SPATIALIZER AUDIO LABORATORIES INC, S-1/A, 2000-04-17

SPATIALIZER AUDIO LABORATORIES INC
S-1/A, 2000-04-17
SEMICONDUCTORS & RELATED DEVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2000.

REGISTRATION NO. 333-30308
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1 TO FORM S-3
ON FORM S-1 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

SPATIALIZER AUDIO LABORATORIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3698 95-4484725
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

20700 VENTURA BOULEVARD, SUITE 140
WOODLAND HILLS, CALIFORNIA 91364
(818) 227-3370
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

HENRY R. MANDELL, CHIEF EXECUTIVE OFFICER
SPATIALIZER AUDIO LABORATORIES, INC.
20700 VENTURA BOULEVARD, SUITE 140
WOODLAND HILLS, CALIFORNIA 91364
(818) 227-3370
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:
MARGARET G. GRAF, ESQ.
BRAND FARRAR & BUXBAUM LLP
515 SOUTH FLOWER STREET, SUITE 3500
LOS ANGELES, CALIFORNIA 90071-2201
(213) 228-0288
DIRECT DIAL: (213) 426-6260

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE PRICE REGISTRATION FEE(2)
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Common Stock, $.01 par value
per share................... 6,197,636 $2.02(2) 12,519,224.72(2) $3,305.08
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</TABLE>

(1) This Registration Statement relates to the resale of 6,197,636 shares of
Common Stock issued prior to the filing date hereof, and the resale of up to
2,525,000 shares of Common Stock issuable on the exercise of currently
outstanding Options and Warrants. The Registration Fee is calculated based
on 6,197,636 shares at a proposed offering price per share of $2.02. The
Registration Statement on Form S-3 filed on February 14, 2000, is being
modified to a registration statement on Form S-1 at the request of the
Securities and Exchange Commission based on the staff's position of limiting
the availability of Instruction I(B)(3) of Form S-3 to registrants that are
listed on the NASDAQ Stock Market's Small Cap or NMS Systems, even though
the OTCBB is an automated quotation system of the NASD.

(2) Pursuant to Rule 457(c), the fee calculation is based on the average of the
high and low prices of the Registrant's Shares on the OTC Bulletin Board on
February 8, 2000, the date that the registration statement on Form S-3 was
filed.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2

SPATIALIZER AUDIO LABORATORIES, INC.

CROSS-REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM NO. FORM S-1 CAPTION
-------- ----------------
<C> <S> <C>
1. Forepart of the Registration Statement Outside Front and Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus of Prospectus
3. Summary Information, Risk Factors and The Company; Business; Risk Factors;
Ratio of Earnings to Fixed Charges Capitalization
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Outside Front Cover; The Company; Plan of
Distribution
9. Description of Securities to be Description of Capital Stock
Registered
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Summary, The Company, Business,
Registrant Properties, Legal Matters, Market
Information, Selected Financial
Information, Supplemental Financial
Information, Financial Statements,
Management Discussion and Analysis of
Financial Condition and Result of
Operations, Directors and Executive
Officers, Executive Compensation
12. Disclosure of SEC Position on Indemnification and Personal Liability of
Indemnification for Securities Act Officers and Directors
Liabilities
</TABLE>
<PAGE> 3

6,197,636 Shares

SPATIALIZER AUDIO LABORATORIES, INC.
(a Delaware corporation)

Certain stockholders of Spatializer Audio Laboratories, Inc. are offering
for resale 6,197,636 shares of Common Stock, including 3,672,636 shares of
Common Stock which are currently outstanding and 2,525,000 shares of Common
Stock reserved for issuance on the exercise of outstanding Options and Warrants.
Of these, 1,733,381 shares of the Common Stock are, or upon exercise of Options
and Warrants will be, held by Selling Stockholders who are officers or
directors.

Our Common Stock is traded on the OTC Bulletin Board under the symbol
"SPAZ." On February 8, 2000 the closing price of the Common Stock on the OTC
Bulletin Board was $2.00 U.S.

BEFORE INVESTING IN THE COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER THE
RISKS DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5.

<TABLE>
<CAPTION>
PER SHARE TOTAL(1)
--------- -----------
<S> <C> <C>
Public offering price....................................... $2.02 $12,519,224
Proceeds, before expenses, to Selling Stockholders.......... $2.02 $10,085,884
Proceeds, before expenses, to the Company on exercise of
Options and Warrants at varying prices.................... $ 2,433,000
</TABLE>

- -------------------------
(1) Reflects current exercise prices for Options and Warrants and assumes
holders immediately resold at the February 8, 2000 closing market price of
$2.00 per share.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this prospectus is , 2000.
<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the Common Stock being offered and our
financial statements and the notes to those financial statements appearing
elsewhere in this Prospectus.

SPATIALIZER AUDIO LABORATORIES, INC.

Spatializer Audio Laboratories, Inc. (the "Company") is a leading
developer, licensor and marketer of next generation audio technologies for the
consumer electronics, personal computing, enterprise computing and entertainment
industries. Our position as a leading developer of next generation technologies
is based on our strong relationships with brand leaders, such as Apple, Toshiba
and Hitachi. We conduct our audio business through our parent company and our
wholly owned subsidiary, Desper Products, Inc. ("DPI"). DPI has developed a full
complement of patented and proprietary 3-D or virtual audio signal processing
technologies directed to the consumer electronics and multimedia PC markets. We
continue to expand our product offerings to take advantage of the emerging
digital audio marketplace specifically for consumer products like Digital
Versatile Disc ("DVD") for personal computers, and home entertainment; and
interactive positional audio for PC gaming on the Windows 95/98(TM) platforms.
As of December 31, 1999, more than 17 million licensed units had been shipped.
DPI's 3-D audio signal processing technologies have been incorporated in over
380 products offered by global brand leaders including in consumer electronics,
Toshiba, Panasonic, JVC, Hitachi, Mitsubishi, Samsung, Sanyo, Goldstar, Emerson,
Zenith and Proton, and in the PC multimedia marketplace, Apple, Compaq, Dell,
Gateway, Hewlett Packard, Sony, Micron, Fujitsu, NEC, Seiko-Epson and Labtec,
among others and on the Internet through software plug-ins for the WinAmp and
Xing MP3 players.

EXECUTIVE OFFICES

Our executive offices are located at 20700 Ventura Boulevard, Suite 140,
Woodland Hills, California 91364, Telephone (818) 227-3370. We maintain Websites
at www.spatializer.com and www.multidisc.com. Information available on our
Websites is not part of this prospectus. We were incorporated in the State of
Delaware in February, 1994.

THE OFFERING AND USE OF AVAILABLE PROCEEDS

The Offering relates to the resale of up to 3,672,636 shares of Common
Stock which are currently outstanding and 2,525,000 shares of Common Stock
reserved for issuance upon exercise of presently outstanding Warrants and
Options. Common Stock offered for resale hereunder is to be offered for resale
for the account of the Selling Stockholders who already hold Common Stock,
Warrants or Options, including certain officers, directors and affiliates. We
are not entitled to any of the proceeds of sale of any such securities by the
Selling Stockholders, but we will pay the expenses of the filing of the
registration statement.

We will receive the proceeds, in the ordinary course, from any cash
exercise of outstanding Options and Warrants. If all outstanding Options and
Warrants registered herein are exercised for cash, including those that
currently have exercise prices above the market price of our stock, we will
receive proceeds of approximately $2.4 million. The proceeds from the exercise
of Options and Warrants, from time to time, will be used to fund general
corporate purposes and for strategic acquisitions or alliances.
1
<PAGE> 5

SALES BY SELLING STOCKHOLDERS

The shares of Common Stock being offered for resale by the Selling
Stockholders pursuant to this prospectus may be offered by them in varying
amounts and transactions so long as this prospectus is then current under the
rules of the SEC and the registration statement has not been withdrawn by us.
The Offering may be through the facilities of the OTC Bulletin Board or such
other exchange or reporting system where the Common Stock may be traded.
Brokerage commissions may be paid or discounts allowed in connection with such
sales; however, it is anticipated that the discounts allowed or commissions paid
will be no more than the ordinary brokerage commissions paid on sales effected
through brokers or dealers. To our knowledge, as of the date hereof, no one has
made any arrangements with a broker or dealer concerning the offer or sale of
the Common Stock. See "Plan of Distribution."

In December 1999, we completed the placement of $1.05 million of Common
Stock, at no discount from market, the conversion of $1 million of short-term
debt to new Series B Redeemable Convertible Preferred Stock and the restatement
of $225,000 on existing secured debt to secured long-term debt (the "December
Transactions"). The December Transactions significantly strengthened our balance
sheet and restored working capital and shareholder's equity. The resulting
liquidity has allowed us to emerge from a turnaround mode and to begin to pursue
a growth strategy.

The Selling Stockholders include the investors who participated in the
December Transactions and were granted registration rights covering the resale
of the Common Stock they acquired, entities that have provided services and
received Common Stock in connection with these services, and our officers and
directors or directors of DPI who hold warrants issued for loans advanced or
performance shares. The release of the performance shares from escrow is treated
as compensation to some of the holders of the performance shares, as of the date
of release and those individuals may find it necessary to sell a portion of
their performance shares to meet their tax obligations. For the others, the
inclusion of the shares in our registration statement provides them with the
flexibility to dispose of a portion of their shares in the market when their
personal needs or planning require the sale.

TRADING INFORMATION

NASDAQ (OTC Bulletin Board) Trading Symbol -- SPAZ
2
<PAGE> 6

OUTSTANDING SECURITIES AT
MARCH 15, 2000

<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
OUTSTANDING
------------
<S> <C>
46,657,972
Reserved for Issuance -- Options.......................... 2,859,467(1)
Reserved for Issuance -- Warrants......................... 2,730,000(1)
Total Shares of Common Stock Outstanding Assuming Exercise
of Warrants and Options................................... 52,247,439
Shares Offered by Selling Shareholders
(including 2,525,000 shares reserved for issuance on
exercise of Warrants and Options)......................... 6,197,636
</TABLE>

- -------------------------
(1) Includes all employee and similar options and warrants issued in prior
financings and these amounts include the 2,100,000 warrants issued net of
the 500,000 outstanding warrants that were canceled in the December
Transactions.

This prospectus includes references to MultiDisc(TM), Spatializer(R) and
other trademarks, tradenames, and product names of Spatializer and of other
entities, some of which may not be designated as such.
3
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................ $ 1,230 $ 2,024 $ 2,781 $ 1,680 $ 1,660
Gross Profit........................ 1,151 1,838 2,551 1,546 1,611
Operating Expenses.................. (4,403) (27,042) (7,238) (3,490) (1,156)
Other Income (Expense)............ 74 119 27 (108) (94)
Loss from Discontinued Operations... (3,702)
Income (Loss)from Operations........ $ (3,178) $ (25,085) $ (4,660) $ (5,754) $ 361
Income Taxes........................ (63) (310) (60) (38) (6)
----------- ----------- ----------- ----------- -----------
Net Income (Loss)................... $ (3,241) $ (25,395) $ (4,720) $ (5,792) $ 355
----------- ----------- ----------- ----------- -----------
Basic Income and Diluted (Loss) Per
Share............................. $ (0.32) $ (2.01) $ (0.23) $ (0.29) $ 0.01
Weighted Average Common Shares...... 10,156,816 12,644,751 20,604,095 22,180,180 33,805,512
</TABLE>

4
<PAGE> 8

RISK FACTORS

INVESTMENT IN OUR SECURITIES IS SPECULATIVE. PLEASE CONSIDER CAREFULLY THE
FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS, BEFORE MAKING A DECISION TO
PURCHASE OUR SECURITIES. IF ONE OR MORE OF THESE RISKS ACTUALLY MATERIALIZE, OUR
BUSINESS AND THE TRADING PRICE OF OUR COMMON STOCK WOULD LIKELY SUFFER AND YOU
COULD LOSE ALL OR PART OF THE MONEY YOU INVESTED IN OUR COMMON STOCK.

IF WE CAN'T OBTAIN AND ENFORCE INTELLECTUAL PROPERTY PROTECTION FOR OUR
TECHNOLOGIES, OUR BUSINESS WILL NOT BE SUCCESSFUL.

Our success will depend significantly on our ability to obtain and enforce
intellectual property protection for our technologies in the United States and
in other jurisdictions. Desper Products, Inc. holds certain patents in the field
of audio signal processing and has a number of additional patent applications on
file with the U.S. Patent and Trademark Office. There can be no assurance that
any U.S. patent will be granted on pending applications, or that such patents
will provide the breadth of coverage intended. In addition, there is no
assurance that any of the rights obtained from our patents will not be
challenged, invalidated or circumvented, or that our competitors will not
independently develop or patent technologies that are equivalent or superior to
our technology.

While we have attempted to protect our technology and general intellectual
property rights, there is no assurance that our efforts will effectively protect
against piracy or theft. Monitoring and identifying unauthorized use of such
technology may prove difficult, and the cost of litigation may impact our
ability to adequately guard against such piracy and infringement. While we
believe the steps we have taken to guard against such abuses are reasonable,
there is no assurance we will be successful in this effort.

IF PRODUCT DEVELOPMENT IS DELAYED, WE WILL EXPERIENCE DELAYS IN REVENUES AND
COMPETITIVE PRODUCTS MAY REACH THE MARKET BEFORE OUR PRODUCTS.

We can't predict the timing or the amount, if any, of revenues which we
will receive from current or future product sales and licensing activities.
Since our inception, we have experienced delays in bringing our products to
market and commercial application as a result of delays inherent in technology
development, financial resource limits and industry responses and maturity.
These delays have resulted in delays in the timing of revenues and product
introduction. In the future, new delays in product development or technology
introduction on behalf of us, our original equipment manufacturers of consumer
electronics and multimedia computer products ("OEMs"), integrated circuit ("IC")
foundries or our software producers and marketers could result in further delays
in revenues and could allow competitors to reach the market with products before
us. In view of the emerging nature of the technology involved, and the rapidly
changing character of the entire media, internet and computer markets, our
expansion into other technology areas and the uncertainties concerning the
ability of our products to achieve meaningful commercial acceptance, there can
be no assurance of when or if we will achieve or sustain profitability.

WE HAVE A HISTORY OF LOSSES.

The overall results for 1997 and 1998 reflect continuing losses from
operations because of the funding requirements of the development of server
technology of our subsidiary, MultiDisc Technologies, Inc. ("MDT") and
subsequently the wind down costs for MDT. Although we were profitable in each of
the first three quarters of fiscal 1999, the first such profitability in our
history, there can be no assurance that we will ever sustain an overall positive
profit position.

5
<PAGE> 9

IF WE ARE UNABLE TO ATTRACT AND RETAIN OUR KEY PERSONNEL, WE MAY NOT BE ABLE TO
SUCCESSFULLY OPERATE OUR BUSINESS.

Our future success primarily depends on the abilities and efforts of a
small number of individuals, with particular management obligations. Loss of the
services of any of these persons could adversely affect our business prospects.
We are seeking to recruit additional key technology personnel in a very tight
labor market where other enterprises with stronger financial records and larger
staffs may offer opportunities which are more desirable than those which we are
able to offer. While we believe that we will be able to recruit and retain
personnel with the skills required for future growth, we can't assure you that
we will be successful. Failure to do so could have an adverse impact upon our
business, the results of our operations and our prospects. Currently, we have
employment agreements with Henry R. Mandell with a term expiring in October 2002
and with our vice president of engineering with a term expiring in October 2000.

IF WE CAN'T RAISE ADDITIONAL CAPITAL, WE MAY HAVE TO MODIFY OR DELAY OUR
DEVELOPMENT AND MARKETING ACTIVITIES.

We have funded our operations from revenues and from a number of equity
financings. While our audio subsidiary, DPI, was profitable for the first time
during the last two quarters of 1997, these revenues were consumed in financing
operations and funding the MDT technology development until we restructured and
downsized our operations in September 1998. Since then we have achieved positive
operating results at reduced operating levels but have delayed product
development.

With the recent financing and cash generated from our existing operations,
we expect to be able to meet our operating obligations and the anticipated
additional research, development, and commercial marketing cost for the audio
business during the next twelve months.

BECAUSE THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, WE MAY NOT BE
SUCCESSFUL IN ESTABLISHING AND MAINTAINING THE TECHNOLOGICAL SUPERIORITY OF OUR
PRODUCTS OVER THOSE OF OUR COMPETITORS.

We are seeking commercial acceptance of our products in highly competitive
markets. Our future success is dependent on establishing and maintaining the
technological superiority of our products over those of competitors and our
ability to successfully identify and bring other compatible technologies and
products to market. Certain of our current competitors have access to greater
financial resources than we do. There is no assurance that our present or
contemplated future products will achieve or maintain sufficient commercial
acceptance, or if they do, that functionally equivalent products will not be
developed by current or future competitors with access to significantly greater
resources. The market for 3D Virtual Audio technologies is characterized by
intense competition and commodity pricing pressures. We compete with a number of
entities that produce various stereo audio enhancement processes, technologies
and products in both traditional two-speaker environments such as consumer
electronics and multimedia computing, and in multi-channel, multi-speaker
applications such as Home Theater. In the field of 3-D or Virtual Audio, our
principal competitors are SRS Labs, Inc., QSound Labs, Inc., Aureal
Semiconductor, Inc., CRL and Harman International, some of which have
considerably greater capitalization and resources than we do. In the future, our
products and technologies may also compete with audio technologies and products
developed by other companies, including entities that have business
relationships with us. There can be no assurance that we will be able to
favorably compete in this market in the future.

6
<PAGE> 10

BECAUSE THERE IS A LIMITED TRADING MARKET IN OUR STOCK, YOU MAY NOT BE ABLE TO
SELL THE COMMON STOCK, OR MAY ONLY BE ABLE TO SELL IT FOR LESS THAN THE OFFERING
PRICE.

Our Common Stock trades on the OTC Bulletin Board under the symbol "SPAZ."
There is no assurance that our current trading will be sustained or expanded as
to correspond with your desire for a ready market for our shares.

IF WE ISSUE PREFERRED STOCK, YOUR RIGHTS MAY BE ADVERSELY AFFECTED.

We are authorized to issue up to 1,000,000 shares of preferred stock in one
or more series, the terms of which are to be determined by the Board of
Directors, without further action by shareholders, and may include voting rights
(including the right to vote as a class on particular matters), preferences as
to dividends and liquidation, the conversion feature and dilution impact and
redemption rights and sinking fund provisions. Since the Board of Directors has
the authority to determine, from time to time, the terms of the preferred stock
to be issued in the future, there is no limit on the amount of Common Stock (or
the related dilution impact) that could be issuable under the terms of future
series of preferred stock authorized by the Board of Directors. Of the 1,000,000
shares of preferred stock, 102,967 shares of Series B, 10% Redeemable
Convertible Preferred Stock ("Series B Preferred Stock") are issued and
outstanding and the issuance of additional shares of Series B Preferred Stock or
any other preferred stock could affect the rights of the holders of Common Stock
and the value of the Common Stock, could result, upon conversion, in a change of
control and could also make it more difficult for the holders of the Common
Stock to control voting with respect to significant corporate transactions. See
"Description of Capital Stock."

SINCE OUR OFFICERS AND DIRECTORS OWN A SUBSTANTIAL NUMBER OF SHARES OF OUR
COMMON STOCK, THEY CAN SUBSTANTIALLY CONTROL ACTIONS BY THE STOCKHOLDERS.

Our current directors and officers beneficially own or control or have
rights to acquire approximately 9.3 million shares of Common Stock or
approximately 21.6% of our fully diluted Common Stock. As a result, in addition
to their influence as officers and directors, if such persons act together as
stockholders, they can substantially control actions by the stockholders with
respect to our business and affairs.

SALES OF SHARES FOLLOWING THIS OFFERING COULD ADVERSELY AFFECT THE MARKET PRICE
OF OUR COMMON STOCK.

Virtually all of our currently outstanding Common Stock, including the
Common Stock held by our affiliates, will be tradeable currently or in the near
future, either under this prospectus or pursuant to Rule 144. Of the issued and
outstanding shares of Common Stock, officers, directors and other founders or
employees hold Escrowed Performance Shares. Under the currently effective
Performance Share Modification Agreements dated December 30, 1996, 5% of the
original 5,776,700 Performance Shares were released on June 22, 1997, 5% on June
22, 1998 and 10% on June 22, 1999, and the remainder of the Performance Shares
are scheduled to be released automatically as follows: 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 revised arrangement the performance shares will vest
if the individual holder has not voluntarily terminated his or her service with
us prior to the applicable vesting dates. Any individual who is involuntarily
terminated by us will be entitled to an automatic acceleration of

7
<PAGE> 11

the unvested performance shares. The Board, in its discretion, may allow an
individual who has voluntarily terminated his or her services with us to retain
a portion or all of any unvested performance shares.

WE DO NOT INTEND TO PAY DIVIDENDS.

We have not paid any cash dividends on our Common Stock and have no present
intention of paying any dividends. Our current policy is to retain earnings, if
any, for use in operations and in the development of our business. Our future
dividend policy will be determined from time to time by the Board of Directors.

However, holders of our Series B 10% Redeemable Convertible Preferred Stock
are entitled to a 10% per annum cumulative dividend, payable only out of assets
legally available. Holders of our Series B Preferred Stock are entitled to
dividends prior to any holders of our Common Stock or any subsequent series of
preferred stock which we may issue.

SINCE OUR SECURITIES ARE SUBJECT TO THE PENNY STOCK RULES, YOU MAY FIND IT MORE
DIFFICULT TO SELL OUR COMMON STOCK.

Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the SEC. Penny stocks
generally are equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or quoted on
Nasdaq provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system).

The penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in connection with the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. Our securities are presently subject to the penny stock
rules, and, as a result, investors may find it more difficult to sell their
securities.

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<PAGE> 12

USE OF PROCEEDS

Securities offered for resale hereunder are to be offered for the account
of the Selling Stockholders. We are not entitled to any of the proceeds of the
sale of any such securities, but we will pay the expenses of the filing of the
registration statement. We will receive the proceeds, in the ordinary course,
from any exercise of outstanding Options and Warrants and will apply those
proceeds to general corporate purposes. If all outstanding Options and Warrants
registered herein are exercised, we will receive proceeds of approximately $2.4
million.

OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our Common Stock was listed and commenced trading on the NASDAQ SmallCap
market on August 21, 1995 under the symbol "SPAZ". In January 1999, the shares
were delisted by the NASDAQ SmallCap Market due to our inability to maintain
listing requirements. Our Common Stock immediately commenced trading on the OTC
Bulletin Board under the same symbol. The following table sets forth the high
and low sales price of our Common Stock on its principal market for fiscal years
1998 and 1999:

<TABLE>
<CAPTION>
PERIOD HIGH (U.S.$) LOW (U.S.$)
------ ------------ -----------
<S> <C> <C>
1998
First Quarter............................... $2.88 $1.00
Second Quarter.............................. $1.56 $0.56
Third Quarter............................... $0.75 $0.19
Fourth Quarter.............................. $0.25 $0.06
1999
First Quarter............................... $0.44 $0.08
Second Quarter.............................. $0.36 $0.08
Third Quarter............................... $0.90 $0.20
Fourth Quarter.............................. $0.96 $0.26
</TABLE>

On March 31, 2000, the closing price reported by NASDAQ was U.S. $1.81.
Stockholders are urged to obtain current market prices for our Common Stock.
Beginning April 1, 1997, Harris Trust Company of California has been our
transfer agent.

To our knowledge there were approximately 125 holders of record of the
stock of the Company as of March 31, 2000. However, our transfer agent has
indicated that beneficial ownership is in excess of 3,300 shareholders.

DIVIDENDS.

We have not paid any cash dividends on our Common Stock, and we have no
present intention of paying any dividends. Our current policy is to retain
earnings, if any, for use in operations and in the development of our business.
Our future dividend policy will be determined from time to time by the Board of
Directors.

9
<PAGE> 13

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among other things,
those listed under "Risk Factors" and elsewhere in this prospectus.

In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. You should not place undue reliance on
these forward-looking statements.

10
<PAGE> 14

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1999
(assuming none of the currently outstanding Options or Warrants are exercised).

<TABLE>
<S> <C>
DEBT
Notes Payable............................................... $ 14,149
Notes Payable to Related Parties............................ 337,742
------------
Total Debt............................................. $ 351,891
STOCKHOLDERS' EQUITY
Preferred shares, $.01 par value, 1,000,000 shares
authorized, 102,967 shares Series B 10% Convertible
Preferred Stock Outstanding at December 31, 1999.......... $ 1,030
Common Stock, $.01 par value, 50,000,000 shares authorized
46,174,970 shares issued and outstanding at December 31,
1999...................................................... 461,750
Additional Paid-In Capital.................................. 45,913,503
Accumulated Deficit......................................... (45,608,146)
------------
Total Stockholders' Equity............................. 768,137
------------
Total Capitalization................................... $ 1,120,028
============
</TABLE>

11
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations", included in Item 7. The selected data presented below
under the headings "Consolidated Statement of Operations Data" and "Consolidated
Balance Sheet Data" as of and for the years ended December 31, 1996 and 1995,
are derived from the consolidated financial statements of Spatializer Audio
Laboratories, Inc. and subsidiaries, which consolidated balance sheets have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
selected financial data for the years ended December 31, 1999, 1998 and 1997 are
derived from the Company's consolidated financial statements which have been
audited by Farber & Hass LLP, independent public accountants.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995(1) 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATION
DATA:
Revenues........................... $ 1,230 $ 2,024 $ 2,781 $ 1,680 $ 1,660
Cost Of Revenues................... (79) (186) (230) (134) (49)
----------- ---------- ----------- ----------- -----------
Gross Profit....................... 1,151 1,838 2,551 1,546 1,611
Total Operating Expenses........... (4,403) (27,042)(2) (7,238) (3,490) (1,156)
Other Income (Expense), Net........ 74 119 27 (108) (94)
Loss from Discontinued
Operations....................... (3,702)
Income taxes....................... (63) (310) (60) (38) (6)
----------- ---------- ----------- ----------- -----------
Net Income (Loss).................. $ (3,241) $ (25,395)(3) $ (4,720) $ (5,792) $ 355
----------- ---------- ----------- ----------- -----------
Basic Income (Loss) Per Share(4)... $ (0.32) $ (2.01) $ (0.23) $ (0.29) $ 0.01
=========== ========== =========== =========== ===========
Diluted Income (Loss) Per
Share(4)......................... $ (0.32) $ (2.01) $ (0.23) $ (0.29) $ 0.01
=========== ========== =========== =========== ===========
Weighted Average Common Shares..... 10,156,816 12,644,751 20,604,095 22,180,180 33,805,512
=========== ========== =========== =========== ===========
CONSOLIDATED BALANCE SHEET DATA:
Cash and Cash Equivalents.......... $ 3,113 $ 1,587 $ 577 $ 264 $ 1,022
Working Capital (Deficit).......... 3,159 2,092 83 (1,975) 395
Total Assets....................... 4,420 4,141 3,165 893 2,118
Advances From Related Parties...... 325 113 113 857 337
Shareholders' Note Payable......... -- -- --
Total Shareholders' Equity
(Deficit)........................ $ 3,697 $ 3,268 $ 1,525 $ (1,553) $ 768
</TABLE>

- -------------------------
(1) A Plan of Arrangement was completed on July 27, 1994 whereby the situs of
the Company was moved to Delaware. Spatializer Audio Laboratories, Inc., a
Delaware corporation, became the parent company for Spatializer-Yukon and
DPI. The financial statements for this fiscal year reflect the consolidation
of all three entities.

(2) Includes two one-time significant changes. Compensation Expense of
$20,218,450 was recorded associated with the transfer of the Company's
performance shares from Canadian Escrow into a new escrow arrangement which
will provide for the release of the performance shares over six years. Based
on the revised escrow arrangement, which primarily converts the escrow
shares release from performance criteria to time-based criteria, the Company
recorded compensation expense on the date the new escrow arrangement terms
were accepted by the Company.

12
<PAGE> 16

Additionally, In-Process Research & Development ("IPR&D") expense of
$679,684 related to the allocation of costs was incurred as a result of the
MDT asset acquisition in June 1996.

(3) Loss per share has been calculated based on the weighted average number of
common shares outstanding including escrowed performance shares, which are
factored into the calculation as of December 30, 1996, the date on which the
British Columbia Securities Commission ("BCSC") issued its consent to the
Company's revised escrow arrangement.

(4) The Company incurred and paid Canadian income taxes in the amount of
$249,000 during the year associated with the liquidation of
Spatializer-Yukon, the Company's Canadian predecessor.

13
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis relates to the financial condition
and results of operations of Spatializer Audio Laboratories, Inc. and
subsidiaries (the "Company") for the year ended December 31, 1999 compared to
the year ended December 31, 1998, and the year ended December 31, 1998, compared
with the year ended December 31, 1997.

RESULTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1999, COMPARED TO THE YEAR ENDED DECEMBER 31,
1998

REVENUES

Revenues declined to $1,660,000 for the year ended December 31, 1999
compared to $1,680,000 for the year ended December 31, 1998, a decline of 1%.
Revenues include license issuance fees and royalties pertaining to the licensing
of Spatializer(R) audio signal processing designs and non-recurring engineering
fees.

The decrease in revenues is attributed primarily to the settlement in early
1998 of royalty claims from a licensee for which there was no comparable license
settlement in the current fiscal year, competitive market pricing pressure and
decreases in recurring royalties for the licensing of Spatializer audio
technology reflecting weakness in the Japanese 3-D audio market. This was
substantially offset by increases in royalties derived from digital signal
processing ("DSP") foundries and OEMs for the Company's N-2-2 technology and
royalty and engineering fees from a new licensee in 1999.

Gross profit increased to 98% in the year ended December 31, 1999 compared
with 92% for the comparable period last year. This increase reflects the impact
of the discontinuation of lower margin consumer products sales, and inventory
write-downs on the remaining consumer products inventory to market in 1998, for
which there was no comparable adjustment in 1999. The Company maintains a high
margin as the majority of revenues are from licensing and royalty activities,
which have little or no associated direct costs.

OPERATING EXPENSES

Operating expenses for the year ended December 31, 1999 decreased to
$1,156,000 from $3,490,000 for the year ended December 31, 1998, a decrease of
67%. The decrease in operating expenses result from the rationalization of
overhead, particularly with regard to the corporate office, implemented in late
September 1998, as part of the Company's strategic repositioning to focus
exclusively on its core audio business.

Based on this strategic refocusing, MDT is being treated as a discontinued
operation for accounting purposes. Operating expenditures in 1999 were minimal
and were accrued in the year ending December 31, 1998. Operating and wind down
expenses of MDT totaling $3,000,000 were excluded from 1998 operating expenses
and presented separately as a discontinued operation. Total operating expenses
of MDT for the year ended December 31, 1997 were $3,791,000.

GENERAL AND ADMINISTRATIVE

General and administrative costs decreased to $516,000 for the year ended
December 31, 1999 from $1,732,000 for the year ended December 31, 1998, a
decrease of 70%. The decrease is primarily due decreased payroll and
payroll-related costs primarily related to the downsizing of the corporate

14
<PAGE> 18

office as a result of overhead rationalizations implemented beginning in
September 1998. General operating costs include rent, telephone, office supplies
and stationery, postage, depreciation and similar costs.

RESEARCH AND DEVELOPMENT

Research and Development costs decreased to $383,000 for the year ended
December 31, 1999, compared to $756,000 for the year ended December 31,1998, a
decrease of 49%. The decrease in research and development expense was due to
headcount attrition and a delay in efforts to fill open positions until
additional working capital became available through the December Transactions.

In addition, the Company continued efforts to identify, validate, and
develop new product ideas at DPI. Specific engineering efforts were directed
toward porting support of N-2-2(TM) -- Digital Virtual Surround technologies to
current and potential licensees during the year and toward development of
StreamFX, an Internet audio enhancement product and Vi.B.E., a virtual bass
enhancement technology.

SALES AND MARKETING

Sales and marketing costs decreased to $257,000 for the year ended December
31, 1999, compared to $1,002,000 for the year ended December 31, 1998, a
decrease of 73%. The decrease results from headcount reductions effected in
September 1998 and suspension of public relations, formal trade show
participation and advertising efforts until the additional working capital
became available through the December Transactions.

LOSS ON DISCONTINUED OPERATION

There was no loss on discontinued operation in the year ended December 31,
1999, compared to a loss on discontinued operation of $3,702,000 for the year
ended December 31, 1998. Expenditures for MDT were minimal in fiscal 1999 and
were accrued in the year ended December 31, 1998. Loss on discontinued operation
was comprised of the reclassification of $2,847,000 of the net MDT expenses and
valuation adjustments of $855,000. The net expense primarily represented general
and administrative, sales and marketing and research and development expenses
for the period January 1 through September 30,1998. The Board of Directors
announced the discontinued operation of MDT on September 25, 1998 and had
preliminary indications from its banker and potential buyers that the sale of
MDT's assets would not result in a loss to the Company. However, since no
transaction had been consummated for the MDT assets as of the date on which the
Company filed its annual report Form 10-K in April 1999, the Company elected to
reserve for the contingency.

NET INCOME (LOSS)

Net Income increased to $355,000 for the year ended December 31, 1999,
compared to a net loss of $5,792,000 for the year ended December 31, 1998, an
increase of 103%. The improvement for the period is primarily the result of
overhead rationalization and corporate refocusing which began its implementation
in September 1998 and the wind down costs of MDT in 1998, for which there were
no such expenses in the current fiscal year.

15
<PAGE> 19

FOR THE YEAR ENDED DECEMBER 31, 1998, COMPARED TO THE YEAR ENDED DECEMBER 31,
1997

REVENUES

Revenues declined to $1,680,000 for the year ended December 31, 1998
compared to $2,781,000 for the year ended December 31, 1997, a decline of 40%.
Revenues include license issuance fees and royalties pertaining to the licensing
of Spatializer(R) audio signal processing designs and the sales of professional
recording systems and consumer products.

The decrease in revenues is attributed primarily to decreases in recurring
royalties for the licensing of Spatializer audio technology reflecting
competitive market pricing pressure, the discontinuation of consumer product
sales, as well as the signing in late 1997 of a flat fee license agreement for
which there was no comparable license agreement in the current fiscal year and
weakness in the Asian market.

Gross profit was unchanged at 92% in the year ended December 31, 1998
compared with 92% for the comparable period. This increase reflects the impact
of the discontinuation of lower margin consumer products sales, partially offset
by inventory write-downs ($86,000) on the remaining consumer products inventory
to market. The Company maintains a high margin as the majority of revenues are
from licensing and royalty activities, which have little or no associated direct
costs.

OPERATING EXPENSES

Operating expenses from continuing operations for the year ended December
31, 1998 decreased to $3,490,000 from $7,238,000 for the year ended December 31,
1997, a decrease of 51%. The decrease in operating expenses resulted primarily
from the reclassification of certain MDT expenses as discontinued operation and
higher technology demonstrator development expense in 1997.

Based on the corporate strategic refocusing, MDT is being treated as a
discontinued operation. Operating expenses of MDT of approximately $2,800,000
have been excluded from operating expenses and presented separately as a
discontinued operation. Total operating expenses of MDT for the year ended
December 31, 1997 were $3,791,000.

GENERAL AND ADMINISTRATIVE

General and administrative costs decreased to $1,732,000 for the year ended
December 31, 1998 from $2,174,000 for the year ended December 31, 1997, a
decrease of 20%. The decrease is primarily due to the reclassification of MDT
expenses of $511,000 to discontinued operations, partially offset by a provision
of $100,000 for corporate restructuring. General operating costs include rent,
telephone, office supplies and stationery, postage, depreciation and similar
costs.

RESEARCH AND DEVELOPMENT

Research and Development costs decreased to $756,000 for the year ended
December 31, 1998, compared to $3,708,000 for the year ended December 31,1997, a
decrease of 79%. The decrease in research and development expense was due to
headcount attrition and a delay in efforts to fill open positions until the
additional working capital became available through the December Transactions.

In addition, the Company continued efforts to identify, validate, and
develop new product ideas at DPI. Specific engineering efforts were directed
toward porting support of N-2-2(TM) -- Digital Virtual Surround technologies to
current and potential licensees during the year, simplified low cost 3-D stereo
solutions and toward enCompass, a true interactive, real-time 3-D audio
positioning technology.

16
<PAGE> 20

SALES AND MARKETING

Sales and marketing costs decreased to $1,002,000 for the year ended
December 31, 1998, compared to $1,356,000 for the year ended December 31, 1997,
a decrease of 26%. The decrease is primarily due to the reclassification of MDT
expenses of $531,000 to discontinued operations, partially offset by an
expansion in DPI sales personnel, travel and international sales representative
expenses.

LOSS ON DISCONTINUED OPERATION

Loss on discontinued operation was $3,702,000 for the year ended December
31, 1998. There was no comparable loss in the prior year. Loss on discontinued
operation is comprised of the reclassification of $2,847,000 of the net MDT
expenses and valuation adjustments of $855,000. The net expense represents
primarily general and administrative, sales and marketing and research and
development expenses for the period January 1 through September 30,1998. The
Board of Directors announced the discontinued operation of MDT on September 25,
1998 and had preliminary indications from its banker and potential buyers that
the sale of MDT's assets would not result in a loss to the Company. However,
since no transaction has been consummated for the MDT assets as of this filing
date, the Company has elected to reserve for this contingency.

NET LOSS

The net loss increased to $5,792,000 for the year ended December 31, 1998,
compared to $4,720,000 for the year ended December 31, 1997, an increase of 22%.
The increased net loss for the period is primarily the result of wind down costs
at the Company's discontinued operation, MDT, and lower revenues of DPI,
partially offset by significantly lower technology demonstrator development
compared with the prior year.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, we had $1,022,000 in cash and cash equivalents as
compared to $264,000 at December 31, 1998. The increase in cash and cash
equivalents is attributed to cash provided by the issuance of 1,884,254
additional shares of Common Stock ($1.05 million in new capital from the
December Transaction), and cash provided by other operating activities. We had
working capital of $395,000 at December 31, 1999 as compared with a working
capital deficit of $1,975,000 at December 31, 1998. Our future cash flow will
come primarily from the audio signal processing licensing business',
semiconductor foundries ("Foundries") and, OEM royalties and common stock
issuances including warrant and option exercises. At December 31, 1999 we had
six Foundry licensees, seventy-six OEM Licensees and fourteen authorized
customers for its audio signal processing business as compared with six Foundry
licensees and seventy-three OEM Licensees and eight authorized customers at
December 31, 1998. We are actively engaged in negotiations for additional audio
signal processing licensing arrangements which will generate additional cash
flow without imposing any substantial costs on the Company.

We have related party obligations of $225,000, convertible into Common
Stock at our or Debtee's option. The obligation matures in June 2001. The
Company owed $337,700 to related parties as of December 31, 1999 and $857,500 at
December 31, 1998.

17
<PAGE> 21

On November 12, 1998, the Compensation Committee of the Board of Directors
re-priced qualified stock options to purchase 100,000 shares of common stock
granted to an employee in March 1998. The exercise price for these options was
adjusted to $0.125 per share (the closing market price on November 12, 1998)
reducing the grant date exercise price from $1.18 per share. The vesting
schedules and expiration dates for these options were not modified.

On April 14, 1998, we entered into a private placement for up to $5 million
of which $3 million was funded. In connection with the private placement, the
Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred
Stock at a stated price of $50 per share and issued 60,000 shares for $3
million. In connection with the April funding, we issued purchase 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, 450,000 were
issued and 150,000 warrants were issued to placement agents. The investor
warrants are exercisable at 140% and the placement warrants are exercisable at
120%, respectively, of the average closing bid price of our common stock for the
10 days preceding the closing. In addition, cash placement fees of 10% were
paid. A related party received 50,000 of the placement agent warrants and
$100,000 of the placement agent cash fee for arranging $1 million of the $3
million investment. We do not expect any additional investment above the initial
$3 million to be received under this placement. At December 31, 1999, 60,000
shares of Series A Convertible Preferred Stock, representing the entire
placement had been converted into a total of 30,517,943 shares of our Common
Stock, some of which are covered by this Registration Statement and the balance
of which were issued as restricted shares.

On September 25, 1998, we announced that our Board of Directors was
refocusing our business on the exploitation of its audio technologies, and, as
noted above, to properly position the MDT assets for sale. In reaching its
decision of September 25, 1998, we indicated that while we recognized the
prospects of MDT, the capital investment required to properly commercialize the
technology was beyond our capacity and, therefore, we made the decision to seek
a sale transaction. Effective as of that date, Steven D. Gershick resigned as
chief executive officer of the Company and as president of MDT, but continued to
serve as chairman of the board and director of the Company until February 10,
2000. Henry R. Mandell, who joined the Company in March, 1998 as senior vice
president finance, chief financial officer was designated as interim chief
executive officer to oversee all of the corporate activities. Michael Bolcerek
resigned as president of DPI. Mr. Mandell was elected as a director by the
stockholders on February 10, 2000 and also was designated chief executive
officer and chairman of the board on that date.

We responded to inquiries from NASDAQ and attended a hearing with respect
to its continued listing on October 29, 1998 at which time we outlined our
strategy for continued listing. In November, 1998, NASDAQ provided us with an
extension and conditional listing until December 31, 1998 to provide evidence of
compliance with all requirements for continued listing. On December 31, 1998, we
informed NASDAQ that we would be unable to comply with these requirements. On
January 5, 1999, our common stock was delisted from the NASDAQ SmallCap Market
and, on the same day, commenced trading on the NASD OTC Bulletin Board under the
symbol "SPAZ".

In December 1999, we completed a set of financial transactions (the
"December Transactions") with certain existing holders of our equity and debt
and with new institutional investors. The December Transactions included the
private placement of 1,884,254 additional shares of our Common Stock ($1.05
million in new capital or $0.55725 per share), the issuance of warrants to
acquire 2,100,000 shares of Common Stock exercisable for three years at an
exercise price of $.67 per share), the cancellation of 500,000 warrants to
acquire Common Stock issued in that earlier financing, the conversion of $1
million of short term debt into a new Series B Redeemable Convertible Preferred
Stock ("Series B Preferred Stock") and the conversion of $225,000 of secured
debt into secured convertible debt.

18
<PAGE> 22

In the December Transactions, $895,000 in short term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10 day average closing
bid price prior to the conversion, but subject to a minimum conversion of $.56
per share and a maximum of $1.12 per share. We have a three year option to
redeem any Series B Preferred Stock, not sooner converted, in whole or in part,
in cash.

In the December Transactions, $225,000 of secured debt, including accrued
interest, was converted into secured long term convertible debt. The long term
debt is held by existing institutional investors and is secured by essentially
all of our assets. The debt, and accrued interest, is convertible at our or the
holder's options into registered Common Stock at a conversion price equal to the
average 10 day closing bid price prior to conversion but subject to the same
minimum and maximum conversion prices set for the Series B Preferred Stock.

The streamlining and downsizing of our operations in 1998, coupled with
additional audio licensing revenues and the new capital in the December
Transactions, have stabilized our operations, strengthened our balance sheet and
restored working capital and shareholders equity. This liquidity, coupled with
improved revenues from audio licensing initiatives, has allowed us to emerge
from a turnaround operating mode and to begin to pursue a growth strategy. While
we continue to seek an arrangement that will allow us to recoup some portion of
the MDT investment, no positive opportunities have developed. We intend to focus
on the expansion and support of our audio efforts. Management anticipates that
liquidity from the December Transactions, along with our operating revenues,
will be sufficient to meet Company requirements for at least the next twelve
months.

Funds generated by these financing activities as well as cash generated
from the Company's existing operations is expected to be sufficient for us to
meet our operating obligations and the anticipated additional research and
development for its audio technology business.

NET OPERATING LOSS CARRYFORWARDS

At December 31, 1999, we had net operating loss carryforwards of
$26,000,000 for income tax purposes. Our ability to utilize approximately
$900,000 of these tax losses which accrued during 1994 against future income may
be restricted as a result of the change in year-ends to December 31, 1994. The
net operating loss carryforwards expire through 2012.

INFLATION

We believe that the moderate inflation rate of the 1990's has not impacted
our operations.

YEAR 2000

We are aware that many computer software programs may not currently be
designed to properly handle the system date change after December 31, 1999. We
have addressed this contingency with our computer consultants and have upgraded
our software programs in 1998, the cost of which was approximately $15,000. We
have not experienced any Year 2000 problems as of this filing date.

THE ASIAN ECONOMIC CRISIS

Approximately 51% of our revenues for the year ended December 31, 1999 were
derived from foundries and OEM's based in Japan and other Asian countries. We
believe that the relatively

19
<PAGE> 23

moderate level of our Asian business, and the concentration of this Asian
business with Matsushita Electronics Corporation, Toshiba Corporation, Samsung
and LG Electronics which comprised 85% of revenues generated from Asian
customers, has resulted in some impact on revenues and profitability.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did
not have a material impact on the financial statements.

In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. We are required to adopt SOP 98-5
for the year ended December 31, 1999. The adoption of SOP 98-5 is not expected
to have a material impact on our consolidated financial statements.

The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective date of FASB Statement No.
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative instruments
be reported as assets or liabilities and measured at their fair values. Under
SFAS 133, changes in the fair values of derivative instruments are recognized
immediately in earnings unless those instruments qualify as hedges of the (1)
fair values of existing assets, liabilities, or firm commitments, (2)
variability of case flows of forecasted transactions, or (3) foreign currency
exposures on net investments in foreign operations. We are required to adopt
SFAS No. 133 for the quarter ended September 30, 2000. The adoption of SFAS No.
133 is not expected to have a material impact on our consolidated financial
statements.

The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and presentations of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all changes in
members' equity, except those arising from transactions with members, and
includes net income and net unrealized gains or losses on securities. There is
no impact on our financial statements as a result of the implementations of SFAS
No. 130. The Company adopted FAS No. 130 in the first quarter of fiscal year
ended December 31, 1998.

20
<PAGE> 24

BUSINESS

We are a leading developer, licensor and marketer of next generation audio
technologies for the consumer electronics, personal computing, enterprise
computing and entertainment industries. Our position as a leading developer of
next generation technologies is based on our strong relationships with brand
leaders, such as Apple, Toshiba and Matsushita. We conduct our audio business
through our parent company and our wholly owned subsidiary, DPI. DPI has
developed a full complement of patented and proprietary 3-D or virtual audio
signal processing technologies directed to the consumer electronics and
multimedia PC markets. We continue to expand our product offerings to take
advantage of the emerging digital audio marketplace specifically for consumer
products like DVD for personal computers, and home entertainment; and
interactive positional audio for PC gaming on the Windows 95/98/00(TM)
platforms.

We are focused on broadening recognition for the Spatializer(R) brand name
through association with these and other globally recognized consumer
electronics and multimedia computer brand leaders, and on broadening our audio
technology and software base to position ourselves for continued growth. We
believe that with the accelerating growth in the digital audio/video
marketplace, the market for virtual audio technologies, and therefore for our
products, is entering a new phase of opportunity.

Our other wholly owned subsidiary, MDT, formed in June 1996 when we
acquired development stage optical disc storage and robotics assets and
technologies from Home Theater Products, International, Inc., a debtor in
possession, is now inactive. In September 1998, we announced our plan to refocus
our business on the exploitation of our core audio technologies, suspend
research and development at MDT and to properly position the MDT assets for
sale. Therefore, MDT has been accounted for as a discontinued operation. Since
1998 we have been unsuccessful in identifying a purchaser for this technology.
This repositioning strategy recognized that the capital investment required to
properly commercialize the MDT technology was beyond our current capacity. We
believe this strategy provides a better opportunity to further solidify our
position as a leading provider of virtual audio solutions, based on available
capital resources.

DESPER PRODUCTS, INC. -- 3-D AUDIO SIGNAL PROCESSING TECHNOLOGIES

DPI has developed a suite of proprietary advanced audio signal processing
technologies for the entire spectrum of applications falling under the general
category of "3-D" or virtual audio. The objective in each product category is to
create or simulate the effect of a multi-speaker sonic environment using two
ordinary speakers (or headphones) for playback. The market for 3-D audio is
segmented into five broad categories of technology as identified in the listing
below. Each of these technologies utilizes different underlying scientific
principles in accomplishing its design objectives and is targeted to a specific
class of consumer electronics or multimedia computer depending on the intended
product use and functional capability of the product. DPI currently has other
audio signal processing technologies under development which will serve to
expand its market scope and partner product capabilities.

21
<PAGE> 25

<TABLE>
<CAPTION>
CATEGORY OF TECHNOLOGY PRODUCT CATEGORIES 3-D AUDIO ENHANCEMENT
---------------------- ------------------ ---------------------
<S> <C> <C>
3-D Stereo (Spatializer(R)3-D Consumer electronics products Surround Sound enhancement from
Stereo) providing stereo playback -- DVD an ordinary stereo signal
Players, Stereo TV's, VCR's,
Stereo Components and Systems,
Car Audio, Laptop and Desktop
Multimedia Computers, Set-top
Boxes
Positional Audio (Spatializer Interactive Gaming for Multimedia Simulation of immersive,
enCompass(TM) V2.0) Computers under Windows '95/'98, interactive sonic environments
Virtual Reality Applications including sound objects that move
in real time with related
graphics objects or changes in
game player position or
perspective.
Two-Speaker Virtualization Products incorporating Creation of spatially accurate
(Spatializer N-2-2(TM)) Digital multi-channel audio sources like multi- speaker cinematic audio
Virtual Surround Dolby Digital(R) (AC-3), Dolby experience from two speakers, and
ProLogic(R) or MPEG-2. Home headphones utilizing discrete
Theater, DVD-Video, Multimedia multi-channel audio information.
Computers utilizing DVD/MPEG and
decoding.
Bass Enhancement (Vi.B.E.(TM)) Consumer electronics products Simulation of lower frequency
providing stereo playback -- DVD response from speakers with
Players, Stereo TV's, VCR's, relatively high low frequency
Stereo Components and Systems, capability
Car Audio, Laptop and Desktop
Multimedia Computers and Speakers
Internet Audio Enhancement Laptop and Desktop Multimedia Surround Sound and bass
(Spatializer(R)StreamFX(TM)) Computers and portable music enhancement to playback of
devices running MP3 media player ordinary MP3 files
software
</TABLE>

LICENSED PRODUCTS

Our current technology product applications are directed to (1) stereo
enhancement in consumer electronics products and multimedia PCs, (2) interactive
positional audio for PC gaming, and (3) two-speaker and headphone virtualization
of multi-channel audio for DVD based multimedia computer and home theater
applications.

1. Spatializer(R) 3D Stereo. Based upon proprietary and patented methods of
stereo signal processing, the Company's Spatializer(R)3-D Stereo technology
is designed to create a vivid and expansive three-dimensional surround
sound listening experience from any stereo source input using only two
ordinary speakers. Along with professional audio quality and coherent
stable sonic imaging, the technology includes the Company's unique DDP(TM)
(Double Detect and Protect(TM)) algorithm. DDP(TM) continuously monitors
the underlying stereo signal and dynamically optimizes spatial processing,
avoiding deleterious sonic artifacts common in other systems and provides
"set and forget" ease of use for consumers. First introduced in July 1994,
in the form of a 20 pin analog integrated circuit (IC) from Matsushita
Electronics Corporation ("MEC"), the technology is now incorporated into
low-cost, standard process ICs by four chip foundries (Matsushita, ESS
Technologies, Inc., OnChip Systems and Luxsonor) for easy and inexpensive
implementation in any consumer electronics or computer products utilizing
stereo audio. The technology is currently available in both analog and
digital formats. Matsushita introduced a new Spatializer IC design in 1999,
offering the Spatializer 3-D Stereo effect in a simplified, lower cost
package.

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<PAGE> 26

2. Spatializer(R) enCOMPASS(TM) V2.0. In March 1998, we introduced
Spatializer(R) enCOMPASS(TM) V2.0, a real-time software-only positional 3-D
audio engine based upon our proprietary implementation of HRTF (head
related transfer functions) algorithms, and Interaural Intensity and
Interaural Time differences. Version 2.0 has variable radiation pattern
models for greater sound functionality, variable frequency dependent
propagation and distance modeling to provide greater depiction of sound in
relation to the player, and a choice of rendering quality levels to address
different processing requirements between PC CPUs. Spatializer enCOMPASS
permits PC game developers to easily create immersive and interactive audio
environments under the Windows '95 DirectSound 3-D audio API where sound
objects move in real time in response to changes in the location or the
perspective of the player in the game. This provides the game designer the
ability of developing under the industry standard Microsoft DirectSound 5.0
open API, rather than under proprietary systems. The system supports
playback over speakers or through headphones. On December 23, 1998, the
Company signed its first license of Spatializer(R) enCOMPASS(TM)with Apple
Computer, Inc., which released the technology in its products in October
1999.

3. Spatializer(R) N-2-2(TM) Digital Virtual Surround. In September 1996,
DPI introduced Spatializer N-2-2, which the Company considers a "core", and
"enabling" technology for DVD based personal computer and home theater
products. DVD is considered by many to be the single most important and
potentially most widely adopted consumer audio/computer technology ever
introduced. The audio standards for DVD (based upon geographic region) are
multi-channel audio formats (Dolby Digital(R) (AC-3) and MPEG-2) which
carry six (or more) discrete (independent) channels of audio -- the front
left and right channels, a center channel (for vocal tracks), two rear
surround channels and a Low Frequency Effects (LFE or "sub-woofer") channel
for sound effects. The Spatializer N-2-2 software-based algorithms permit
spatially accurate reproduction of this multi-channel audio over any
ordinary stereo system using two rather than the five or six speakers
normally required in traditional home theater setups. Spatializer N-2-2
runs in real-time on general purpose DSP hardware platforms like those
offered by C-Cube, Acer Labs, Inc., Motorola, and Zoran; may be integrated
with host based software-only MPEG-2 or DVD decoders (like SoftDVD and
DVDExpress, offered by CompCore Multimedia and Mediamatics, respectively,
for the Intel(R)Pentium(R) microprocessors); and can be ported to any of
the principal audio codecs or media processor/accelerator platforms
performing Dolby Digital (AC-3) or MPEG-2 audio decoding. N-2-2 has been
approved by Dolby Laboratories and qualifies Spatializer licensees to use
the newly created Dolby Digital VIRTUAL(TM) trademark on products
incorporating the technology. We believe our Spatializer N-2-2 process will
serve to widen and accelerate the market for DVD acceptance, because it
delivers the full cinematic audio experience to ordinary consumers without
the additional expense and complication of multi-speaker home theater
playback systems. The Spatializer N-2-2 technology is also available for
use over headphones, which accurately renders a spatially accurate 5
speaker position simulating the typical home theater arrangement. In the
third quarter 1999, we licensed Spatializer N-2-2 to Acer Labs, Inc.

4. Spatializer(R) Vi.B.E. In early 1999, DPI introduced Spatializer
Vi.B.E., a virtual bass enhancement technology. Spatializer Vi.B.E.
produces a dynamic bass response from even the lowest-end speakers or
headphones. Spatializer Vi.B.E. uses proprietary technology to generate
realistic virtual bass frequencies that are unaffected by speaker system
frequency response.

5. Spatializer(R) StreamFX. Spatializer StreamFX creates a dramatic and
enveloping sound experience out of any pair of regular speakers or
headphones when playing MP3 music files. Spatializer StreamFX utilizes
Spatializer 3-D Stereo and is a long-time favorite of both movie and sound
studios in addition to numerous audio product manufacturers. Combined with
Vi.B.E.,

23
<PAGE> 27

this product widens and deepens the soundfield to surround the listener
with rich and ambient enhanced audio. A headphone option generates the same
equally immersive experience over headphones creating a dramatic audio
experience.

LICENSING ACTIVITIES

We have traditionally licensed our technologies through semiconductor
manufacturing and distribution licenses ("Foundry Licenses") with Foundries. In
turn, these Foundries manufacture and distribute ICs incorporating Spatializer
technology to OEMs.

The terms of the Foundry Licenses are negotiated on an individual basis
requiring the payment of a per unit running royalty according to sliding scales
based upon cumulative volume. Certain of the licenses call for the payment of an
up-front license issuance fee either in lieu of, or in addition to the running
royalty. Per unit royalties are payable in the quarter following shipment from
the Foundry to the OEM.

OEMs who desire to incorporate these ICs into their products are required
to enter into a license ("OEM Licenses") with us before they may purchase the
ICs in quantity. Foundry Licenses generally have limited the sale of Spatializer
ICs to OEMs who have entered into an OEM License with us. OEM licenses generally
provide for the payment of a further per unit royalty by the OEM for OEM
products incorporating a Spatializer IC ("Licensed Products") payable in the
quarter following shipment by the OEM of its Licensed Products.

In mid-1996, we modified our licensing program to ease the licensing
process and accelerate cash flow by offering Foundries an alternative "Bundled
Royalty" arrangement which permits the IC foundry to make a traditional
component IC sale to an OEM without requiring the OEM to negotiate a separate
royalty license agreement with the Company. In these situations, the IC Foundry
is authorized to sell Spatializer ICs to OEMs, which enter into a simplified
Logo Usage Agreement ("LUA"), or to be authorized customers in consideration for
a higher ("bundled") per unit royalty from the IC Foundry. This license
structure has relieved much of the licensing burden from the IC foundries and
has resulted in an increase in License signings.

Because the Spatializer N-2-2 technology may be fully implemented in
software to run in host based (Intel Pentium(R)) or general purpose DSP (C-Cube,
Motorola, Zoran, and Acer Labs) environments, no IC Foundry may be involved, as
is the licensing arrangement with Apple Computer, Inc. In these situations, we
will enter into royalty bearing licenses directly with the OEM. However, we may
still pursue bundled agreements with DSP providers, if appropriate.

We are currently negotiating new IC/DSP Foundry and OEM licenses for its
N-2-2, enCOMPASS V2.0, and 3-D stereo technologies.

IC FOUNDRY LICENSES

In October 1999, Acer Labs, Inc. entered into a Foundry License for
Spatializer N-2-2. As of December 31, 1999, we have entered into six
non-exclusive Foundry Licenses for its 3-D Audio Signal Processing technologies
with Matsushita Electronics Corporation ("MEC"), ESS Technology, Inc. ("ESS"),
OnChip Systems, Inc. ("OnChip") C-Cube Technologies, Inc. ("C-Cube") Acer Labs,
Inc. ("Ali") and Luxsonor. Foundry Licenses generally require the payment of per
unit running royalties based upon a sliding scale computed on the number of
Spatializer ICs or DSPs sold.

MEC currently manufactures and sells four 3-D Stereo IC's incorporating
Spatializer audio signal processing and has several more ICs in design. ESS
currently manufactures and sells two Spatializer(R) ICs, which are primarily
used for multimedia and notebook applications. OnChip

24
<PAGE> 28

currently manufactures three versions of the 3-D Stereo Spatializer(R) IC.
C-Cube currently incorporates N-2-2 on their Ziva-3 DSP and Ali incorporates
N-2-2 into their M3321 DSP.

As of December 31, 1999, more than 17 million ICs and DSPs incorporating
Spatializer 3-D audio signal processing and N-2-2 digital virtual surround sound
technology had been manufactured and sold.

OEM LICENSEES AND CUSTOMERS

As of December 31, 1999, our technology has been incorporated in products
offered by over 90 separate OEM Licensees and customers on various economic and
business terms. Some of these OEM Licenses required a license issuance fee
and/or a separate per unit royalty, while others were licensed under the LUA or
were authorized customers under bundled royalty licenses with the IC foundries.
The OEM licensees and customers offer a wide range of products, which include
DVDs, car stereo systems, direct view TVs, wide screen and projection TVs, VCRs,
powered speakers, portable audio systems ("Boomboxes"), HiFi stereo systems and
components, computer sound cards and graphics accelerator cards, multimedia
desktop personal computers, notebook computers, LCD projectors, multimedia
computer monitors, and arcade pinball and video games.

The following table is a partial list of the OEM Licensees and authorized
customers as of December 31, 1999:

<TABLE>
<CAPTION>
PARTIAL LIST OF OEM LICENSEES OR CUSTOMERS
------------------------------------------
<S> <C>
Apple, Computer Inc NEC
Compaq Computer Corp. Panasonic TV & VCR (Matsushita Kotobuki
Dell Computer Corp. Electronics Industries, Ltd.)
Digital Technology Systems Of California, Panasonic Car Audio (Matsushita
Inc. Communications Industrial Co., Ltd.)
Emerson Proton Electronic Industrial Co., Ltd.
Fujitsu Computer Corp. Samsung
Hewlett Packard Seiko Epson Corp.
Hitachi, Ltd. Sanyo Corp.
Iiyama Electric Co., Ltd. Sharp Corp.
Gateway Computer Corp. Toshiba DVD
Golden Regent Toshiba TV
LG Electronics Taisei Electric, Inc.
JVC Taiyo Electric Company, Ltd.
Labtec Enterprises, Inc. Texas Instruments
Mag Monitors Theta Digital
Marantz VM Labs, Inc.
Micron Computer Corp Zenith
Mitsubishi Image and Information Works
</TABLE>

HARDWARE PRODUCTS

Sales of our professional and consumer hardware products to date have not
generated significant revenues and we do not plan to manufacture these products
in the future. Instead, we are focusing our attention on licensing these product
designs to third parties and concentrating on software-only products and
"plug-ins" for use with MP3 players for PC platforms and portable audio devices.

25
<PAGE> 29

MULTIDISC TECHNOLOGIES, INC. -- NETWORK BASED MODULAR, SCALEABLE COMPACT
DISC/DVD SERVERS

As our first effort to broaden our technology portfolio and capitalize on
our strong relationships with manufacturers of consumer electronics and personal
computer peripheral products, we acquired certain developmental stage
technologies and assets from Home Theatre Products ("HTP"), for approximately
$1,062,000 in June 1996 and formed a subsidiary, MDT. The MultiDisc transaction,
which was implemented through a court-approved sale in the HTP bankruptcy
proceeding, included an array of compact disc server robotics and software
technologies in various stages of completion. The MDT transaction was intended
to position us for long term growth in a significant new market. We expected to
license this technology or enter into third party manufacturing arrangements for
sale of MDT CD/DVD changer products to OEMs.

On September 25, 1998, we announced our plan to refocus our business on the
exploitation of its core audio technologies and to properly position the MDT
assets for sale. The repositioning strategy recognized that the capital
investment required to properly commercialize the MDT technology was beyond the
Company's capacity. As a result, all research and development activities were
suspended and the Company has accounted for MDT as a discontinued operation. The
Company has explored the sale of the business or the patent portfolio with
interested parties, but to date, no transaction has been consummated.

REVENUES AND EXPENSES

We generate revenues in our audio business from royalties pursuant to our
Foundry, OEM, and other licenses, and from non-recurring engineering fees to
port our technologies to specific licencees' applications. Our revenues, which
totaled $1,660,371 in 1999, were derived substantially from Foundry and OEM
license fees and royalties.

We seek to maximize return on our intellectual property base by
concentrating our efforts in very high margin licensing and software products
and have eliminated our hardware product operations. Licensing operations have
been managed internally by our personnel and through use of an international
sales rep force.

We had four major customers, C-Cube Technologies, Inc., Apple Computer,
Inc., Matsushita Electronics Corp. (MEC) and Toshiba Corporation in 1999, each
of whom accounted for greater than 10% of our total 1999 revenues. One OEM
accounted for 30%, another accounted for 26% and two accounted for between 10%
and 15% of our royalty revenues during 1999. All other OEM's accounted for less
than 10% of royalty revenues individually.

In September, 1998, the U.S. Court of Appeals for the Federal Court upheld
the U.S. District Court's ruling of August 1996, in which we prevailed in a
22-month legal battle over our 3-D Stereo intellectual property when the U.S.
District Court granted our motion for summary judgment against a competitor's
assertions of patent infringement. (See ITEM 3 -- LEGAL PROCEEDINGS, Page 8, for
further detail). The uncertainties caused by the patent litigation had hindered
our corporate results, particularly since licensing revenue depends upon OEM
unit shipments, which follow three to four quarter production cycles. The
resolution of this litigation contributed to our ability to attract new
licensing and financing arrangements and to reposition ourselves for positive
growth in profitability.

26
<PAGE> 30

In September 1998, we implemented cost cutting measures in conjunction with
the suspension of our research and development activities at MDT and to further
rationalize the overhead of DPI and the corporate office in response to lower
levels of operating performance. The result of these initiatives was to reduce
1999 operating costs from 1998 levels, which enabled us to achieve profitable
operating results in 1999.

COMPETITION

3-D AUDIO SIGNAL PROCESSING MARKETPLACE

We compete with a number of entities that produce various audio enhancement
processes, technologies and products, some utilizing traditional two-speaker
playback, others utilizing multiple speakers, and others restricted to headphone
listening. These include the consumer versions of multiple speakers, matrix and
discrete digital technologies developed for theatrical motion picture exhibition
(like Dolby Digital(R), Dolby ProLogic(R), and DTS(R)), as well as other
technologies designed to create an enhanced stereo image from two or more
speakers.

Our principal competitors in the field of 3-D audio are QSound Labs, Inc.
("QSound"), SRS Labs, Inc., Aureal Semi-conductor, Inc., CRL and Harman
International. In the future, our products and technologies also may compete
with audio technologies and product applications developed by other companies
including entities that have business relationships with us.

We believe that we will favorably compete in this market because we offer a
single source, complete suite of patented and proprietary 3D Stereo, interactive
positional, and speaker virtualization technologies, and because of our superior
engineering and OEM support, the strength of our IC Foundry and OEM
relationships, and the Spatializer(R) brand name recognition in the industry.

PATENTS, TRADEMARKS AND COPYRIGHTS

Our core Spatializer audio signal processing technology is covered by our
U.S. patent 5,412,731, issued May 2, 1995. On July 15, 1997, the Company filed a
patent in the U.S. Patent office on our N-2-2(TM) intellectual property with the
U.S. Patent Office. On March 20, 1998, we filed a patent on our enCompass V 2.0
positional audio gaming technology with the U.S. Patent Office. Additional
patent applications for our reduced cost/higher performance 3-D Stereo designs
and other technologies are currently in process. Much of our intellectual
property consists of trade secrets. We possesses copyright protection for our
principal software applications and have U.S. and foreign trademark protection
for our key product names and logo marks.

The MDT transaction brought a unique combination of proprietary
electromechanical designs, robotics, operating software, firmware, intellectual
property, and engineering know-how and five patent applications acquired in the
asset acquisition. MDT added an additional forty-seven patent applications filed
with the United States Patent & Trademark Office ("USPTO") to bring the total to
fifty-two patent applications filed. However, due to the suspension of all
operating activities of MDT, we are not pursuing these applications and some
applications have lapsed. The core MDT data storage technology is covered by
U.S. patents 5,774,431, 5,822,283, 5,886,960 and 5,886,974. We have either
obtained or applied for U.S. trademark protection for its principal product
names and logo marks.

On September 25, 1998, we announced our plan to refocus our business on the
exploitation of the MDT core audio technologies and to properly position the MDT
assets for sale. The repositioning strategy recognized that the capital
investment required to properly commercialize the MDT technology was beyond our
capacity. As a result, all research and development activities were suspended
and we have accounted for MDT as a discontinued operation.

27
<PAGE> 31

EMPLOYEES

We began 1999 with thirteen full-time and five part-time employees and
sales representatives and reduced our staff to five full-time and six part-time
employees by December 31, 1999. Currently, we are in the process of expanding
our development staff and marketing efforts and have added four full-time
persons since the beginning of 2000. At year-end, there were two employees
engaged in research and development. From time to time, we also employ the
services of outside professional consultants. None of our employees are
represented by a labor union or are subject to a collective bargaining
agreement. We consider our relations with our employees and consultants to be
satisfactory.

28
<PAGE> 32

FACILITIES

Our executive office is located in Woodland Hills, California where we
occupy approximately 900 square feet with an annual rent of approximately
$32,000. The lease term on this space is month to month. During 1999, we also
had leased facilities in Mountain View, CA, and Santa Clara, CA.

Our regional office in Mountain View, CA, was the primary location for our
audio technology division, DPI. We occupied approximately 4,200 square feet in
this location and the annual rent on a triple net basis for these premises was
approximately $101,000, with the lease term expiring December 31, 1999. This
lease has not been renewed. On November 16, 1999, we entered into a lease for
approximately 2,700 square feet of office space in Santa Clara, CA for DPI, and
relocated our DPI office from Mountain View on December 12, 1999. The annual
rent for this facility on a full service basis is approximately $75,000, with
the lease expiring on November 30, 2002.

Our regional office in Huntington Beach, CA, was the primary location for
MDT. MDT occupied approximately 4,000 square feet of office space in this
location and the annual rent for these premises was approximately $50,000, with
the lease term expiring July 31, 1999. In connection with the suspension of MDT
operations, this space was vacated in November 1998. Rent deposits were
forfeited in connection with a full settlement and termination of the lease.

We lease our space at rental rates and on terms which management believes
are consistent with those available for similar space in the applicable local
area. Our properties are well maintained, considered adequate and are being
utilized for their intended purposes.

29
<PAGE> 33

LEGAL PROCEEDINGS

In the Fall of 1994, QSound Labs, Inc. ("QSound") advised MEC that, in its
view, the Spatializer technology infringed certain U.S. patents held by QSound.
In October 1994, we and DPI initiated a proceeding against QSound seeking a
determination that the technology did not infringe on QSound's patents and other
relief.

On August 29, 1996, the Court granted our summary judgment motion of
non-infringement in its entirety and denied the motion by QSound in the pending
patent infringement litigation between the Company and QSound. In September,
1998, the U.S. Court of Appeals for the Federal Court upheld the U.S. District
Court's ruling of August 1996, finding in favor of DPI and the Company on all
aspects of the appeal.

In granting our summary judgment motion, the Court found that our IC
(Integrated Circuit) does not infringe the QSound patent and denied QSound's
motion with respect to infringement. Our claim that the QSound patent is invalid
was not decided and, since the issues which the Court would need to consider on
the patent invalidity claim are similar to certain issues considered in the
infringement claim, QSound was granted the right to immediately appeal the
denial of its motion and trial on the invalidity issue was deferred until after
that appeal. In substance, the Court's finding confirms our position that there
is no infringement by the Company's IC of any patent held by QSound and that the
claims by QSound were without merit. QSound has not appealed and we are not
pursuing our other claims at the present time.

In December 1998, a complaint was filed in the United States District Court
for the Northern District of New York, by Alexander, Wescott & Co., Inc.,
against the Company alleging breach of contract and seeking fees from us based
on its claim that the amounts were due for arranging a financing. The action
also sought attorneys' fees, interest and the costs of suit. We filed a motion
to dismiss the action. On July 20, 1999, the Court found in favor of the Company
and dismissed the complaint.

In February 1999, a complaint was filed in the Superior Court of Los
Angeles County, Northwest District, by I.N. Associates, Inc., against our wholly
owned subsidiary, MDT, alleging breach of contract and fraud, and claiming
$499,953.94 in damages, attorneys fees, interest and the costs of suit. MDT has
answered and denied the claims. The matter was subject to a mediation preceding
in March 2000, and settlement is currently being documented. If the current
settlement is finalized, the matter will be resolved without any cost to the
Company and I.N. will be entitled to a cashless exercise of warrants for the
125,000 shares originally issued to them in 1997 and 1998.

In October, 1999, a complaint was filed in the Superior Court of Orange
County, California, by Bentall U.S. LLC, against us alleging breach of contract,
and claiming $18,630.73 in damages, attorneys fees, interest and costs of the
suit. This claim was settled and the complaint dismissed in November 1999.

In connection with our downsizing, a number of employees have been
terminated and have filed various employment and compensation related claims
with the various State labor authorities which claims have either been settled
or are pending resolution and funding if our resources allow. In September,
1999, an entry of judgement in the Municipal Court of Santa Clara County,
California was entered on behalf of one claimant in the amount of $8,307.30. In
February, 2000, an appeal was heard in the Superior Court of Orange County,
California, relating to a claim filed by a former employee of MDT for back
vacation pay and penalties. In March 2000, both parties agreed to dismiss the
action as part of a settlement.

We also anticipate that, from time to time, we may be named as a party to
other legal proceedings that may arise in the ordinary course of our business.

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<PAGE> 34

MANAGEMENT

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Corporate Officer and Directors
Henry R. Mandell................ 43 Chairman of the Board -- 2/10/2000 to date.
Chief Executive Officer -- 2/10/2000 to date.
Interim Chief Executive Officer and Secretary
9/98 to 2/10/2000.
Chief Financial Officer -- 3/98 to date.
Stephen W. Desper............... 57 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.
Carlo Civelli................... 51 Director -- 3/93 to date.
Vice President Finance, Europe -- 8/91 to 3/95.
Principal Holder.
James D. Pace................... 44 Director -- 2/95 to date.
Member of Compensation Committee -- 2/95 to date.
Gilbert N. Segel................ 67 Director -- 5/95 to date.
Member of Audit Committee -- 5/95 to date.
Key Personnel
Andrew Wheeler.................. 30 Vice President, Engineering.
</TABLE>

CORPORATE OFFICER AND DIRECTORS

Henry R. Mandell. Chief Executive Officer since February 10, 2000; Interim
Chief Executive Officer and Secretary from September 1998 to February 10, 2000.
Chief Financial Officer since March 1998; Senior Vice President, Finance from
March 1998 until September 1998. Executive Vice President and Chief Financial
Officer of The Sirena Apparel Group, Inc. from November 1990 to January, 1998
(The Sirena Apparel Group filed for protection under Chapter 11 of the
Bankruptcy Code in June of 1999). 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. Senior Corporate Auditor for Twentieth Century Fox Film
Corporation from June 1981 to June 1982. Mr. Mandell was a Senior Auditor for
Arthur Young and Company from August 1978 to June 1981, where he qualified as a
Certified Public Accountant.

Carlo Civelli. Director since March 1993. VP Finance -- Europe from August
1991 to March 1995. Has extensive experience in financing emerging public
companies. Managing director of Clarion Finanz AG, Zurich, Switzerland, for more
than the last five years. Director and Financial Consultant to Clarion Finanz
AG.

Stephen W. Desper. Vice Chairman of the Board, Inventor. Mr. Desper devoted
his full time for a number of years to developing and refining Spatializer(R)
technology. Recording engineer, over twenty (20) years experience; Director of
Engineering for The Beach Boys Organization. Acoustician, Acoustic Design and
Noise Control Engineer. December, 1991 to December, 1995, Chairman of
Spatializer Audio Laboratories, Inc. Since December, 1995 Vice Chairman of
Spatializer Audio Laboratories, Inc., Inventor and President of DPI from June
1986 to October, 1991. Vice President and Director of Research, DPI from October
1991 to December 1996.

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

31
<PAGE> 35

into the professional recording and film industries. Mr. Pace 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 serves as a director of various
private business and charitable enterprises.

KEY PERSONNEL

Andrew Wheeler. Vice President, Engineering since October 1999. Mr. Wheeler
brings to the Company significant engineering and management experience in
digital signal processing and software development. Most recently, Andrew
Wheeler was Software Engineering Manager at Aureal Semiconductor, a leading
developer and marketer of advanced audio semiconductor technologies for the PC
and consumer electronics markets. Earlier in his career, Mr. Wheeler was DSP
design engineer at Crystal River Engineering, a start-up company focused on
psychoacoustic research and design of 3D sound systems for the virtual reality
market. Mr. Wheeler is a graduate of the University of Texas at Austin, where he
was a research assistant at the university's Applied Research Labs.

RESIGNATIONS OF CERTAIN DIRECTORS

Mr. Scot E. Land and Mr. Jerold H. Rubinstein resigned as Directors on
March 1999 and November 1999, respectively. Mr. Land and Mr. Rubinstein did not
resign as a result of any disagreement with the Board of Directors. Mr.
Gershick's term as a Director expired at our annual meeting held on February 10,
2000 and he decided not the seek re-election. Mr. Gershick's decision not to
seek re-election was not a result of any disagreement with the Board of
Directors.

COMPENSATION OF DIRECTORS

None of our Directors received any cash compensation or other arrangements
for services provided in their capacity as Directors. However, we have 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 to an automatic
annual grant of an option to purchase 50,000 shares of Common Stock which are
granted as options and are available for grant under the 1995 Stock Option Plan.
If the recipient has received a grant in the last two years, the actual grant is
delayed until the person is eligible. Employee Directors may receive such a
grant at the discretion of the Board of Directors. We issued such options to our
non-employee directors in April of 1999.

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. Standing committees of the Board of Directors of the
Company include an Audit Committee and a Compensation and Stock Option
Committee. The Audit Committee consists of Mr. Segel and Mr. Mandell and is
directed to review the scope, cost and results of the independent audit of our
books and records, the results of the annual audit with management and the
internal auditors and the adequacy of our accounting, financial, and operating
controls; to recommend annually to the Board of Directors the selection of the
independent auditors;

32
<PAGE> 36

to consider proposals made by our independent auditors for consulting work; and
to report to the Board of Directors, when so requested, on any accounting or
financial matters.

Our Compensation and Stock Option Committee (the "Compensation Committee")
currently consists of Messrs. Pace and Segel. The Compensation Committee reviews
and approves annual salaries, bonuses and other benefits for our officers and
employees. No Compensation Committee interlock relationships existed in 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
UNDER RESTRICTED
ANNUAL COMPENSATION OPTIONS/ STOCK
---------------------------- SARS AWARDS LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER GRANTED(#) ($) PAYOUTS
--------------------------- ----- -------- ------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry R. Mandell(1)................ 12/99 $175,000 $ $34,000 750,000 N/A N/A
Chief Executive Officer 12/98 $105,833 $ $ 6,750 500,000 N/A N/A
Peter S. Birch..................... 12/99 $120,000 -- -- 120,000 -- --
Sr. Vice President, Sales 12/98 $129,654 $ $ 5,400 30,000 N/A N/A
and Marketing for DPI
</TABLE>

- -------------------------
(1) Mr. Mandell became an employee of the Company in March 1998. He became
Interim Chief Executive Officer of the Company on September 25, 1998,
concurrent with the effective date of Mr. Gershick's resignation as
President and Chief Executive Officer. Based on actions by the Board of
Directors in November 1999, Mr. Mandell's base salary for 2000 has been set
at $200,000 and he will be entitled to a bonus equal to 5% of the Company's
income after taxes (not to exceed $100,000). Additionally Mr. Mandell
received a finders fee of $25,000 related to the December Transactions. The
500,000 options shown above were treated as having been fully vested at
November 12, 1999 and at that time he was granted options to acquire 750,000
additional shares (250,000 shares exercisable at $.50 and immediately
vested; 250,000 shares exercisable at $.55 to vest on November 12, 2000; and
250,000 shares exercisable at $.75 to vest on November 12, 2001). In
addition, the 168,628 performance shares held by Mr. Gershick directly and
the 674,516 performance shares held in escrow for him have been reallocated
to Mr. Mandell. (See "Transactions With Management and Others.")

(2) Of the 5,776,700 originally issued performance shares, 5% were released on
each of June 22, 1997 and 1998, and, in accordance with the escrow
arrangement, 10% were released on June 23, 1999. During 1998 the vesting of
55,000 shares was accelerated when the recipient left the Company. As a
result, as of December 14, 1999, 4,527,359 of the originally issued
performance shares remained in escrow. Unless released earlier based on
cumulative positive cash flow of $.6285 Cdn. per share or in a discretionary
acceleration where the recipient leaves the Company, the remainder of these
shares will vest based on the following schedule: 20% June 2000; 30% June
2001; and 30% June 2002.

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

33
<PAGE> 37

under our Stock Option Plan ("the Stock Option Plan") during the most recently
completed financial year to each of the Named Executive Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------
ALTERNATIVE
POTENTIAL REALIZABLE TO REALIZABLE
MARKET VALUE VALUE AT ASSUMED VALUE:
OF SECURITIES ANNUAL RATES OF GRANT
SECURITIES % OF TOTAL UNDERLYING STOCK PRICE VALUE DATE
UNDER OPTIONS/SARS OPTIONS/SARS APPRECIATION FOR -------------
OPTIONS/ GRANTED TO EXERCISE OR ON DATE OPTION TERM GRANT DATE
SARS EMPLOYEES IN BASE PRICE OF GRANT EXPIRATION --------------------- PRESENT
NAME(1) GRANTED FISCAL YEAR ($/SECURITY) ($/SECURITY) DATE 5%($) 10%($) VALUE $
------- ---------- ------------ ------------ ------------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry R. Mandell.... 250,000 25% $ 0.500/shr $ 0.500/shr 11/12/04 $174,128 $252,463 N/A
250,000 25% $ 0.550/shr $ 0.550/shr 11/12/05 $161,128 $239,963 N/A
250,000 25% $ 0.750/shr $ 0.750/shr 11/12/06 $111,628 $189,963 N/A
Andrew Wheeler...... 100,000 10% $ 0.375/shr $ 0.375/shr 10/11/04 $123,227 $170,228 N/A
Peter S. Birch...... 30,000 3% $0.1900/shr $0.1900/shr 5/14/04 $ 30,270 $ 39.671 N/A
120,000 12% $ 0.080/shr $ 0.080/shr 5/14/04 $133,982 $171,582 N/A
</TABLE>

- -------------------------
(1) As of February 10, 2000, only Mr. Mandell continues as a named executive
officer. The valuation information for the other parties has not been
included.

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 granted
during the year ended December 31, 1999 by each of the Named Executive Officers
and the financial year-end value of unexercised options/ SARs on an aggregated
basis:

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SECURITIES AGGREGATE UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED ON VALUE OPTIONS/SARS AT AT FISCAL YEAR-END ($)
NAME(1) EXERCISE REALIZED FISCAL YEAR-END EXERCISABLE/UNEXERCISABLE
------- ----------- --------- --------------- -------------------------
<S> <C> <C> <C> <C>
Henry R. Mandell.................... N/A N/A 1,250,000 $ 256,250/$143,750
Andrew Wheeler...................... N/A N/A 100,000 $ 84,375/$0
Peter S. Birch...................... N/A N/A 150,000 $135,583.33/$24,916.67
</TABLE>

- -------------------------
(1) As of February 10, 2000, only Mr. Mandell continues as a named executive
officer. The valuation information for the other parties has not been
included.

34
<PAGE> 38

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 year ended December 31, 1999 for the Named Executive Officers:

<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES MARKET PRICE ORIGINAL TERM
UNDERLYING OF STOCK EXERCISE PRICE REMAINING
OPTIONS/SARS AT TIME OF AT TIME OF NEW AT DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
---- ---- ------------ ------------ -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry R. Mandell....... N/A N/A N/A N/A N/A N/A
Andrew Wheeler......... N/A N/A N/A N/A N/A N/A
Peter S. Birch......... N/A N/A N/A N/A N/A N/A
</TABLE>

The above referenced stock option repricings were effected to bring the
exercise prices down to reflect the current market price in order to properly
incentivize the option holders. The modifications to the exercise prices
effected on October 30, 1998 were generally applied to all of our and DPI's
employees whose option exercise prices were above the then current market price.
The modifications to the exercise prices effected on November 12, 1998 were
generally applied to the interim chief executive officer whose option exercise
prices were above the then current market price.

EMPLOYMENT AGREEMENTS

Effective June 1996, MDT entered into employment agreements that had
original terms continuing until December 1997, with extensions, pursuant to
which Mr. Eric Rene Bos was designated as Vice President of Product Development
and Mr. Robert Montelius was designated as Vice President of Engineering, at
annual salaries of $120,000 each. In May 1997, we notified Messrs. Bos and
Montelius that we did not intend to renew their agreements beyond December 1997.
In September 1997, we notified both parties that MDT would extend their
agreements through June 1998. Both Mr. Bos and Mr. Montelius left MDT in April
1999.

Effective October 1996, DPI entered into an employment agreement through
December 1997 (which, by its terms, was 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. 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. As of July 31, 1998, Mr.
Tanner's annual salary was increased to $120,000. Mr. Tanner resigned from DPI
effective March 12, 1999.

Effective January 1, 2000, the Company and Mr. Mandell entered into a three
year employment agreement in which Mr. Mandell's base salary for 2000 will be
set at $200,000 and he will be entitled to an annual bonus equal to 5% of our
income after taxes (not to exceed $100,000). Of the options held by Mr. Mandell,
existing options to acquire 500,000 shares were treated as having been fully
vested at November 12, 1999 and at that time he was granted options to acquire
750,000 additional shares (250,000 shares exercisable at $.50 and immediately
vested; 250,000 shares exercisable at $.55 to vest on November 12, 2000; and
250,000 shares exercisable at $.75 to vest on November 12, 2001). In addition,
the 168,628 performance shares held by Mr. Gershick directly and the 674,516
performance shares held in escrow for him were reallocated to Mr. Mandell.

Effective October 11, 1999, the Company and DPI entered into a one-year
employment agreement with Andrew Wheeler pursuant to which he is serving as vice
president of engineering at an annual base salary of $120,000 per year. The
employment agreement is renewable from year to year subject to the notice
provisions in the agreement and his base salary will be reviewed annually in
connection with the extensions. Mr. Wheeler is entitled to a bonus of $25,000
upon successful

35
<PAGE> 39

completion of certain technology and will be entitled to bonuses in connection
with future patent filings. Mr. Wheeler was granted options to acquire 100,000
shares vesting equally on October 11, 1999, 2000 and 2001 all at an exercise of
$0.37, the closing bid price on October 11, 1999.

TRANSACTIONS WITH MANAGEMENT AND OTHERS

In December 1998, we entered into a loan agreement with the directors and
officers pursuant to which Carlo Civelli advanced $75,000 to us and Messrs.
Mandell, Rubinstein, Pace and Segel each advanced $5,000 to us as a loan to fund
immediate operating requirements. The loan bore interest at the rate of 10% per
annum and matured on November 30, 1999. In April 1998, Clarion Finanz AG
advanced $650,000 in a working capital loan to the Company. The loan bears
interest at the rate of 10% per annum and matured on December 31, 1998 but has
been extended from time to time through the date hereof. Clarion Finanz AG is an
affiliate of Carlo Civelli, a member of our Board of Directors.

In the December Transactions, the $745,000 in principal of loans to us from
our directors and officers (or other affiliates) and $116,506.86 in accrued
interest, described above, as well as other advances from other securities
holders which resulted in total short term loans of $895,000 and accrued
interest of $134,647, were restructured into the $1,000,000 in new Series B
Preferred Stock. The Series B Preferred Stock, and any dividends therefrom not
converted into cash, are convertible commencing in 2001 into restricted Common
Stock at a 10% discount, based on the 10 day average closing bid price prior to
the conversion, but subject to a minimum conversion of $.56 per share and a
maximum of $1.12 per share. We have a three year option to redeem any Series B
Preferred Stock, not sooner converted, in whole or in part, in cash.

The other participants in the December Transactions were certain existing
holders of the our equity and debt and new institutional investors. In addition
to the issuance of the Series B Preferred Stock, the December Transactions
included the private placement of 1,884,254 additional shares of Common Stock
($1.05 million in new capital), the issuance of warrants to acquire 2,100,000
shares of Common Stock, the cancellation of 500,000 warrants to acquire Common
Stock (at a variable exercise ratio), and the conversion of $225,000 of secured
debt, including accrued interest, into secured long term convertible debt. The
long term debt is held by existing institutional investors and is secured by
essentially all of our assets. The debt, and accrued interest, is convertible at
our or the holder's options into registered Common Stock at a conversion price
equal to the average 10 day closing bid price prior to conversion but subject to
the same minimum and maximum conversion prices set for the Series B Preferred
Stock.

INDEMNIFICATION AND PERSONAL LIABILITY
OF OFFICERS AND DIRECTORS

Our Certificate of Incorporation contains a provision authorized by
Delaware law which eliminates the personal liability of a director to us, or to
any of our stockholders, for monetary damages for a breach of his fiduciary duty
as a director, except in the case where the director breached his duty of
loyalty, failed to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law, or obtained an improper
personal benefit. This provision has no effect on the availability of equitable
remedies, such as an injunction or rescission for breach of fiduciary duty,
including the duty of care. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

36
<PAGE> 40

Our bylaws obligate us to indemnify our directors, officers, employees and
other agents to the fullest extent permitted by Delaware law, in respect of
expenses, judgments, penalties, fines, and settlement of claims paid or
incurred, including those resulting from liability under the 1933 Act, if the
indemnitee acted in good faith and in what he or she reasonably believed to be
in, or not opposed to, our best interest, and, in the case of criminal action,
if the indemnitee had no reasonable cause to believe his or her conduct was
unlawful. The right to indemnity conferred by the Bylaws is a contractual right.

Such indemnification may be made against (a) expenses (including attorneys'
fees), judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit or proceeding (other than an action by, or in the right of, us)
arising out of a position with us (or with some other entity at our request),
and (b) expenses (including attorneys' fees) and amounts paid in settlement
actually and reasonably incurred in connection with a threatened, pending or
completed action or suit by, or in the right of, us, unless the director or
officer is found liable to us and an appropriate court does not determine that
he or she is nevertheless fairly and reasonably entitled to indemnification.

In certain circumstances, Delaware law permits advances to cover such
expenses before a final determination that indemnification is permissible.
Delaware law requires indemnification for expenses in certain circumstances and,
in others, requires that the indemnification be approved by a majority vote of
directors not involved in the event. In certain actions brought by or on behalf
of us against a person, indemnification of that person is available only after a
judicial determination by the Court in which the matter was heard. To the extent
that an indemnitee is successful in the defense of any proceeding, he or she is
entitled to be indemnified against actual and reasonable expenses incurred in
connection with such defense. Our bylaws establish procedures pursuant to which
such a determination may be made.

Delaware law permits us to enter into written agreements confirming (and in
certain cases, extending our obligations to) the purchase of insurance on behalf
of any of our directors, officers, employees or agents or other corporation,
partnership, joint venture, trust or other enterprise whether or not we would
have the power to indemnify such insured under Delaware law, against liabilities
arising out of their positions with us. To date, we have not obtained any such
insurance.

Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the SEC, such
indemnification is against public policy as expressed in the 1933 Act and is
therefore unenforceable.

37
<PAGE> 41

PRINCIPAL STOCKHOLDERS

The following table sets forth information (except as otherwise indicated
by footnote) as to shares of Common Stock owned as of March 15, 2000, or which
can be acquired in sixty days, by (i) each person known by management to
beneficially own more than five percent (5%) of our outstanding Common Stock,
(ii) each of our directors, and officers, (iii) all executive officers and
directors as a group, including individuals who were directors in 1999. On March
15, 2000, there were 46,657,972 shares outstanding.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF CLASS(5)
--------------------------------------- -------------------- --------------------
<S> <C> <C>
DIRECTORS AND OFFICERS
Carlo Civelli(2)(4)(5)............................. 4,120,958 8.7%
Stephen W. Desper(3)(4)(5)......................... 1,955,628 4.1%
Henry Mandell(6)................................... 2,203,144 4.6%
James D. Pace(4)(5)................................ 316,997 *
Gilbert N. Segel(4)................................ 205,000 *
All directors and executive officers as a group (5
persons)(5)(7)................................... 8,801,727 18.1%
</TABLE>

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

(1) Each of the directors and officers named can be reached at the Company's
executive offices located at 20700 Ventura Boulevard, Suite 140, 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. Mr.
Land and Mr. Rubinstein resigned as directors in February and September of
1999 respectively.

(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 them,
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) Includes an aggregate of 3,640,557 performance shares held in escrow as of
February 10, 2000, as follows: Carlo Civelli, 1,112,704 shares; Stephen W.
Desper, 1,543,740 shares; Henry Mandell, 674,516 shares; Gilbert N. Segel
88,000; James D. Pace 101,597; and Jerold H. Rubinstein 120,000.

(5) Calculation includes options to purchase 2,109,467 shares exercisable at
various prices from $0.09 to $3.26 per share, and expiring on various dated
from February, 2000 to October 2004.

(6) Includes 1,350,000 options held by Mr. Mandell, exercisable at various
prices from $.125 to $1.00 with varying expiration dates of which the final
such expiration date is November, 2006.

38
<PAGE> 42

(7) In November 1999, the Board of Directors approved, subject to the
finalization of appropriate documentation, the reallocation of the 674,516
performance shares held in escrow for Steven D. Gershick to Henry R. Mandell
and the transfer among Mr. Gershick, the Company and Mr. Mandell of the
168,628 performance shares previously released from escrow to Mr. Gershick.
The documentation was finalized in January 2000.

39
<PAGE> 43

SELLING STOCKHOLDERS

The shares of Common Stock offered hereunder are to be offered for sale,
from time to time, by persons acquiring them in private placements, or who may
acquire the shares on exercise, from time to time, of Warrants or Options held
by them. The shares offered also include the performance shares which have been
released to date and which have not been sold by the holders as well as the
performance shares to be released in June 2000.

The following tables set forth the names and addresses of each of the
Listed Selling Stockholders, other than officers and directors (who have an
address at the Company), indicate their relationship to us or our predecessors
and specify security ownership at March 15, 2000. The security ownership of the
participants in the December Transactions, Steven D. Gershick, Henry R. Mandell
and Brand Farrar are stated to give effect to the termination of Mr. Gershick's
ownership of performance shares and the issuance of these shares to Mr. Mandell
and the issuance of shares in the December Transactions and to Brand Farrar. The
tables show security ownership before and after giving effect to the sale of
Common Stock registered hereunder.

<TABLE>
<CAPTION>
PERCENTAGE SECURITIES TO BE PERCENTAGE OWNERSHIP
OWNERSHIP RETAINED, IF ALL AFTER OFFERING, IF ALL
CATEGORY OF SHARES SHARES BEFORE REGISTERED REGISTERED SECURITIES
NAME AND RELATIONSHIP(1) BENEFICIALLY OWNED(2) OFFERED OFFERING(3) SECURITIES ARE SOLD ARE SOLD(3)
------------------------ ----------------------- ------- ----------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Henry R. Mandell............ Shares -- 178,628 168,628 4.6% 10,000 4.0%
Chief Executive Officer, Escrow -- 674,516 168,628 505,888
Chief Financial Officer, Options -- 1,350,000 0 1,350,000
Secretary and Director(4)
Total -- 2,203,144 337,256 1,865,888
Carlo Civelli............... Shares -- 2,758,254 278,176 8.7% 2,480,078 7.6%
Director(5) Escrow -- 1,112,704 278,176 834,528
Options -- 250,000 0 250,000
Total -- 4,120,958 556,352 3,564,606
Stephen W. Desper........... Shares -- 262,145 262,145 4.1% 0 2.9%
Director Escrow -- 1,559,305 389,828 1,169,477
Options -- 173,800 0 173,800
Total -- 1,955,628 661,973 1,343,277
Gilbert N. Segel............ Shares -- 67,000 22,000 * 45,000 *
Director Escrow -- 88,000 22,000 66,000
Options -- 50,000 0 50,000
Total -- 205,000 44,000 161,000
James D. Pace............... Shares -- 85,400 25,400 * 60,000 *
Director Escrow -- 101,597 25,400 76,197
Options -- 130,000 0 130,000
Total -- 316,997 50,800 266,197
Steven D. Gershick(4)....... Shares -- 83,000 83,000 * 0 *
Options -- 100,000 100,000 0
Total -- 183,000 183,000 0
I.N. Inc.................... Warrants -- 125,000 125,000 * 0 *
Lufeng Investments Ltd...... Shares -- 179,453 179,453 * 0 *
Warrants -- 200,000 200,000 0
Total -- 379,453 379,453 0
Bank Insinger de Beaufort... Shares -- 448,632 448,632 2.0% 0 *
Herengracht 551 Warrants -- 500,000 500,000 0
1017 BW Amsterdam Total -- 948,632 948,632 0
The Netherlands
Brand Farrar & Buxbaum
LLP....................... Shares -- 55,000 55,000 * 0 *
515 S. Flower St., Ste. 3500
Los Angeles, CA 90071
</TABLE>

40
<PAGE> 44

<TABLE>
<CAPTION>
PERCENTAGE SECURITIES TO BE PERCENTAGE OWNERSHIP
OWNERSHIP RETAINED, IF ALL AFTER OFFERING, IF ALL
CATEGORY OF SHARES SHARES BEFORE REGISTERED REGISTERED SECURITIES
NAME AND RELATIONSHIP(1) BENEFICIALLY OWNED(2) OFFERED OFFERING(3) SECURITIES ARE SOLD ARE SOLD(3)
------------------------ ----------------------- ------- ----------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Romofin AG.................. Shares -- 541,132 448,632 2.2% 92,500 *
Burglestrasse 6 Warrants -- 500,000 500,000 0
8027 Zurich, Switzerland Total -- 1,041,132 948,632 92,500
CPR (USA) Inc............... Shares -- 1,537,779 403,769 4.99%(6) 1,134,010 4.99%(6)
101 Hudson St., 37th Floor Warrants -- 450,000 450,000 0
Jersey City, NJ 07302 Total -- 1,987,779 853,769 1,134,010
LibertyView Funds, L.P...... Shares -- 1,447,052 323,015 4.99%(6) 1,124,037 4.99%(6)
Hemisphere House............ Warrants -- 360,000 360,000 0
9 Church Street............. Total -- 1,807,052 683,015 1,124,037
Hamilton, Bermuda HMDX
LibertyView Fund, LLC....... Shares -- 406,775 80,754 1% 326,021 *
101 Hudson St., 37th Floor Warrants -- 90,000 90,000 0
Jersey City, NJ 07302 Total -- 496,775 170,754 326,021
Cardinal Capital Mgmt,
Inc....................... Warrants -- 100,000 100,000 * 0 *
3340 Peachtree Road N.E
Suite 620
Atlanta, GA 30326
MDC Group, Inc.............. Warrants -- 100,000 100,000 * 0 *
1900 Wazee Street Total -- 100,000
Suite 202
Denver, CO 80202
</TABLE>

- -------------------------
(1) Each of the directors and officers named can be reached at the Company's
executive offices located at 20700 Ventura Boulevard, Suite 140, 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. Mr.
Land and Mr. Rubinstein resigned as directors in February and September of
1999 respectively.

(2) Includes Escrowed Performance Shares of Common Stock and Options and
Warrants which are currently exercisable or exercisable within 60 days of
the date hereof. Escrowed Performance Shares which are scheduled for release
from Escrow during 2000 are included as being registered for resale by the
respective holders.

(3) Denominator includes all shares reserved for issuance to the specified
person on exercise of Options and Warrants which are exercisable within 60
days of the date hereof.

(4) Mr. Gershick was a director until February 10, 2000, when he did not seek
re-election. In November 1999, the Board of Directors approved, subject to
the finalization of appropriate documentation, the reallocation of the
674,516 performance shares held in escrow for Steven D. Gershick, the former
chief executive officer and a director, to Henry R. Mandell, the current
chief executive officer and chairman of the Board of Directors, and the
transfer among Mr. Gershick, us and Mr. Mandell of the 168,628 performance
shares previously released from escrow to Mr. Gershick. The above table
reflects the transactions. Mr. Gershick has appointed Mr. Mandell as his
proxy to vote the performance shares.

(5) Clarion Finanz AG is a non-reporting investment company controlled by Carlo
Civelli. 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 either currently exercises full or
partial control, without duplication through attribution.

41
<PAGE> 45

(6) CPR (USA) Inc., LibertyView Funds, L.P. and LibertyView Fund LLC are
affiliated entities but each has made an individual investment in the
Company. In addition to limitations set forth in the Certificate of
Designation for the Series A Preferred Stock, which limits ownership of the
Common Stock by any holder to 4.99% of our outstanding Common Stock, the
three entities have independent legal obligations and internal practices
which bar them from collectively owning more than 4.99% of any company's
outstanding Common Stock at any particular time. Therefore, the disclosure
reflects beneficial ownership of the aggregate percentage of Common Stock
that could be beneficially owned by the three entities combined at any one
time, during the effectiveness of this registration statement.

* Denotes less than 1% ownership.

42
<PAGE> 46

PLAN OF DISTRIBUTION

The shares of Common Stock held by the Selling Stockholders may be offered
by them in varying amounts and transactions, from time to time, including
through the facilities of the OTC Bulletin Board or such other exchange or
reporting system where the Common Stock may be traded, at prices then obtainable
and satisfactory to them so long as this prospectus is then current under the
rules of the SEC and we have not withdrawn the registration statement. Brokerage
commissions may be paid or discounts allowed in connection with such sales;
however, it is anticipated that the discounts allowed or commissions paid will
be no more than the ordinary brokerage commissions paid on sales effected
through brokers or dealers. To our knowledge, none of the Selling Stockholders
has made any arrangements with a broker or dealer concerning the offer or sale
of the Common Stock as of the date of this prospectus. We will receive the
proceeds from the exercise of Options and Warrants but the Selling Stockholders,
not we, will receive the net proceeds of any sales of their Common Stock
hereunder after payment of any discounts and commissions. We have paid the
professional fees and related costs of this registration statement from our
general funds.

REGISTRATION RIGHTS OF CERTAIN SELLING STOCKHOLDERS

We have granted certain registration rights with respect to Common Stock to
the Selling Stockholders who are not our affiliates and who acquired 2,181,930
shares of Common Stock (in the December Transactions and in private placements)
or who could acquire 2,475,000 shares issuable on exercise of Warrants issued in
the December Transactions (the "Registrable Shares"). We also have agreed that
if we propose to register any of our securities under the 1933 Act in connection
with the public offering of such securities for cash, including the performance
shares, as released, (other than a registration relating solely to the sale of
securities pursuant to a Rule 145 transaction) it will allow those holders to
have their Registrable Securities included in such registration statement. We
have agreed to bear all registration expenses in connection with the
registration of the Registrable Securities other than underwriting commissions.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Our authorized capital consists of 65,000,000 shares of Common Stock (par
value U.S. $.01) of which 46,657,972 were outstanding at March 15, 2000,
exclusive of the 2,740,000 shares reserved for issuance on exercise of
outstanding Warrants and 2,659,467 shares reserved for issuance on exercise of
outstanding Options and 1,000,000 shares of Preferred Stock (par value U.S.
$.01) of which 150,000 preferred shares are designated as Series B 10%
Redeemable Convertible Preferred Stock. As of March 15, 2000, there were 102,967
shares of Series B 10% Redeemable Convertible Preferred Stock outstanding.

COMMON STOCK

All of the issued shares of our Common Stock are fully paid and
non-assessable. Subject to the release and performance conditions relating to
Escrowed Performance Shares, all of the shares of Common Stock rank equally as
to voting rights, participation in the distribution of our assets 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 our
liquidation, dissolution or winding-up or other distribution of our assets, the
holders of the Common Stock will be entitled to receive, on a pro-rata basis,
all of the assets remaining after we have paid our liabilities. Subject to the
rights granted to

43
<PAGE> 47

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 46,374,970 shares of Common Stock currently issued and outstanding
as of February 10, 2000, [4,527,359] are classified as Escrowed Performance
Shares, are held in escrow by our transfer agent, Harris Trust Company of
California, and will vest under the modification arrangements.

We have Options outstanding which could result in the issuance of up to
approximately 2.86 million shares of additional Common Stock and have Warrants
outstanding which could result in the issuance of up to approximately 2.64
million additional shares of Common Stock. 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 our capital. See "Executive Compensation" in our Annual Report
on Form 10-K or in our Proxy materials for further information with respect to
the Options.

PREFERRED STOCK GENERALLY

The Board of Directors is authorized to issue, without stockholder action,
up to 1,000,000 shares of Preferred Stock. 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.

44
<PAGE> 48

SERIES A PREFERRED STOCK

In connection with a private placement in April 1998, the Board of
Directors authorized the issuance of up to 100,000 shares of Series A, 7%
Convertible Preferred Stock ("Series A Preferred Stock") with a par value of
$.01 per share and a stated value of $50.00 per share, with a 7% per annum
dividend. In the April 1998 private placement, 60,000 shares were issued. None
of the Series A Preferred Stock is currently outstanding.

SERIES B PREFERRED STOCK

In connection with the December Transaction, the Board of Directors
authorized the issuance of up to 150,000 shares of Series B Redeemable
Convertible Preferred Stock ("Series B Preferred Stock") with a par value of
$0.01 per share and a stated value of $10.00 per share, with a 10% annual
dividend. In the December Transaction 102,967 shares of Series B Preferred were
issued.

The Series B Preferred Stock ranks: (i) prior to all of our Common Stock,
and (ii) prior to any class or series of capital stock created after the Series
B Preferred Stock (unless such future class specifically, by its terms, ranks on
parity with the Series B Preferred Stock), and (iii) junior to any class or
series of capital stock created before the Series B Preferred Stock, in each
case as to distributions of assets upon liquidation, dissolution or winding up,
whether voluntary or involuntary (all such distributions being referred to
together as "Distributions"). The Series B Preferred Stock will bear a 10% 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 our option. No dividends shall be paid on the
Common Stock or any other subsequently issued stock prior to the payment of
dividends on the Series B Preferred Stock.

In the event of any liquidation, dissolution or winding up, either
voluntary or involuntary, the holders of Series B Preferred Stock shall be
entitled to receive a liquidation preference of $10.00 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 B Preferred Stock have a right to convert their shares, at
their option on or after December 29, 2000. The date we receive a notice of
conversion from a shareholder shall be treated as a "Conversion Date."

The conversion price shall be determined on the Conversion Date and shall
equal ninety percent of the average of the closing bid prices of Common Stock
for ten consecutive trading days ending on the trading day immediately preceding
the Conversion Date. The conversion price may not be lower than the average of
the closing bid prices of Common Stock for the ten consecutive trading days
ending one trading day prior to December 29, 1999 (the "Floor Price") or be
higher than 200% of the Floor Price.

After giving effect to the Series B Preferred Stock, we have 750,000 shares
of Preferred Stock remaining reserved for issuance all of which shares which
could be issued with terms calculated to delay or prevent a change in control or
to make removal of management more difficult. The issuance of Preferred Stock
may have the effect of delaying, deterring or preventing a change in control
without any further action by the stockholders or discouraging bids for our
Common Stock at a premium because the purchasers would not be in a position to
limit certain future capital transactions through the issuance of Preferred
Stock. In addition, we believe that conversions of future issuances of Preferred
Stock could discourage market interest in our Common Stock because of the
dilutive effects on the capital structure and possible price pressure and market
overhang because of a potential sale of the Common Stock into the market. If the
future preferred stock were to be issued with conversion features that set the
conversion price of the preferred stock at less than current market, it

45
<PAGE> 49

could discourage interest in our Common Stock and could have the effect of
decreasing the market price of the Common Stock.

APPLICATION OF CALIFORNIA CORPORATIONS CODE

Although incorporated in Delaware, our business has been conducted through
our operating subsidiaries in the State of California. Section 2115 of the
California Corporations Code ("Section 2115") provides that certain provisions
of the California Corporations Code shall be applicable to a corporation
organized under the laws of another state to the exclusion of the law of the
state in which it is incorporated, if the corporation meets certain tests
regarding the business done in California and the number of its California
shareholders.

An entity such as Spatializer can be subject to Section 2115 even though we
do not ourselves transact business in California if, on a consolidated basis,
the average of the property factor, payroll factor and sales factor is more than
fifty percent (50%) deemed to be in California during its latest full income
year and more than one-half of our outstanding voting securities are held of
record by persons having addresses in California. Section 2115 does not apply to
corporations with outstanding securities listed on the New York or American
Stock Exchange, or with outstanding securities designated as qualified for
trading as a national market security on NASDAQ, if such corporation has at
least 800 beneficial holders of its equity securities. We currently are deemed
to be subject to Section 2115.

DELAWARE CORPORATE GOVERNANCE ISSUES

As a Delaware corporation, we are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover provision which generally prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination has been approved by the directors and shareholders as
provided in our Certificate of Incorporation and Bylaws. Our Certificate of
Incorporation and Bylaws incorporate the provisions of Section 203. For purposes
of Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock and approval of the holders of at least two-thirds of
the voting stock is required to alter, amend or repeal the foregoing provisions.

We have adopted certain provisions to limit the ability of stockholders to
change corporate management. Our Certificate of Incorporation contains
provisions which classifies the Board of Directors and provides that Board
members may only be removed for cause and with the approval of the holders of
two-thirds of the voting stock. The Certificate of Incorporation adopts the
interested stockholder provisions described above. While these or similar
provisions are commonly adopted by public corporations formed under Delaware
law, such provisions may allow management to retain their positions with us and
may discourage third parties from attempting to acquire control of us. As a
result, our stockholders may have reduced opportunities to sell their stock in
transactions where third parties are seeking an interest in us and such third
parties may be discouraged from undertaking transactions to acquire a
significant interest in us.

46
<PAGE> 50

SHARES ELIGIBLE FOR FUTURE SALE

As of March 15, 2000 and including the effect of the December Transactions,
there were 46,657,972 shares of Common Stock outstanding and 2,730,000 shares
reserved for issuance on exercise of outstanding Warrants and 2,859,467 shares
reserved for issuance on exercise of outstanding Options, representing in the
aggregate a fully diluted total of 52,247,439 shares. The shares of Common Stock
underlying the Series B Preferred Stock are not reflected since the number of
shares will be calculated at the time of conversion. Of that total,
approximately 9.3 million, or 18.1%, were held by persons who are officers or
directors including 3,640,557 of Escrowed Performance Shares.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for us
by Brand Farrar & Buxbaum LLP.

EXPERTS

The consolidated financial statements of Spatializer Audio Laboratories,
Inc. and subsidiaries as of December 31, 1999, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1999 have been included
herein in reliance upon the report of Farber & Hass LLP independent certified
public accountants, and upon the authority of said firm as experts in accounting
and auditing.

WHERE YOU CAN FIND MORE INFORMATION

This prospectus is part of a registration statement that we filed with the
SEC. This prospectus does not contain all of the information set forth in the
registration statement, part of which has been omitted in accordance with the
rules and regulations of the SEC. In addition, the registration statement and
this prospectus incorporate by reference certain materials previously filed with
the SEC. You should read the exhibits carefully for provisions that may be
important to you. We became subject to the reporting requirements imposed under
the Securities Exchange Act of 1934 (the "1934 Act") on August 21, 1995, and
have filed all reports required to be filed since such date.

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., Chicago, Illinois, and New
York, New York. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. Our SEC filings are also available to the public
from the SEC's Web site at "http://www.sec.gov".

Until February, 1997 when we terminated our listing on the Vancouver Stock
Exchange, we and our predecessor, Spatializer Audio Laboratories, Inc., a Yukon
corporation ("Spatializer-Yukon"), also were subject to the information and
reporting requirements under the Yukon Territory Business Corporations Act and
the British Columbia Securities Act. You may read and copy all periodic reports,
proxy materials and other reports filed with the Superintendent of Brokers for
British Columbia and the VSE at the VSE offices at 609 Granville Street, 4th
Floor, Vancouver, B.C. V7Y 1H1, CANADA and at the offices of the Superintendent
of Brokers for British Columbia at 865 Hornby Street, Suite 1200, Vancouver,
B.C. V6Z 2H4, CANADA, at prescribed rates.

Upon request, we will provide copies of materials on file at the SEC to
stockholders and any person to whom a prospectus is delivered, including
material incorporated herein by reference. Requests should be made orally or in
writing to Spatializer Audio Laboratories, Inc. at 20700 Ventura Boulevard,
Suite 140, Woodland Hills, California 91364, Attention: Secretary, telephone
(818) 227-3370.

47
<PAGE> 51

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
of Spatializer Audit Laboratories, Inc.:

We have audited the accompanying consolidated balance sheets of Spatializer
Audio Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spatializer
Audio Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flow for each of the years in the
three year period ended December 31, 1999 in conformity with generally accepted
accounting principles.

/s/ FARBER & HASS LLP

Oxnard, California
March 10, 2000

F-1
<PAGE> 52

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents................................. $ 1,021,998 $ 264,054
Accounts Receivable....................................... 687,595 134,633
Inventory................................................. 12,993 7,993
Prepaid Expenses and Deposits............................. 22,640 65,718
------------ ------------
Total Current Assets................................... 1,745,226 472,398
Property and Equipment, Net................................. 132,803 184,140
Intangible Assets, Net...................................... 207,793 236,913
Other Assets................................................ 32,177
------------ ------------
$ 2,117,999 $ 893,451
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes Payable............................................. $ 14,149 $ 14,795
Notes Payable to Related Party............................ 337,742 857,500
Accounts Payable.......................................... 234,117 335,784
Accrued Wages and Benefits................................ 53,136 84,423
Accrued Expenses.......................................... 291,117 370,548
Deferred Income........................................... 250,000
Net Liabilities of Discontinued Operation................. 419,600 533,891
------------ ------------
Total Current Liabilities.............................. 1,349,861 2,446,941
------------ ------------
Commitments and Contingencies
Stockholders' Equity (Deficit):
7% Series A Convertible Preferred shares, $0.01 par value;
100,000 shares authorized; no shares and 52,900 shares
issued and outstanding at December 31, 1999 and 1998,
respectively........................................... 529
10% Series B Convertible Redeemable Preferred shares,
$0.01 par value; 1,000,000 shares authorized; 102,967
shares and no shares issued and outstanding at December
31, 1999 and 1998, respectively........................ 1,030
Common shares, $0.01 par value; 50,000,000 shares
authorized; 46,174,970 and 25,841,867 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 461,750 258,418
Additional Paid-In Capital................................ 45,913,503 44,150,501
Accumulated Deficit....................................... (45,608,146) (45,962,938)
------------ ------------
Total Shareholders' Equity (Deficit)................... 768,137 (1,553,490)
------------ ------------
$ 2,117,999 $ 893,451
============ ============
</TABLE>

See accompanying notes to consolidated financial statements

F-2
<PAGE> 53

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product Revenues, Net........................ $ 39,496 $ 336,703
Licensing Revenues........................... 663,522 880,000
Royalty Revenues............................. $ 1,660,371 976,697 1,564,530
----------- ----------- -----------
1,660,371 1,679,715 2,781,233
Cost of Revenues.......................... 48,780 134,190 229,736
----------- ----------- -----------
1,611,591 1,545,525 2,551,497
----------- ----------- -----------
Operating Expenses:
General and Administrative................... 515,843 1,732,097 2,173,717
Research and Development..................... 383,176 755,899 3,707,995
Sales and Marketing.......................... 257,017 1,001,747 1,356,196
----------- ----------- -----------
1,156,036 3,489,743 7,237,908
----------- ----------- -----------
Operating Income (Loss)................... 455,555 (1,944,218) (4,686,411)
----------- ----------- -----------
Interest Income................................ 3,401 27,672 57,305
Interest Expense............................... (102,468) (84,723) (21,063)
Other Income (Expense), Net.................... 4,804 (50,955) (8,949)
----------- ----------- -----------
(94,263) (108,006) 27,293
----------- ----------- -----------
Income (Loss) from Continuing
Operations........................... 361,292 (2,052,224) (4,659,118)
Loss from Discontinued Operations....... (3,701,599)
----------- ----------- -----------
Income (Loss) Before Income Taxes......... 361,292 (5,753,823) (4,659,118)
Income Taxes.............................. (6,500) (38,238) (60,703)
----------- ----------- -----------
Net Income (Loss)......................... $ 354,792 $(5,792,061) $(4,719,821)
=========== =========== ===========
Basic and Diluted Income (Loss) per Share:
Continued Operations.................... $ .01 $ (.12) $ (.23)
Discontinued Operations................. (.17)
----------- ----------- -----------
$ .01 $ (.29) $ (.23)
=========== =========== ===========
Weighted-Average Shares Outstanding..... 33,805,512 22,180,180 20,604,095
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE> 54

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss).................................. $ 354,793 $(5,792,061) $(4,719,821)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Used by Operating Activities:
Depreciation and Amortization................... 103,564 126,334 407,283
Discontinued Operations......................... 962,060
Deferred Transaction Costs...................... 146,529
Loss on Disposal of Property and Equipment...... 50,308 14,281
Provision for Doubtful Accounts................. 100,000
Options and Warrants Issued for Services........ 56,030 100,000
Net Change in Assets and Liabilities:
Accounts Receivable and Employee Advances....... (558,583) 798,675 (249,806)
Inventory....................................... (5,000) 85,257 203,289
Prepaid Expenses and Deposits................... 16,521 31,112 125,282
Other Assets.................................... (4,135)
Accounts Payable................................ (101,667) 102,737 247,506
Accrued Expenses and Other Liabilities.......... (360,718) 503,007 78,701
Discontinued Operations......................... (114,291) (66,796)
---------- ----------- -----------
Net Cash Used by Operating Activities................ (665,382) (2,996,808) (3,697,465)
---------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of Property and Equipment.............. (16,365) (43,079) (187,485)
Proceeds from Disposal.......................... 20,400
Intangible Assets............................... (6,740) (34,350) (237,036)
Deferred Transaction Costs...................... (146,529)
Discontinued Operations......................... (238,025)
---------- ----------- -----------
Net Cash Used by Investing Activities................ (23,105) (295,054) (571,050)
---------- ----------- -----------
Cash Flows from Financing Activities:
Issuance of Common and Preferred Shares, Net....... 1,959,627 2,611,474 1,966,144
Exercise of Options and Warrants................... 7,208 45,954 910,917
Notes and Amounts Due to (from) Related Parties.... (519,757) 745,000
Proceeds (Repayments) on Line of Credit............ (400,000) 400,000
Discontinued Operations............................ (20,501)
Repayments of Notes Payable........................ (647) (3,424) (18,528)
---------- ----------- -----------
Net Cash Provided by Financing Activities............ 1,446,431 2,978,503 3,258,533
---------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents..... 757,944 (313,359) (1,009,982)
Cash and Cash Equivalents, Beginning of Year......... 264,054 577,413 1,587,395
---------- ----------- -----------
Cash and Cash Equivalents, End of Year............... $1,021,998 $ 264,054 $ 577,413
========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year for:
Interest........................................ $ 11,250 $ 26,370 $ 21,063
Income Taxes.................................... $ 6,500 $ 35,838 $ 60,703
</TABLE>

See accompanying notes to consolidated financial statements

F-4
<PAGE> 55

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A, 7% CONVERTIBLE SERIES B, 10% CONVERTIBLE
PREFERRED SHARES PREFERRED SHARES COMMON SHARES
------------------------- ------------------------- --------------------------------------------
NUMBER OF NUMBER OF NUMBER OF ADDITIONAL
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE PAID-IN-CAPITAL
----------- ----------- ----------- ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1998................ 21,410,012 $214,100 $41,481,890
Issuance of Preferred
Shares, Net......... 60,000 $ 600 2,610,874
Options Issued for
Services............ 13,333 133 12,571
Options Exercised..... 19,000 190 33,060
Warrants Exercised....
Conversion of
Preferred Shares.... (7,100) (71) 4,399,522 43,995 (43,924)
Net Loss.............. -- -- --
------- ----- ------- ------ ---------- -------- -----------
Balance, December 31,
1998................ 52,900 529 25,841,867 258,418 44,150,501
Issuance of Preferred
Shares, Net......... 102,967 $1,030 1,028,617
Issuance of Common
Shares, Net......... 1,884,254 18,843 911,137
Options Exercised..... 59,998 600 6,608
Conversion of
Preferred Shares.... (52,900) (529) 18,388,851 183,889 (183,360)
Net Income............ -- -- --
------- ----- ------- ------ ---------- -------- -----------
Balance, December 31,
1999................ 0 $ 0 102,967 $1,030 46,174,970 $461,750 $45,913,503
======= ===== ======= ====== ========== ======== ===========

TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance, January 1,
1998................ $(40,170,877) $ 1,525,113
Issuance of Preferred
Shares, Net......... 2,611,474
Options Issued for
Services............ 12,704
Options Exercised..... 33,250
Warrants Exercised....
Conversion of
Preferred Shares....
Net Loss.............. (5,792,061) (5,792,061)
------------ -----------
Balance, December 31,
1998................ (45,962,938) (1,553,490)
Issuance of Preferred
Shares, Net......... 1,029,647
Issuance of Common
Shares, Net......... 929,980
Options Exercised..... 7,208
Conversion of
Preferred Shares....
Net Income............ 354,792 354,792
------------ -----------
Balance, December 31,
1999................ $(45,608,146) $ 768,137
============ ===========
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE> 56

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) NATURE OF BUSINESS

Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company") is in
the business of developing and licensing technology.

The Company's wholly-owned subsidiary, Desper Products, Inc. ("DPI"), is in
the business of developing proprietary advanced audio signal processing
technologies and products for consumer electronics, entertainment, and
multimedia computing.

The Company's wholly-owned subsidiary, MultiDisc Technologies, Inc.
("MDT"), was in the business of developing scaleable, modular compact disc and
digital versatile disc ("DVD") server technologies associated with a network
based compact disc/DVD server for internet and intranet applications. Operations
of MDT were discontinued in the fourth quarter of 1998 and the assets are being
marketed for sale (see Note 12).

(2) SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION -- The consolidated financial statements include the
accounts of Spatializer Audio Laboratories, Inc. and its wholly-owned
subsidiary, Desper Products, Inc. MultiDisc Technologies, Inc. has been
presented as a discontinued operation (see Note 12). All significant
intercompany balances and transactions have been eliminated in consolidation.

REVENUE RECOGNITION -- The Company recognizes revenue from product sales
upon shipment to the customer. License revenues are recognized when earned, in
accordance with the contractual provisions. Royalty revenues are recognized upon
shipment of products incorporating the related technology by the original
equipment manufacturers (OEMs) and foundries.

CONCENTRATION OF CREDIT RISK -- Financial instruments which potentially
subject the company to concentrations of credit risk consist principally of cash
and trade accounts receivable.

At December 31, 1999, four customers accounted for 48%, 16%, 12% and 12%,
respectively, of the Company's trade receivables. The Company performs ongoing
credit evaluations of its customers and normally does not require collateral to
support accounts receivable.

CASH AND CASH EQUIVALENTS -- Cash equivalents consist of highly liquid
investments with original maturities of three months or less.

MAJOR CUSTOMERS -- During the year ended December 31, 1999, four customers
accounts for 30%, 26%, 15% and 10%, respectively, of the Company's net sales.

INVENTORY -- Inventory, which consists primarily of finished goods, is
stated at the lower of cost (first-in, first-out) or market.

RESEARCH AND DEVELOPMENT COSTS -- The Company expenses research and
development costs as incurred.

PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Property and equipment under capital leases are stated at the present value of
minimum lease payments. Property and equipment are depreciated over three to
five years using accelerated-depreciation methods, which

F-6
<PAGE> 57
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

approximates 150% declining balance. Leasehold improvements are amortized over
the shorter of the useful life of the asset or lease term.

INTANGIBLE ASSETS -- Intangible assets consist of patent costs which are
amortized on a straight-line basis over the estimated useful lives of the
patents which range from five to ten years.

VALUATION ACCOUNTS -- The Company had reserves for doubtful accounts
recorded in the accompanying consolidated financial statements which are
summarized as follows:

<TABLE>
<S> <C>
BALANCE AT JANUARY 1, 1998........................... $ 190,000
Charged to Expense................................... 0
Deductions........................................... (190,000)
---------
BALANCE AT DECEMBER 31, 1998......................... 0
BALANCE AT DECEMBER 31, 1999......................... $ 0
=========
</TABLE>

EARNINGS PER SHARE -- On December 31, 1997, the Company retroactively
adopted the provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") which replaces the presentation of primary and
fully diluted earnings (loss) per share with a presentation of basic and diluted
earnings (loss) per share. Basic earnings (loss) per share is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
(loss) per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted earnings (loss) per share is computed similarly
to fully diluted earnings (loss) per share pursuant to the Accounting Principles
Board ("APB") Opinion No. 15.

The impact of Statement 128 on the calculation of earnings per share is as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
BASIC:
Net Income (Loss) Available to Common
Shareholders............................... $ 354,792 $(5,792,061)
Weighted Average Shares Outstanding.......... 33,805,512 22,180,180
Basic Earnings per Share..................... $ 0.01 $ (0.29)
DILUTED:
Net Income (Loss) Available to Common
Shareholders............................... $ 354,792 $(5,792,061)
Weighted Average Shares Outstanding.......... 33,805,512 22,180,180
Net Effect of Dilutive Stock Options and
Warrants Based on the Treasury Stock Method
Using Average Market Price................. 1,859,519 N/A
Total Shares................................. 35,665,031
Diluted Earnings per Share................... $ 0.0100 N/A
Average Market Price of Common Stock......... $ 0.4700 N/A
Ending Market Price of Common Stock.......... $ 0.9375 N/A
</TABLE>

F-7
<PAGE> 58
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents contingently issuable shares, options and
warrants to purchase shares of common stock that were outstanding during 1998
and 1997 which were not included in the computation of diluted loss per share
because the impact would have been antidilutive:

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Options.............................. 1,252,500 1,972,300 1,855,070
Warrants............................. 2,730,000 732,000 934,750
--------- --------- ---------
Total.............................. 3,982,500 2,704,300 2,789,820
========= ========= =========
</TABLE>

The loss per share for the year ended December 31, 1998 includes the effect
of approximately $371,000 of the beneficial conversion feature of the Series
"A", 72 Convertible Preferred Stock as well as dividends in arrears of
approximately $149,000 related to this Preferred Stock.

STOCK OPTION PLAN -- Prior to January 1, 1996 the Company accounted for its
stock option plan in accordance with the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January 1,
1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense using the fair-value-based method
over the vesting period the fair value of all employee stock-based awards on the
date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income (loss) and
pro forma earnings (loss) per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 has been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123 (Note 9).

IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF -- The Company
adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of, on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amounts of the assets exceed the fair value of the assets (see Notes 4). Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.

SEGMENT REPORTING -- The Financial Accounting Standards Board issued
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"), in June 1997. SFAS No. 131 establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
It replaces the "industry segment" concept of SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise, with a "management approach" concept as
to basis for identifying reportable segments. SFAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997. The
Company adopted SFAS 131 in December 1997. MDT is

F-8
<PAGE> 59
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

considered a discontinued operation as of September 1998. As of December 31,
1998, the Company has only one operating segment, DPI, the Company's 3-D Audio
Signal Processing business.

COMPREHENSIVE INCOME -- The Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), in June 1997.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company adopted SFAS No. 130
January 1, 1998. Comprehensive income (loss) is the change in equity of a
business enterprise during a period from transactions and all other events and
circumstances from non-owner sources. Other comprehensive income (loss) includes
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. The
Company did not have components of other comprehensive income (loss) during the
years ended December 31, 1999, 1998 and 1997. As a result, comprehensive income
(loss) is the same as the net income (loss) for the years ended December 31,
1999, 1998 and 1997.

INCOME TAXES -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

USE OF ESTIMATES -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

FINANCIAL INSTRUMENTS -- The carrying values of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities at December 31,
1999 and 1998 approximated fair value due to the short maturity of those
investments.

The fair value of the advances from related parties could not be estimated
due to the nature of the borrowings.

The fair values of notes payable at December 31, 1999 and 1998 are
materially consistent with the related carrying values based on current rates
offered to the Company for instruments with similar maturities.

DISCONTINUED OPERATIONS -- In September 1998, the Board of Directors
approved a plan to refocus corporate activities on the Company's core audio
business, Desper Products, Inc. In conjunction to this strategic refocusing, the
Company permanently suspended operations of MDT and placed the business and its
related patent portfolio up for sale. The Company is accounting for the on-going
operating and termination expenses of MDT as a discontinued operation (see Note
12).

F-9
<PAGE> 60
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) PROPERTY AND EQUIPMENT

Property and equipment, as of December 31, 1999 and 1998, consists of the
following, net of a reserve for impairment loss in 1998 in accordance with
application of SFAS 121:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Office Computers, Software, Equipment and
Furniture....................................... $242,272 $225,907
Test Equipment.................................... 60,647 60,647
Tooling Equipment................................. 44,136 44,136
Trade Show Booth and Demonstration Equipment...... 122,768 122,768
Leasehold Improvements............................ 22,122 22,122
-------- --------
Total Property and Equipment...................... 491,945 475,580
Less Accumulated Depreciation and Amortization.... 359,142 291,440
-------- --------
Property and Equipment, Net....................... $132,803 $184,140
======== ========
</TABLE>

(4) INTANGIBLE ASSETS

Intangible assets, as of December 31, 1999 and 1998 consist of the
following:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Capitalized Patent and Technology Costs........... $373,677 $365,637
Less Accumulated Amortization..................... 165,884 128,724
-------- --------
Intangible Assets, Net............................ $207,793 $236,913
======== ========
</TABLE>

(5) FINANCING ARRANGEMENTS

NOTES PAYABLE -- Notes payable at December 31, 1999 and 1998 consist of the
following:

<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Notes payable, secured by equipment, interest at
11.5% to 22%, payable in monthly installments
through May 2002.................................. $14,149 $14,795
======= =======
</TABLE>

The notes payable balances as of December 31, 1999 and 1998 have been
classified as current liabilities since the long-term portion of the debt is not
material to the accompanying consolidated balance sheet. Capital lease
obligations totalling $25,552 at December 31, 1999 are included in the Net
Liabilities of Discontinued Operations.

(6) NOTES PAYABLE TO RELATED PARTIES

The Company was indebted to certain related parties for an amount totaling
$337,742 at December 31, 1999. This amount bears interest at a fixed rate of 10%
annually and is due on demand. It is convertible into shares of common stock
based on the 10 day average closing bid price immediately prior to notice of
conversion.

At December 31, 1998, the Company was indebted to four of its directors and
one of its executives for an amount totalling $745,000. This amount bears
interest at a fixed rate of 10%

F-10
<PAGE> 61
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

annually. Of this amount, $650,000 was due on December 31, 1998. The remaining
$95,000 was due on November 30, 1999, or upon the sale of the MDT assets. The
Company granted 95,000 warrants to purchase common stock at $0.20 per share in
connection with the $95,000 of indebtedness. This debt was converted into Series
B preferred stock in December 1999 (see Note 7).

(7) SHAREHOLDERS' EQUITY

During the year ended December 31, 1999, shares were issued or converted as
follows:

In December 1999, the Company completed a set of financial transactions
(the "December Transactions") with certain existing holders of the Company's
equity and debt and with new institutional investors. The December Transactions
included the private placement of 1,884,254 additional shares of our common
stock ($1.05 million in new capital or $0.55725 per share), the issuance of
warrants to acquire 2,100,000 shares of common stock exercisable for three years
at an exercise price of $.67 per share), the cancellation of 500,000 warrants to
acquire common stock issued in an earlier financing, the conversion of $1
million of short-term debt into a new Series B Convertible Redeemable Preferred
Stock ("Series B Preferred Stock") and the conversion of $225,000 of secured
debt into secured long-term convertible debt.

In the December Transactions, $895,000 in short-term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted common stock at a 10% discount, based on the 10-day average closing
bid price prior to the conversion, but subject to a minimum conversion of $56
per share and a maximum of $1.12 per share. The Company has a three-year option
to redeem any Series B Preferred Stock, not sooner converted, in whole or in
part, in cash.

In the December Transactions, $225,000 of secured debt, including accrued
interest, was converted into secured long-term convertible debt. The long-term
debt is held by existing institutional investors and is secured by essentially
all of the Company's assets. The debt, and accrued interest, is convertible at
the Company's or the holder's options into registered common stock at a
conversion price equal to the average 10-day closing bid price prior to
conversion but subject to the same minimum and maximum conversion prices set for
the Series B Preferred Stock.

Also, concurrently with the December Transactions, 55,000 shares were
allocated to the Company's outside legal counsel in payment of a portion of its
legal fees for this transaction.

During the year ended December 31, 1998, shares were issued or converted as
follows:

On April 14, 1998, the Company entered into a private placement for up to
$5 million of which $3 million was funded at December 31, 1998. In connection
with the private placement, the Company authorized 100,000 shares of a new
Series A, 7% Convertible Preferred Stock at a stated price of $50 per share and
issued 60,000 shares for the $3 million. In connection with the April funding,
the Company issued purchase 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, 450,000 were issued and 150,000 warrants were issued to
placement agents. The investor warrants are exercisable at 140% and the
placement warrants are exercisable at 120%, respectively, of the average

F-11
<PAGE> 62
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

closing bid price of the Company's common stock for the 10 days preceding the
closing. In addition, cash placement fees of 10% were paid. A related party of
the Company received 50,000 of the placement agent warrants and $100,000 of the
placement agent cash fee for arranging $1 million of the $3 million investment.
As of December 31, 1998, $1 million of the remaining $2 million of the funding
was due but had not yet been received.

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 a Form S-3 Registration Statement (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 and 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 (149) days of
first issuance of the Series A Preferred Stock. The applicable Conversion
Discount increased by five percent (5%) when the Company was delisted 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.

At December 31, 1998, 7,100 shares of the Convertible Preferred Series A
Stock had been converted into a total of 4,399,522 shares of the Company's
Common Stock.

The beneficial conversion feature of the Series A Preferred Stock will be
recorded as a dividend using the most favorable conversion terms available to
the shareholder to calculate the dividend in accordance with FASB (Emerging
Issues Task Force) Topic D-60. Since the Company has an accumulated deficit and,
under Delaware Law, must charge dividends against additional paid-in capital,
the net impact of recording the beneficial conversion feature is zero since both
sides of the entry are recorded in additional paid-in capital. At December 31,
1998, dividends in arrears were $131,148.

In the private placement, the participants were granted certain rights to
participate in the separate financing of approximately $6 million currently
being pursued by the Company to fund the commercial introduction of its
MultiDisc CD/DVD server technology. However, as reported by the Company on
September 25, 1998, the Company has decided to refocus on the core audio
technologies and to properly position the MultiDisc assets for sale. Therefore
this financing is not currently being pursued actively.

F-12
<PAGE> 63
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During the year ended December 31, 1997, shares were issued or converted as
follows:

In March 1997, the Company completed a private placement of 1,600,000 units
at a price of $1.25 per unit, each unit comprised of one common share and
one-half of one non-transferable share purchase warrant. One warrant entitles
the holder to purchase one additional share at a price of $1.75 on or before
April 7, 1998. Stock issuance costs consisted of 67,500 shares of common stock,
12,000 warrants to purchase an equivalent number of shares of common stock at
1.50 per share and $33,856 cash.

(8) ESCROWED PERFORMANCE SHARES

In December 1996, the Company accepted the terms outlined by the British
Columbia Securities Commissions ("BCSC") for the release of the Company's
5,776,700 escrowed "Performance Shares" from Canadian Escrow into a new escrow
arrangement with the Company. The overall modification was approved by the
Company's shareholders in August 1996. Under the revised arrangement, the
performance shares will be released automatically as follows: 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.

Under the revised escrow arrangement, the performance shares will vest,
provided the individual has not voluntarily terminated his/her relationship with
the Company prior to applicable vesting dates.

Based on the revised escrow arrangement, which primarily converts the
escrow shares release from performance criteria to a time-based criteria, the
Company recorded as compensation expense the excess of the fair market value of
the 5,776,700 performance shares on the date the Company accepted the terms of
the new escrow arrangement over the purchase price of such escrow shares.

All of the performance shares are included in the issued and outstanding
shares for the years ended December 31, 1999, 1998 and 1997. However, the shares
were not reflected in the calculation of loss per common share until earned by
and released to the holders on December 30, 1996, the date on which the Company
and the BCSC accepted and entered into the terms of the current escrowed
agreement as discussed above.

(9) STOCK OPTIONS

In 1995, the Company adopted a stock option plan (the "Plan") pursuant to
which the Company's Board of Directors may grant stock options to directors,
officers and employees. The Plan authorizes grants of options to purchase
authorized but unissued common stock up to 10% of total common shares
outstanding at each calendar quarter, 4,617,497 as of December 31, 1999. Stock
options are granted with an exercise price equal to the stock's fair market
value at the date of grant. Stock options have five-year terms and vest and
become fully exercisable up to three years from the date of grant.

At December 31, 1999, there were 1,758,030 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1999, 1998 and 1997 was

F-13
<PAGE> 64
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$0.32, $0.25, and $1.44, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 1999 and 1998 -- expected dividend yield 0%, risk-free interest
rate of 9.0%, expected volatility of 95% and an expected life of 3 years;
1997 -- expected dividend yield 0%, risk-free interest rate of 6.50%, expected
volatility of 147% and an expected life of 5 years.

The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for the fair value of its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1999 1998 1997
-------- ----------- -----------
<S> <C> <C> <C>
NET INCOME (LOSS):
As Reported............................... $354,792 $(5,792,061) $(4,719,821)
Pro Forma................................. $(49,978) $(5,792,061) $(6,408,547)
BASIC AND DILUTED LOSS:
As Reported............................... $ 0.01 $ (.29) $ (.23)
Pro Forma................................. $ (0.01) $ (.29) $ (.31)
</TABLE>

Pro forma net loss reflects only options granted since December 31, 1994.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to January 1, 1995 is not
considered.

Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at January 1, 1997...... 1,701,732 $2.737
Options granted............................. 780,000 $1.560
Options exercised........................... (339,833) $1.182
Options forfeited........................... (286,829) $3.208
---------
Options outstanding at December 31, 1997.... 1,855,070 $1.897
Options granted............................. 646,000 $0.728
Options exercised........................... (13,333) $0.953
Options forfeited........................... (515,437) $1.763
---------
Options outstanding at December 31, 1998.... 1,972,300 $1.515
Options granted............................. 1,280,000 $0.316
Options exercised........................... (59,998) $1.242
Options forfeited........................... (332,835) $1.131
---------
Options outstanding at December 31, 1999.... 2,859,467 $1.271
=========
</TABLE>

At December 31, 1999, the number of options exercisable was 2,401,300, and
the weighted-average exercise price of those options was $1.48.

F-14
<PAGE> 65
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On October 30, 1998, the Compensation Committee of the Board of Directors
re-priced qualified stock options to purchase 121,000 shares of common stock
granted to various employees beginning in June 1995. The exercise price for
these options was adjusted to $.01875 per share (the closing market price on
October 30, 1998) reducing grant date exercise prices ranging from $0.72 to
$2.34 per share. Also, on November 12, 1998, the compensation Committee of the
Board of Directors re-priced qualified stock options to purchase 100,000 shares
of common stock granted to an employee in March 1998. The exercise price for
these options was adjusted to $0.125 per share (the closing market price on
November 12, 1998) reducing the grant date exercise price from $1.18 per share.
The vesting schedules and expiration dates for these options were not modified.

(10) WARRANTS

Warrant activity for the periods indicated below is as follows:

<TABLE>
<CAPTION>
WARRANT
WARRANTS PRICE
--------- -------------
<S> <C> <C>
Warrants outstanding at January 1, 1997......... 174,000 $3.79
Warrants issued................................. 1,067,000 $1.45
Warrants exercised.............................. (287,250) $1.75
Warrants expired................................ (19,000) $3.80
---------
Warrants outstanding at December 31, 1997....... 934,750 $1.70
Warrants issued................................. 720,000 $1.45
Warrants exercised.............................. (19,000) $1.75
Warrants expired................................ (903,750) $1.70
---------
Warrants outstanding at December 31, 1998....... 732,000 $1.11
Warrants issued................................. 2,410,000 $0.60
Warrants exercised.............................. 0
Warrants expired................................ (412,000) $1.26
---------
Warrants outstanding at December 31, 1999....... 2,730,000 $0.67
=========
</TABLE>

All of the warrants granted in 1999, 1998 and 1997 were issued in
connection with private placements except for the following: 100,000 warrants
were granted in 1997 as consideration for consulting services rendered during
1997; 25,000 warrants were granted in 1998 as consideration for consulting
services rendered during 1998; and 95,000 warrants were granted in 1998 in
connection with a debt financing with the Company's directors. For those
warrants granted as consideration for consulting services, the fair value of the
consulting services was included in research and development costs in the
accompanying consolidated statement of operations for the years ended December
31, 1998 and 1997. At December 31, 1999 and 1998, the number of warrants
exercisable was 2,730,000 and 732,000, respectively.

F-15
<PAGE> 66
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) INCOME TAXES

The Company files a consolidated return for U.S. income tax purposes.
Income tax expense for the years ended December 31, 1999, 1998 and 1997
consisted of the following:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
State franchise tax........................ $ 800 $ 2,400 $ 2,856
Foreign taxes.............................. 5,700 35,838 57,847
------ ------- -------
Total...................................... $6,500 $38,238 $60,703
====== ======= =======
</TABLE>

Certain revenues received from customers in foreign countries are subject
to withholding taxes that are deducted from outgoing funds at the time of
payment. These taxes range from approximately 8.5% to 15% and are recorded as
foreign tax expense when incurred.

Income tax expense for the years ended December 31, 1999, 1998 and 1997
differed from the amounts computed by applying the U.S. federal income tax rate
of 34 percent to loss before income taxes primarily due to the generation of
additional net operating loss carryforwards for which no tax benefit has been
provided.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below.

<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net Operating Loss Carryforwards............ $ 9,854,000 $ 9,475,000
In-Process Research and Development Costs... 272,000
Asset Reserves.............................. 313,000
Accrued Liabilities......................... 19,000 32,000
Property and Equipment, Principally Due to
Differences in Depreciation and
Capitalized Interest...................... 23,000 20,000
----------- ------------
Total Gross Deferred Tax Assets............. 9,896,000 10,112,000
Less Valuation Allowance.................... (9,896,000) (10,112,000)
----------- ------------
Net Deferred Tax Assets..................... $ 0 $ 0
=========== ============
</TABLE>

The net change in the total valuation allowance for the years ended
December 31, 1999 and 1998 was a change of $(216,000) and $2,074,000,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making
this assessment. Based upon the level of historical taxable losses, management
believes it is more likely than not the Company will not realize the benefits of
these deductible differences and has established a valuation allowance to fully
reserve the deferred tax assets at December 31, 1999 and 1998. Additionally, the
ultimate realizability of net operating losses may be limited by change of
control provisions under Section 382 of the Internal Revenue Code.

F-16
<PAGE> 67
SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At December 31, 1999, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $26,000,000 which are available to
offset future Federal taxable income, if any, through 2013.

(12) DISCONTINUED OPERATION

On September 25, 1998, the Board of Directors determined that it would be
unable to raise the necessary capital required to properly commercialize the MDT
technology. Therefore, the Company ceased funding the operations of MDT and is
actively seeking to sell the assets and technology. All employees of MDT have
been terminated and the Company has vacated the MDT facilities.

Based on this action, the Company is treating MDT as a discontinued
operation. Accordingly, the balance sheet and statement of operations of MDT are
not consolidated in the continuing operations of the Company, but rather are
disclosed as Net Liabilities of Discontinued Operation and Loss From
Discontinued Operation, respectively.

The Net Liabilities of Discontinued Operation at December 31, 1999 are
comprised of the following:

<TABLE>
<S> <C>
Accounts payable..................................... $(260,364)
Accrued expenses..................................... (133,684)
Notes payable........................................ (25,552)
---------
Net liabilities of discontinued operations........... $(419,600)
=========
</TABLE>

(13) COMMITMENTS AND CONTINGENCIES

In February 1999, a complaint was filed in the Superior Court of Los
Angeles County, Northwest District, by I.N. Associates, Inc., against the
Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT"),
alleging breach of contract and fraud, and claiming $499,953.94 in damages,
attorneys fees, interest and the costs of suit. MDT has answered and denied the
claims. The matter was subject to a mediation preceding in March 2000, and
settlement is currently being documented. If the current settlement is
finalized, the matter will be resolved without any cost to the Company and I.N.
will be entitled to a cashless exercise of warrants for the 125,000 shares
originally issued to them in 1997 and 1998.

Operating Lease Commitments

The Company is obligated for future minimum rental payments for all
operating leases of approximately $75,000 per year through November 2002. Rent
expense amounted to approximately $140,000, $251,000 and $238,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.

F-17
<PAGE> 68

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

No person is authorized in connection with this prospectus to give any
information or to make any representations about us, the Selling Stockholders,
the Common Stock, or any matter discussed in this prospectus, other than the
information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
Selling Stockholder. This prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy the Common Stock in any circumstances under
which the offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any distribution of securities in accordance with this prospectus
shall, under any circumstances, imply that there has been no change in our
affairs since the date of this prospectus.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Use of Proceeds....................... 9
Special Note Regarding Forward-Looking
Statements.......................... 10
Capitalization........................ 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 21
Facilities............................ 29
Legal Proceedings..................... 30
Management............................ 31
Principal Stockholders................ 38
Selling Stockholders.................. 40
Plan of Distribution.................. 43
Description of Capital Stock.......... 43
Shares Eligible for Future Sale....... 47
Legal Matters......................... 47
Experts............................... 47
Where You Can Find More Information... 47
Index to Financial Statements
</TABLE>

SPATIALIZER AUDIO
LABORATORIES, INC.
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 69

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following list itemizes all estimated expenses incurred by us in
connection with this registration statement. The fees and expenses of the
Selling Stockholders are being paid by the Company.

<TABLE>
<S> <C>
Registration Fees........................................... $ 3,305.08
Transfer Agent Fees......................................... $ 500.00*
Printing and Engraving Costs................................ $ 3,000.00*
Legal Fees.................................................. $15,000.00*
Accounting Fees............................................. $10,000.00*
Miscellaneous............................................... $ 5,000.00*
Total..................................................... $36,805.08
</TABLE>

- -------------------------
* Estimated.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

We are incorporated in Delaware. Under Section 145 of the General
Corporation Law of the State of Delaware (the "DGCL"), a Delaware corporation
generally has the power to indemnify its present and former directors and
officers against expenses and liabilities incurred by them in connection with
any suit to which they are, or are threatened to be made, a party by reason of
their serving in those positions so long as they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, our best interests,
and with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The statute expressly provides that the power to
indemnify authorized thereby is not exclusive of any rights granted under any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
Our Certificate of Incorporation contains the following provision:

"ARTICLE IX
INDEMNIFICATION

SECTION 1. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or an
officer of the corporation, against expenses (including, but not limited
to, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action,
suit or proceeding to the fullest extent and in the manner set forth in and
permitted by Delaware law and any other applicable law as from time to time
in effect. Such right of indemnification shall not be deemed to be
exclusive of any other rights to which such director or officer may be
entitled apart from the foregoing provisions. The foregoing provisions of
this Section 1 shall be deemed to be a contract between the Corporation and
each director and officer who serves in such capacity at any time while
this Section 1 and the relevant provisions of Delaware law and other
applicable law, if any, are in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with
respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter brought or threatened based in
whole or in part upon any such state of facts.

II-1
<PAGE> 70

SECTION 2. The Corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was an employee or agent
of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including, but not limited to, attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding to the extent and in the
manner set forth in and permitted by Delaware law and any other applicable
law as from time to time in effect. Such right of indemnification shall not
be deemed to be exclusive of any other rights to which any such person may
be entitled apart from the foregoing provisions."

Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not eliminate
or limit the liability of a director (i) for such breach of the director's duty
of loyalty to the corporation or its stockholder, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 (relating to liability for unauthorized
acquisitions or redemptions of, or dividends on, capital stock) of the DGCL, or
(iv) for any transactions from which the director derived an improper personal
benefit.

Our Certificate of Incorporation contains the following relevant provision:

"ARTICLE X
LIABILITY FOR BREACH OF FIDUCIARY DUTY

To the fullest extent permitted by Delaware law, a director of the
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. In furtherance
thereof, a director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, as the same exists or hereafter may be
amended, or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law
hereafter is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of directors shall be
eliminated or limited to the full extent authorized by the General
Corporation Law of the State of Delaware, as so amended."

Our Bylaws obligate us to indemnify our directors, officers, employees and
other agents to the fullest extent permitted by Delaware law, in respect of
expenses, judgments, penalties, fines, and settlement of claims paid or
incurred, including those resulting from liability under the Act, if the
indemnitee acted in good faith and in what he or she reasonably believed to be
in, or not opposed to,

II-2
<PAGE> 71

the best interest of the corporation, and, in the case of criminal action, if
the indemnitee had no reasonable cause to believe his or her conduct was
unlawful. The Bylaws provide:

"ARTICLE VI
INDEMNIFICATION

SECTION 1. Directors and Officers. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is
or was a director or an officer of the Corporation, against expenses
(including, but not limited to, attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding to the fullest extent and
in the manner set forth in and permitted by the General Corporation Law of
the State of Delaware and any other applicable law as from time to time may
be in effect. Such right of indemnification shall not be deemed to be
exclusive of any right to which such director or officer may be entitled
apart from the foregoing provisions. The foregoing provisions of this
Section 1 shall be deemed to be a contract between the Corporation and each
director and officer who serves in such capacity at any time while this
Section 1 and the relevant provisions of the General Corporation Law of the
State of Delaware and other applicable law, if any, are in effect, and any
repeal or modification thereof shall not affect any right or obligation
then existing, with respect to any state of facts then or theretofore
existing, or any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of
facts.

SECTION 2. Agents and Employees. The Corporation may indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is
or was an employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including, but not limited to, attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding to the
extent and in the manner set forth in and permitted by the General
Corporation Law of the State of Delaware and any other applicable law as
from time to time may be in effect. Such right of indemnification shall not
be deemed to be exclusive of any other right to which any such person may
be entitled apart from the foregoing provisions."

* * *

Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the 1933 Act and is
therefore unenforceable.

The preceding discussion of our Certificate of Incorporation, Bylaws and
Section 145 of the DGCL is qualified in its entirety by reference to the
complete text of our Certificate of Incorporation and Bylaws which are on file
with the SEC.

II-3
<PAGE> 72

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1* Desper-Spatializer Reorganization Agreement dated January
29, 1992. (Incorporated by reference to the Registrant's
registration statement on Form S-1, Registration No.
33-90532, effective August 21, 1995.)
2.2* Arrangement Agreement dated as of March 4, 1994 among
Spatializer-Yukon, DPI and Spatializer-Delaware.
(Incorporated by reference to the Registrant's registration
statement on Form S-1, Registration No. 33-90532, effective
August 21, 1995.)
3.1* Certificate of Incorporation of Spatializer-Delaware as
filed February 28, 1994. (Incorporated by reference to the
Company's Registration Statement on Form S-1, Registration
No. 33-90532, effective August 21, 1995.)
3.2* Amended and Restated Bylaws of Spatializer-Delaware
(Incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 33-90532, effective
August 21, 1995.)
3.3* Certificate of Designation of Series B 10% Redeemable
Convertible Preferred Stock of the Company as filed December
27, 1999. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.)
3.4* Certificate of Amendment of Certificate of Incorporation of
the Company as filed on February 25, 2000. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.)
4.1* Form of Subscription Agreement for August 1994 Private
Placement. (Incorporated by reference to the Registrant's
registration statement on Form S-1, Registration No.
33-90532, effective August 21, 1995.)
4.2* Form of Subscription Agreement for November 1994 Private
Placement. (Incorporated by reference to the Registrant's
registration statement on Form S-1, Registration No.
33-90532, effective August 21, 1995.)
4.3* Form of Spatializer-Yukon Incentive Stock Option Agreement.
(Incorporated by reference to the Registrant's registration
statement on Form S-1, Registration No. 33-90532, effective
August 21, 1995.)
4.4* Spatializer-Delaware Incentive Stock Option Plan (1995
Plan). (Incorporated by reference to the Registrant's
registration statement on Form S-1, Registration No.
33-90532, effective August 21, 1995.)
4.5* Performance Share Escrow Agreements dated June 22, 1992
among Montreal Trust Company of Canada, Spatializer-Yukon
and certain shareholders with respect to escrow of 2,181,048
common shares of Spatializer-Yukon. (Incorporated by
reference to the Registrant's registration statement on Form
S-1, Registration No. 33-90532, effective August 21, 1995.)
4.6* Spatializer-Delaware 1996 Incentive Plan. (Incorporated by
reference to the Registrant's Proxy Statement dated June 25,
1996 and previously filed with the SEC.)
4.7* Form of Subscription Agreement for 1995 Private Placements.
4.8* Form of Subscription Agreement and Warrant Agreement for
March 7, 1997 Private Placement.
4.9* Modification Agreement for Escrowed Performance Shares.
4.10* Form of 7% Convertible Series A Preferred Stock Subscription
Agreement, Warrant Agreement and Registration Right
Agreement (with Form of Amendment) for April 14, 1998
Private Placement.
4.11* Form of Common Stock Subscription Agreement for December
1999 Private Placement with CPR (USA) Inc., LibertyView
Funds, L.P. and LibertyView Fund, LLC.
</TABLE>

II-4
<PAGE> 73

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
4.12* Form of Secured Non-Negotiable Convertible Promissory Note
issued to CPR (USA) Inc., LibertyView Funds, L.P. and
LibertyView Fund, LLC in the original principal amounts of
$112,620.55, $90,096.43 and $22,524.12, respectively.
4.13* Form of Agreement Regarding Indebtedness, dated December 29,
1999, among the Registrant and CPR (USA) Inc., LibertyView
Funds, L.P. and LibertyView Fund, LLC.
4.14* Form of Security Agreement, dated December 29, 1999, among
the Registrant and CPR (USA) Inc., LibertyView Funds, L.P.
and LibertyView Fund, LLC.
4.15* Form of Common Stock Subscription Agreement for December
1999 Private Placement with Bank Insinger de Beaufort.
4.16* Form of Common Stock Subscription Agreement for December
1999 Private Placement with Romofin AG.
4.17* Form of Common Stock Subscription Agreement for December
1999 Private Placement with Arab Commerce Bank, as designee
for Lu Feng Investments, Ltd. (Lu Feng Investments, Ltd. is
now both the record and beneficial owner of the subject
Common Stock). (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999.)
4.18* Form of 10% Convertible Series B Preferred Stock
Subscription Agreement for December 1999 Private Placement
with Clarion Finanz, A.B., Carlo Civelli, Henry R. Mandell,
James D. Pace, Jerold H. Rubinstein, Gilbert N. Segel, Aton
Select Fund, Ltd., and Romofin A.G.
4.19* Form of Agreement Regarding Cancellation of Warrants, dated
December 29, 1999, among the Registrant, CPR(USA) Inc.,
LibertyView Funds, L.P., LibertyView Fund, LLC, Clarion
Finanz, A.G. and Aton Select Fund, Ltd.
4.20 Certificate of Designation of Series B 10% Redeemable
Convertible Preferred Stock (included in Exhibit 4.18).
5.1 Opinion of Brand Farrar & Buxbaum LLP concerning legality of
securities subject to registration.
23.1 Consent of Farber & Hass, independent certified public
accountants.
23.2 Consent of Brand Farrar & Buxbaum LLP (included in Exhibit
5.1)
</TABLE>

- -------------------------
* Previously filed.

** To be filed by amendment.

ITEM 17. UNDERTAKINGS

We hereby undertake:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price

II-5
<PAGE> 74

represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement.

(2) That, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(4) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of
Spatializer pursuant to the provisions described in Item 6 or otherwise, we
have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(5) The undersigned Registrant undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of the registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by
the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the registration statement as
of the time it was declared effective, and (2) for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-6
<PAGE> 75

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-3 (and
the resulting Registration Statement on Form S-1) to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Los Angeles, State of
California on April 17, 2000.

SPATIALIZER AUDIO LABORATORIES, INC.

By: /s/ HENRY R. MANDELL
-------------------------------------
Henry R. Mandell
Chief Executive Officer
Chairman of the Board

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HENRY R. MANDELL Chairman of the Board, April 17, 2000
- --------------------------------------------- Chief Executive Officer,
Henry R. Mandell Chief Financial Officer,
Secretary and Director

CARLO CIVELLI* Director April 17, 2000
- ---------------------------------------------
Carlo Civelli

JAMES D. PACE* Director April 17, 2000
- ---------------------------------------------
James D. Pace

GILBERT N. SEGEL* Director April 17, 2000
- ---------------------------------------------
Gilbert N. Segel

STEPHEN W. DESPER* Director, Vice Chairman April 17, 2000
- --------------------------------------------- of the Board,
Stephen W. Desper Secretary

*By: /s/ HENRY R. MANDELL April 17, 2000
- --------------------------------------------
Henry R. Mandell,
Attorney-in-Fact
</TABLE>

II-7

<PAGE> 1
EXHIBIT 5.1

BRAND FARRAR & BUXBAUM LLP

COUNSELLORS AT LAW
515 South Flower Street, Suite 3500
LOS ANGELES, CALIFORNIA 90071-2201
Telephone: (213) 228-0288
Facsimile: (213) 426-6222
e-mail: [email protected]
Direct Dial: (213) 426-6260
e-mail: [email protected]

April 10, 2000

Spatializer Audio Laboratories, Inc.
20700 Ventura Boulevard, Suite 134
Woodland Hills, California 91364

Re: Registration Statement on Form S-1 and Amendment No. 1 to
Registration Statement on Form S-3.

Ladies and Gentlemen:

We have acted as counsel to Spatializer Audio Laboratories, Inc. (the
"Company"), with respect to the filing of the Company's Registration Statement
on Form S-1 and Amendment No. 1 to Registration Statement on Form S-3
(collectively the "Registration Statement") with the Securities and Exchange
Commission for the purpose of registering under the Securities Act of 1933, as
amended, the resale of an aggregate of up to 6,197,636 shares (the "Shares") of
Common Stock, par value $.01 per share ("Common Stock"), by certain stockholders
of the Company. The Shares consist of 3,672,636 shares of Common Stock issued
prior to the date hereof (the "Issued Shares"), and up to 2,525,000 shares of
Common Stock issuable upon exercise of currently outstanding options and
warrants ("Option Shares"). This opinion is delivered to you in connection with
the Registration Statement for the aforementioned resales.

As such counsel, we have examined such documents and records of the
Company as we deemed necessary as a basis for the opinion set forth herein, and
we are familiar with actions anticipated to be taken by the Company in
connection with the authorization and issuance of the Shares.

With respect to the Issued Shares, we have assumed that such shares have
been issued and the certificates evidencing the same have been duly delivered,
against receipt of the consideration stipulated therefor, which was not less
than the par value of the Issued Shares.

With respect to the issuance of the Option Shares by the Company, we have
assumed that the Option Shares will be issued, and the certificates evidencing
the same will be duly delivered, in accordance with the respective terms of the
options and the warrants, as the case may be, and against receipt of the
consideration stipulated therefor, which will not be less than the par value of
the Option Shares.

BEIJING - CHENGDU - GUANGZHOU - NEW YORK - SHANGHAI -
SHENZEN - ULAANBATAR - XIAMEN

<PAGE> 2
Spatializer Audio Laboratories, Inc. BRAND FARRAR & BUXBAUM LLP
April 10, 2000 COUNSELLORS AT LAW
Page 2

Based on such examination, in reliance thereon, subject to the foregoing
assumptions, and subject to compliance with applicable state securities laws, we
are of the opinion that the Issued Shares are or, in the case of the Option
Shares, when issued by the Company and paid for in the manner described in the
Registration Statement, will be, validly issued, fully paid and nonassessable.

The Company is a Delaware corporation. We are not admitted to practice in
Delaware. However, we are generally familiar with the Delaware General
Corporation Law and have made such review thereof as we consider necessary for
the purpose of this opinion. Subject to the foregoing, this opinion is limited
to Delaware, California and federal law.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.

Very truly yours,

/s/ BRAND FARRAR & BUXBAUM LLP

BRAND FARRAR & BUXBAUM LLP

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 10, 2000, in the Registration Statement on Form
S-1, Amendment No. 1 to the Registration Statement on Form S-3, of Spatializer
Audio Laboratories, Inc.

/s/ Farber & Hass LLP
Oxnard, California
April 14, 2000