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Spatializer Targets New Products and New Markets as the Basis for Sustainable Growth

Spatializer Chairman and CEO Henry R. Mandell told the company's shareholders that the company was entering a period of change, transition and opportunity. Mandell reviewed the company's five existing pathways of targeted growth: virtual surround, speaker enhancement, headphone enhancement, Spatializer Interactive and consulting services. "Global consumer electronics and PC sales total nearly 1 billion units annually. While the market presents formidable challenges, there are tremendous opportunities ... that no player in our industry has locked up," declared Mandell.

Spatializer's fiscal 2002 revenues were $1,856,000, compared to $1,604,000 in 2001, an increase of 16%. Net income for fiscal 2001 was $18,000, or $0.00 per share, compared to net loss of ($240,000, or ($0.01) per share, in the prior year. Stockholder's equity and working capital were stable at $1.4 million and $1.1 million, respectively.

"Our improved operating performance was driven by top line growth and operating efficiencies. We also further diversified our customer base. More importantly, we were able to leverage some of our smaller deals into larger deals by carefully cultivating our relationships and execution of our strategy of intense customer service that I talked about last year."

In outlining primary accomplishments in 2002, Mr. Mandell noted that the industry faces difficult market dynamics. Network effects derived from alliances with some chip suppliers have been weakened by the competitive pressures they face. The result has been the offering by these companies of simple, but free virtual surround solutions to enhance their standard product offering. Consumer electronics manufacturers continue to cope with price deflation and low cost Chinese imports, resulting in on-going cost cutting and greater scrutiny of the need for additional features.

During the year, Spatializer was featured in additional new products including Sharp DVD recorders, Toshiba hard disk recorders, as well as DVD/VCR combos from JVC. In addition, new distribution relationships were entered into with Mediatek, Micronas and LSI Logic. The company also announced three new products, Spatializer enCompass AV(TM), Spatializer Virtual Digital Theater(TM) and Spatializer Audio Alchemy(TM).

Mr. Mandell outlined several opportunities in the coming year:

"Our success with Spatializer N-2-2 Ultra(TM) in virtual surround today is currently tied to the DVD player market. That market is maturing and is under price pressure. We must leverage this presence into emerging markets. DVD Recorders is one such market. We have made inroads with Sharp and Toshiba in the recordable market. Recordable DVD today is a less than 2 million unit market. However, prices have been reduced to be broadly attractive. These devices will replace the DVD player and are projected by analysts to grow rapidly to 40 million units by 2006. We are targeting a 35% penetration of this market."

Mr. Mandell continued, "Digital TV is projected to grow from 7 million units to 30 million in 2006. To date, audio has been implemented in analog, where we are at a competitive disadvantage due to high priced chips from our analog partner. As these systems adopt DSP-based audio, and we expand our network of DSP partners in this market, our solutions will be more competitive. One of our new partners, Micronas, is a DSP leader in the digital TV market."

In commenting on the speaker enhancement segment, Mr. Mandell stated, "In-car audio is a 50 million unit market and is growing, according to industry analysts. enCompass AV is perfectly suited to feed and enhance 2 channel source material, like MP3 and CDs to the multiple speakers in the car environment. AV Receivers are another large target market for enCompass AV. Our solution offers an effective, yet low-cost alternative to Dolby Prologic II."

"Our speaker enhancement solutions, Spatializer PCE and Spatializer Vi.B.E directly address the speaker limitations faced by manufacturers of TVs, including new plasma and LCD TVs, small form factor home audio systems, cell phones, car audio and notebook computers. These markets comprise sales of over 700 million units annually, per industry experts."

Spatializer is putting strong emphasis on headphone enhancement. Mobility and the need for privacy are driving the growth in personal audio. Key to succeeding in this market is delivering compelling technology through headphones. Spatializer Natural Headphone delivers on market requirements by creating:

  -- An open and personal surround sound experience
  -- Improved dialog clarity when watching DVDs on notebook computers
  -- A high fidelity experience from frequency response challenged
     head pieces
  -- A solution that is sensibly priced

Mr. Mandell focused on the future where new products and new markets drive future sustainable growth. Mr. Mandell expanded on this theme by stating, "I've talked about growth opportunities and challenges within our traditional markets and licensing business model. These markets are highly competitive. We need to relieve some of this pressure and achieve better competitive advantage to invigorate our growth prospects. We need to develop and move to new product and technology platforms that will serve as a basis for a wide new array of compelling products that truly address customer needs and problems beyond our traditional and crowded market. Rather than just our traditional customers, we're going directly to the consumer ... and that's where Spatializer Interactive comes in."

Spatializer Interactive (SI) brings to the PC the same clear, immersive and high-quality audio enjoyed on home entertainment systems. SI brings Spatializer Audio Laboratories' renowned expertise and focus on psychoacoustic audio in the consumer electronics market to PC manufacturers and Internet content providers alike, resulting in business partnerships that deliver meaningful product solutions that improve Internet and PC-based audio. SI, through its products, sales programs and relationships intends to build a value network between consumers, manufacturers and content providers that will be the bridging facilitator for the home computing and entertainment convergence.

Further expanding on a theme of diversification and innovation, Mr. Mandell illuminated the importance and prospects for Spatializer Audio Alchemy. Spatializer Audio Alchemy is an ambient noise suppression technology that also improves voice intelligibility. It has received a strong reception from DVD recorder, camcorder, voice recorder and notebook PC manufacturers. It has further potential applications in cellular telephones, DVD authoring software, digital cameras and hearing aids. "We're very excited about Spatializer Audio Alchemy because this product solves a real problem ... eliminating extraneous and undesirable noise in a wide array of applications. This solution is unique, innovative, marketable and affordable. If we are able to convert this strong initial interest into a string of new licenses, we expect to build a family of new products around this core technology to drive sustainable growth."

About Spatializer

Spatializer Audio Laboratories Inc. is a leading developer, licensor and marketer of next-generation technologies for the consumer electronics, computing and entertainment industries. The company's advanced audio technology is incorporated into consumer electronics audio and video products from global brand leaders including Toshiba, JVC, Panasonic, Samsung, Sharp and Sanyo, among others. Spatializer stock is traded on the OTC Bulletin Board under the symbol: SPAZ. The company is headquartered in Santa Clara, CA, with executive offices in Westlake Village, CA and marketing offices in Tokyo, Japan. Further information may be obtained from the company's web site, www.spatializer.com, Spatializer's SEC filings, and by contacting the company's Investor Relations Department at 408-296-0600 or by writing to investor@spatializer.com.

Safe Harbor Act Statement Under the Private Securities Litigation Reform Act of 1995: Certain information in this background news release, including the comments by Mr. Mandell in this press release are forward looking statements that are based on management's belief, as well as assumptions made by, and information currently available to management. While the company believes that its expectations are based upon reasonable assumptions, there can be no assurances that the company's financial goals will be realized. Numerous uncertainties and risk factors may affect the company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the company. These uncertainties and risk factors include, but are not limited to the continued need for additional capital, dependence on new technology and intellectual property, dependence on the PC and consumer electronics industries, dependence on product shipments of third-party licensees, competition and pricing pressures, and other risks detailed from time to time in the company's periodic reports filed with the Securities and Exchange Commission. NOTE: Desper Products Inc. is a wholly owned subsidiary of Spatializer Audio Laboratories Inc. Spatializer(R) is a registered trademark and Spatializer N- 2-2 Ultra(TM), Spatializer enCompass AV(TM), Spatializer Vi.B.E (TM), Spatializer PCE(TM) and Spatializer Natural Headphone(TM), Spatializer Virtual Digital Theater(TM) and Spatializer Audio Alchemy are trademarks of Desper Products Inc. All other trademarks are the property of their respective owners.

Source: Spatializer Audio Laboratories Inc.

CONTACT: Henry R. Mandell, CEO of Spatializer Audio Laboratories, Inc.,
+1-408-296-0600, Ext. 4, or investor@spatializer.com

Web site: http://www.spatializer.com/