in accordance
with the foregoing provisions, the holders of the Series A Preferred Stock may
be entitled to receive upon conversion of the Series A Preferred Stock.

(3) No Fractional Shares. If any adjustment under this Section would
create a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be

24
<PAGE> 28

disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next higher number of shares.

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

Section 8. Status of Converted Stock. In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 6 hereof, the shares so
converted shall be canceled, shall return to the status of authorized but
unissued Preferred Stock of no designated series, and shall not be issuable by
the Company as Series A Preferred Stock.

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

IN WITNESS THEREOF, the Company has caused the undersigned to sign this
Certificate of Designation this 15th day of April, 1998.

SPATIALIZER AUDIO LABORATORIES, INC.

By: /s/ STEVEN D. GERSHICK
------------------------------------
President: Steven D. Gershick
Attest:

By: /s/ HENRY R. MANDELL
----------------------------------
Secretary: Henry R. Mandell

25
<PAGE> 29

PROXY PROXY
SPATIALIZER AUDIO LABORATORIES, INC.

20700 VENTURA BOULEVARD, SUITE 134
WOODLAND HILLS, CALIFORNIA 91364

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MANAGEMENT OF
SPATIALIZER AUDIO LABORATORIES, INC.

The undersigned does hereby appoint Steven D. Gershick and Henry R.
Mandell as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated below, all the shares
of Common Stock of Spatializer Audio Laboratories, Inc. held of record by the
undersigned on April 30, 1998, at the annual meeting of stockholders to be held
on June 25, 1998 or any adjournment thereof.

Please check this box only if you intend to [ ]
attend and vote at the Annual Meeting.

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.

(Continued and to be signed on reverse side.)

<PAGE> 30

SPATIALIZER AUDIO LABORATORIES, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.

[ ]

<TABLE>
<S> <C> <C> <C> <C>
For All
For Withhold (Except Nominee(s)
1. ELECTION OF DIRECTORS - All All written below)
Nominees: James D. Pace and Gilbert N. Segel. [ ] [ ] [ ] In their discretion, the Proxies are authorized to
vote upon such other business as may properly come
--------------------------------------------- For Against Abstain before the meeting. This Proxy, when properly
2. Ratification of the issuance of Common Stock, [ ] [ ] [ ] executed, will be voted in the manner directed by
to be Issued upon conversion of the Series A the undersigned stockholder.
Preferred stock, to the extent that such
Issuance is in excess of the 20% allowed If no direction is made, this Proxy will be voted
under Rule 4310(c)(25)(h) of the NASDAQ FOR Proposals 1 and 2.
stock rules.
Dated: ______________, 1998

___________________________________________
(Signature)

___________________________________________
(Signature, if held jointly)

Please sign exactly as name appears below.
When shares are held jointly, both should
sign. When signing as attorney, as executor,
administrator, trustee or guardian, please
give full title as such. If a corporation,
please sign in full corporate name by
President or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
</TABLE>