<PAGE>

================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           -------------------------
                                   FORM 10-K/A

(MARK ONE)

    [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

           For the fiscal year ended December 31, 2000

                                       Or

    [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

           For the transition period from ____________ to ___________

                         COMMISSION FILE NUMBER: 0-26516

                                 EUPHONIX, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               CALIFORNIA                                  77-0189481
    (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NUMBER)

           220 PORTAGE AVENUE
          PALO ALTO, CALIFORNIA                              94306
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE))

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 855-0400

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $.001 PAR VALUE

       Indicate by check mark whether the registrant has filed (1) all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

       The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on
February 15, 2001, as reported on the Nasdaq SmallCap Market, was approximately
$8,542,518. Shares of Common Stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may under certain circumstances be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

       The number of shares of the Registrant's Common Stock as of February 15,
2001 was 12,192,099.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

       Portions of the definitive Proxy Statement to be filed pursuant to
Regulation 14A promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, which is anticipated to be filed within 120
days after the end of the Registrant's fiscal year ended December 31, 2000, are
incorporated by reference in Part III of this Form 10-K.

================================================================================


<PAGE>

                                 EUPHONIX, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                 Page
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<S>                                                                                                              <C>
Explanatory Note..............................................................................................    ii

PART I........................................................................................................     1

    Item 1.   Business........................................................................................     1
    Item 2.   Properties......................................................................................    15
    Item 3.   Legal Proceedings...............................................................................    15
    Item 4.   Submission Of Matters To A Vote Of Security Holders.............................................    15

PART II.......................................................................................................    16

    Item 5.   Market For The Registrant's Common Equity And Related Stockholder Matters.......................    16
    Item 6.   Selected Financial Data.........................................................................    17
    Item 7.   Management's Discussion And Analysis Of Financial Condition And Results Of Operations...........    18
    Item 7a.  Quantitative And Qualitative Disclosures About Market Risk......................................    29
    Item 8.   Financial Statements And Supplementary Data.....................................................    29
    Item 9.   Changes In And Disagreements With Accountants On Accounting And Financial Disclosure............    56

PART III......................................................................................................    57

    Item 10.  Directors And Executive Officers Of The Registrant..............................................    57
    Item 11.  Executive Compensation..........................................................................    57
    Item 12.  Security Ownership Of Certain Beneficial Owners And Management..................................    57
    Item 13.  Certain Relationships And Related Transactions..................................................    57

PART IV.......................................................................................................    58

    Item 14.  Exhibits, Financial Statements And Reports On Form 10-K.........................................    58

SIGNATURES....................................................................................................    63
</TABLE>


                                      -i-
<PAGE>

                                EXPLANATORY NOTE

       This amended Annual Report on Form 10-K/A for the year ended December 31,
2000 is being filed as a result of the restatement of our consolidated financial
statements for the year ended December 31, 2000, as further described in Note 16
of the Notes to Condensed Consolidated Financial Statements on this Form 10-K/A.
This report still speaks as of the original filing date, and except as stated,
no attempt has been made to update this report to reflect events occurring
subsequent to the date of the original filing.


                                      -ii-
<PAGE>

                                     PART I

       The Business section and Management's Discussion and Analysis of
Financial Condition and Results of Operations in this Annual Report on Form 10-K
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements represent our
expectations and beliefs concerning future events and include statements
regarding our expectations or beliefs that: our RocketPowered products will
allow collaboration and project transfer between studios and across different
software and hardware platforms; the market requiring audio production for
computer-based audio such as Internet web pages, interactive CD-ROM, DVD-ROM and
games may continue to grow; as the complexity of audio production increases,
there will be an increased need for larger-scale mixing consoles; the Euphonix
system will become the control center for automating and streamlining
significant portions of the audio production process; our brand name recognition
and loyalty will benefit us as we seek to increase our share of our target
market; we are well- positioned to take advantage of new opportunities offered
by the Internet as one of the few companies to employ an Internet Protocol based
architecture; due to the rapid proliferation of new technologies, intellectual
property protection will be less influential on our ability to compete than the
ability of our research and development personnel and our ability to enter new
markets and service our customers; as technology in the professional audio
industry advances, prices for mixing consoles and other audio equipment will
decrease and as a result our products may increasingly compete against lower
priced products, as well as products in the high-end price range; and our
available cash and cash equivalents will not be sufficient to meet our
anticipated needs for working capital and capital expenditures through the end
of 2001; we will have to raise additional funds in order to meet our operating
needs; and we are actively engaged in securing a new borrowing facility. These
statements are subject to risks and uncertainties, and our future actual results
could differ materially from such forward-looking statements. Factors that could
adversely affect the business include: our ability to introduce and sell new
products according to our plans; changes in the market for our products and the
growth of the professional audio market; worldwide and European market
acceptance of our and our competitors' products; the strength of our
competitors; our ability to manage our expenses according to our plans over the
course of the next year and our ability to raise new capital if necessary. These
factors and others are described in more detail in the section of this Annual
Report entitled "Risk Factors That May Affect Results of Operations and
Financial Condition" beginning on page 21.

ITEM 1. BUSINESS.

       Founded in California in July 1988, Euphonix, Inc. develops, manufactures
and supports networked digital audio systems for music, film and television
post-production, broadcast, sound reinforcement and multimedia applications. Our
core products consist of high-performance digital audio consoles,
digital-control analog audio consoles, disk-based multi-track recorders and
audio format converters. Our products are used to produce audio content for
entertainment industry markets including music and CDs, film and television
audio post-production, television and radio broadcast, concert and theater sound
reinforcement, multimedia and the Internet. We are an industry leader in
providing software-driven functionality that serves to automate and streamline
the audio production process, while providing high quality audio and extended
functionality relative to the current audio industry standards. Our high
performance audio systems play a major role in the production of popular music,
motion picture and television projects. Many feature films and television
programs are scored and mixed on our digital-control analog CS Series and System
5 high-performance digital audio consoles. Our business strategy is to supply
digital solutions to meet our customers' needs as the entertainment industry
converts from analog to digital production and distribution methods. We produce
a variety of software, scalable hardware and services for recording, editing,
and mixing audio for high-end professional use.


                                      -1-
<PAGE>

       During the year ended December 31, 2000, we introduced a number of new
initiatives and entered into a number of strategic alliances.

              (1) In February 2000, we announced a software licensing agreement
       with Rocket Network Inc. to develop future software releases for the R-1
       multi-track recorder and System 5 digital audio console that will allow
       users to tap into the online production and collaboration capabilities of
       Rocket Network.

              Euphonix is presently the only company serving the high-end market
       with an Internet-Protocol-based architecture, which gives us a strategic
       advantage as the audio industry begins to migrate aspects of the content
       production process to the Internet. Rocket Network provides important
       technology and services that will accelerate this migration. Rocket
       Network's online production and collaboration technology enables
       Euphonix-equipped studios to network with each other to create music and
       audio for CDs, films, television and the Internet. Future RocketPowered
       products from Euphonix will allow collaboration and project transfer
       between studios and across different software and hardware platforms.
       Traditionally, the movement of projects between bricks-and-mortar studios
       has been limited by a high degree of platform incompatibility between
       various tape and digital audio formats.

              (2) At the NAB 2000 Convention in April 2000, Euphonix emphasized
       our ongoing commitment to designing and innovating practical, flexible
       solutions for today's digital-conscious television broadcast and
       post-production communities.

              The broadcast and post production industries are changing, as they
       transition from analog to digital production and delivery techniques.
       Stations require enhanced flexibility and multi-purpose tools to handle a
       diverse range of productions at variable sampling frequencies and bit
       rates. A high priority for us is to develop appropriate solutions for the
       broadcast community that translate into user-friendly control surfaces,
       reliable fail-safe operation and outstanding multi-channel sound quality.

              (3) In May 2000, we launched Listen-In(TM) Service, which allows
       live audio streaming from System 5 to studio clients around the world.
       This Internet-enabled remote monitoring service offers our customers real
       time System 5 facilities and secure access to a control room mix via a
       high-speed Internet connection.

              (4) In September 2000, at the Audio Engineering Society Convention
       in Los Angeles, Euphonix demonstrated solutions from Digidesign, Rocket
       Network and Sonic Solutions that were inter-networked with Euphonix
       technologies to demonstrate how companies are collaborating to streamline
       the audio production process.

              Euphonix licensed proprietary technology developed by Digidesign
       to deliver value to studio operators, producers and musicians who record
       and mix high-quality audio projects. "Pro Tools(TM)" users can now work
       directly with the Euphonix System 5 digital console and R-1 recorder to
       mix and produce DVD-Audio projects at 24 bit/96 kHz.

              Euphonix and Sonic Solutions are working on ways to make file
       transfer and system integration as seamless as possible. Sonic Solutions
       and Euphonix systems are being used to create DVD-Audio releases, and the
       two companies are well positioned for further integration and continued
       compatibility, which will help make efficient DVD-Audio production
       possible.


                                      -2-
<PAGE>

              Leading record companies, including Warner Music Group and BMG,
       are using System 5, R-1 and Sonic Solutions systems to create some of the
       first 24 bit/96 kHz DVD-Audio releases. With three times the audio
       resolution of CDs, DVD-Audio is becoming the new standard for
       high-quality consumer audio software.

              (5) In September 2000, Euphonix System 5 received the coveted TEC
       Award for high-performance digital system in the Large Format Console
       category, which was awarded by readers of Mix magazine, a leading
       international trade magazine for the professional audio industry.

INDUSTRY OVERVIEW

       Audio content for the entertainment industry is produced by professionals
in four primary applications: music (CDs, DVD-Audio, tapes, music for film and
television), post production (sound for film, video, DVD and television),
broadcast (sound for broadcast television) and live sound reinforcement (sound
for live concerts and theater). The market requiring audio production for
computer-based audio such as Internet web pages, interactive CD-ROM, DVD-ROM and
games, has developed and, we believe, may continue to grow in the future.

       Mixing consoles serve as the central component of most professional audio
production studios, and are used by all applications of the professional audio
market throughout the production process, which includes recording, editing and
mixing. A mixing console electronically blends, routes and enhances sound from
musical instruments, voices, sound effects and pre-recorded material. Mixing
consoles that are used in each market during the different stages of production
share a high degree of common functionality. Professional mixing consoles are
used to process, combine, and reduce a large number of individual audio inputs
(typically 20-100) to produce a smaller number of outputs (typically 2-8) for
the audio engineer to hear or record. Audio inputs and outputs to mixing
consoles have traditionally been transmitted via analog methods. The
entertainment industry is rapidly replacing analog methods with digital methods.
Euphonix provides solutions for both analog and digital processing as well as
products to convert audio between analog and digital formats. We also produce
digital disk-based multi-track recorders to replace tape-based systems used to
record the many channels of sound that are subsequently fed through the mixing
console during typical professional audio productions. We expect that as the
complexity of audio production increases in all market segments due to consumer
demand for higher quality and more captivating sound, including the audio
requirements of High Definition Television, or HDTV, there will be an increased
need for larger-scale mixing consoles.

STRATEGY

       Our goal is to remain one of the leading providers of sound production
tools for the entertainment industry through developing innovative, high value,
user oriented products. Our strategy includes the following key elements:

   Develop a family of products

       Our goal is to leverage our reputation and substantial investment in
digital control technology, digital signal processing and distributed computer
processing to develop a family of digital product offerings to support
recording, editing and mixing functions. Our plan is to focus on the needs of
the high-end professional music recording, short and long form post production
and on-air broadcast facilities. In the long term, we intend to develop,
internally or through acquisitions or licensing, a range of compatible audio


                                      -3-
<PAGE>

production products that will enable the Euphonix system to become the control
center for automating and streamlining significant portions of the audio
production process.

   Capitalize on Leading Edge Technology

       Since our inception in 1988, we have dedicated ourselves to bringing
cost-effective digital hardware and software technology to professional audio
mixing. In 1991, we brought to market the first commercially successful
digitally controlled audio mixing console with performance which we believe
rivaled high-end products from other manufacturers at a significantly lower
price. In 1999, we launched the System 5 high performance digital console and a
48-track 96 kHz version of the R-1 Multitrack Recorder. Our product architecture
and technology have been designed to enable the professional user to express
more easily creative talents while reducing labor and time-intensive operations,
at a more favorable price-performance ratio than existing mixing systems.

   Provide Complete Scalable Solutions

       We offer modular systems that provide customers a range of functionality
and flexibility, allowing them to configure our systems to meet their
professional needs and financial resources. A key focus of our product
development efforts is to make an initial investment in a Euphonix system, and
then upgrade their system as their needs and finances permit.

   Leverage Brand Name Recognition

       We seek to enhance our reputation for technical innovation, high quality
and favorable price-performance. To date, as a result of our product
architecture, customer satisfaction, excellent price-performance and significant
industry visibility, Euphonix has generated brand name recognition and loyalty,
which will benefit us as we seek to increase our share of our target market.

   Build Global Presence

       Our sales strategy is to build a worldwide presence in order to fully
address our target markets and to serve customers that operate on an
international basis. Our sales outside the United States as a percentage of our
net revenues were approximately 42% in 2000, 33% in 1999, and 43% in 1998. In
addition to our New York, Los Angeles, Nashville and Palo Alto offices in the
United States, we have offices in Tokyo and a network of sales representatives
outside of the United States.

       In April 2000, we entered into a joint venture agreement with Audio
Export George Neumann & Company Gmbh (Audio Export), a leading German-based
audio distributor and service provider, to build Euphonix Europe Ltd., an
international distribution organization serving the European, Middle Eastern and
African markets. Headquartered in London, Euphonix Europe supports a network of
highly skilled service and distribution centers throughout Europe, the Middle
East and Africa.

       One of the objectives of the joint venture is to increase the sales
potential of Euphonix products in Europe. Audio Export has an established sales
and service organization and provides Euphonix with the "local" management
bandwidth, experience necessary to address multiple geographic boundaries.


                                      -4-
<PAGE>

PRODUCTS

       Our products include the System 5 High Performance Digital Audio Console
and the 48-track R-1 Multi-track Recorder, both introduced in 1999, the CS3000
Series Digital-Control Analog Console and a family of high-performance
multi-channel audio format converters as described below.

   System 5 High-Performance Digital Audio Console

       Introduced in September 1999 at the Audio Engineering Society convention
in New York City, the System 5 is our flagship high-performance digital audio
console. In development for over three years, the System 5 is the first digital
console to provide the following benefits to customers: 24-bit, 96 kHz digital
audio interfacing and processing, simple user interface, and high degrees of
modularity, scalability, and fault tolerance. We believe that the adoption rate
of digital technology by the audio industry has been slow, due to the perceived
reduction in audio quality and in ease of use and in fault tolerance brought on
by early generations of digital audio consoles. System 5 was designed from
inception to address these concerns as significant investments were made in
producing breakthroughs in sound quality, ease of use, and fault tolerance.

       The System 5 offers a modular, scalable architecture that is configurable
to a broad range of sizes and applications for the production of audio for music
CDs and DVDs, film and television soundtracks, live television broadcasts and
live auditorium performances. Since the product's introduction, we have
delivered System 5s to customers for applications in the major segments of
professional audio production.

       The System 5 is the only large-scale audio console to employ multiple
Pentium-based computers connected with an Internet Protocol network and
Microsoft's Windows NT operating system. We believe this architecture will
benefit over time with performance increases and price reductions brought on by
the rapid technology development of standard computing and networking platforms.

   CS3000 Series Digital-Control Analog Console

       Introduced in 1997, the Euphonix CS3000 has been designed for operational
speed, high sound quality and flexible configuration control and processing.
CS3000 options and upgrades may be factory-installed or added in the field,
allowing customers to tailor the product to their exact requirements and then to
subsequently modify and upgrade their CS3000 as their needs change. We offer
specific features developed for individual market applications to all customers
in order to ensure compatibility between each CS3000 and to provide customers
with the ability to change applications across market applications. The CS3000
can use the same version of software for various applications. The base CS3000
may currently be specified with hardware variations to accommodate differences
in application of the product by the music ("D" & "M" Systems), post production
("P" & "F" Systems) and broadcast ("B" Systems) market applications.

   R-1 Multi-Track Recorder

       We debuted the 24-track version of the R-1 Multi-track Recorder at the
AES show in San Francisco during September 1998. The R-1 shipments began in the
first quarter of 1999. At the AES show in New York during September 1999, we
announced version two of the R-1 Multi-track Recorder in a 48-track 96 kHz
configuration. It was the professional audio industry's first product to offer a
user-friendly transition from analog or 16-bit digital tape recording to 24-bit
disk recording. The R-1 provides the users of over 50,000 professional
multi-track tape recorders with a replacement product that significantly
improves sound


                                      -5-
<PAGE>

quality, reliability, and operational efficiency while maintaining a
user-interface that has remained an industry standard since the early 1970's.
Key features include:

              Improved Sound Quality results from 24-bit, 96 kHz domain
       conversion, transmission and storage combined with 40-bit floating point
       Digital Signal Processing. Almost 100% of the installed tape recorders
       are either analog or 16-bit digital, providing significantly less audio
       resolution than the R-1.

              Operational Feel and Efficiency surpasses tape recorders where
       possible, yet emulates tape recorders where tradition dictates, to
       provide recording engineers with a minimal learning curve transition to
       disk recording.

              Reliability is an essential attribute for equipment that is
       required to capture performances that may only happen once in a lifetime.
       The R-1 has been designed for equal or better fault tolerance and
       endurance when compared with tape recorders.

              Long-Term Storage has long been a desire for the audio industry.
       Extremely low wear and tear and long shelf life are well known attributes
       of hard-disk technology. Tape technology suffers from constant media and
       component wear that occurs every time audio is recorded and played back.
       Tape has a significantly shorter shelf life than disk storage products.

              Random Access to audio anywhere in a recording reduces waiting
       time for recording artists and engineers. The R-1 provides instant
       locating and looping capabilities. Tape is rewound and fast-forwarded
       hundreds of times in a typical recording session while recording
       engineers and artists wait.

              Cut and Paste Editing is provided on the R-1 to permit sound
       manipulation not possible on tape recorders. Basic editing functions are
       provided so recording engineers do not have to spend time and money
       transferring to editing equipment in order to implement a basic
       adjustment or correction to a recorded track.

              Non-Destructive Recording is possible on the R-1. When enabled,
       this feature allows more than one take of a recording to be kept for
       every track. In comparison, tape technology requires the destruction of a
       previous recording every time an existing track is used to record a new
       take. The R-1 reduces the risk of accidentally erasing or recording over
       a once in a lifetime performance.

              Modular, Scalable, and Open Architecture provides the ability to
       expand or re-purpose systems over time in much the same way computer
       owners can increase the size, performance, or feature sets of their PCs
       as new technology and product offerings permit.

   Future Internet-Based Products

       In February 2000, we announced plans to incorporate features into future
versions of the System 5 and R-1 to allow project and workflow transfers and
collaboration via the Internet. We believe that we are well positioned to take
advantage of new opportunities offered by the Internet as one of the few
companies to employ an Internet Protocol based architecture.


                                      -6-
<PAGE>

TECHNOLOGY

       Our proprietary technology is central to our product offering and our
business strategy. The key elements of our technology are described below.

   Digital Signal Processing

       Our products employ state-of-the-art digital signal processing techniques
and software in their digital subsystems. We intend to continue to develop
digital signal processing technology in order to improve fidelity, simplify
interfaces and reduce costs involved with digital audio transmission and
processing.

   Digital Control of Analog Audio Processing

       Traditionally, the predominant mode of audio processing and transmission
has been analog due to its simplicity, cost-effectiveness, high sound quality
and the extensive analog infrastructure, which currently exists in the
professional audio market. Euphonix is a market leader in providing digital
control in conjunction with analog or digital processing and transmission.

       We utilize an architecture that physically separates the mixing control
surface from the audio processing hardware. We have replaced manual
(mechanically coupled) control methods with digital control technology so that
the audio processing hardware may be controlled remotely over a digital link by
the separated control surface. Because of this separation, it is possible to
insert a computer in the link between the controller and the processing circuit
so that audio may be operator or computer manipulated. A high degree of computer
automation can then be provided with appropriate software. The elimination of
bulky and expensive mechanical controls, the ability to share digital controls
for different functions and the relocation of the audio processing hardware to a
separate enclosure has allowed a substantial reduction in size, weight, heat
generation and cost of the console surface.

   Hard Disk Recording and Editing

       We utilize technology to record and edit sound using off-the-shelf
computer hard disks.

   Scalable, Distributed Computer Processing

       The computer power required to instantly reconfigure and automate a
mixing console is proportional to the console's size (number of controls per
channel multiplied by the number of channels). Two approaches may be taken in
order to provide adequate computer power to reset and automate a large-scale
mixing console. The first is to use a large, fast and powerful central computer
that has sufficient capacity to manipulate all of the console's controls in the
required period of time for the largest possible console. The second is to
distribute the processing load over multiple processors that have sufficient
capacity to handle their share of the processing load. We have chosen the
distributed processing method because it has the added benefit of being
scalable. The Euphonix system may be configured in, and upgraded to, a range of
sizes. Our customers benefit because they only pay for computer power that is
proportional to the size of their systems, yet more computer power can be added
as their systems are upgraded. Because of the lighter demand placed on each
individual microprocessor in a distributed system, the use of low-cost
components is possible to further leverage price performance. Another benefit of
our distributed processing architecture is our systemwide SnapShot(TM) Recall
performance within one video frame (1/30 of a second), which we believe is
superior to competitive commercial offerings.


                                      -7-
<PAGE>

   Multi-Processor Communications and Real-time Operating Systems

       Euphonix has developed real-time operating system technologies for
interfacing the multiple microprocessors required to support our large
distributed processing system. A typical large Euphonix console will contain as
many as 125 independent microprocessors of different varieties and functions,
all working together as one system. In addition, the Euphonix system provides
interfaces to microprocessors in third-party peripheral studio equipment. This
seamless networking of internal processors (Euphonix components) and external
equipment (third-party digital audio workstations, tape machines and MIDI
devices) provides a powerful foundation to encourage new product development by
both Euphonix and third-party manufacturers.

   Audio Format Conversion

       We have developed proprietary technology to convert audio between the
various signal transmission formats that are used in broadcast, post production
and music studios. We have focused development on the primary formats that are
endorsed by the Audio Engineering Society including: analog, Audio Engineering
Society/European Broadcasting Union digital, and MADI (Multi-channel Audio
Digital Interface). Sample Rate Conversion technology is employed to convert
digital audio between formats that are operating at different sampling
frequencies such as 44.1kHz for CD-Audio, 48kHz for professional audio
production and 96kHz for emerging standards such as DVD-Audio.

   Advanced User Interface Methods for Audio Processing

       Our digitally controlled system gives the user real-time feedback of the
system's performance, thereby enabling the user to evaluate and improve the
audio mix more effectively and efficiently. We have developed several user
interface methods for the professional audio market that are designed to
simplify and improve the user's understanding of how the mixing console is
affecting the sound. Our interface techniques are designed to allow the operator
to harness the power of digital control in a user-friendly manner. For example,
graphical user interfaces are used extensively to show views of settings and
parameters, enabling a "what you see is what you hear" display. Such graphical
comparisons and various archival, marking and retrieval methods allow for
greater operator efficiency.

CUSTOMERS

       The Euphonix product line has been adopted by many professional audio
facilities worldwide, with more than 500 Euphonix consoles currently installed.
The following table sets forth a partial list of Euphonix customers:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
 CUSTOMER              LOCATION                                           SAMPLE PROJECT/OTHER
-----------------------------------------------------------------------------------------------------------------
                                                   MUSIC
-----------------------------------------------------------------------------------------------------------------
<S>                 <C>                          <C>
Max Martin          Stockholm, Sweden            Max Martin is one of the world's leading songwriter/ producers.
                                                 He has achieved international chart success with such acts as
                                                 Britney Spears (for whom Martin wrote the smash hit "Oops....I
                                                 did it again"), `N Sync, Celine Dion and Backstreet Boys (for
                                                 whom he wrote "I Want It That Way").
-----------------------------------------------------------------------------------------------------------------
Sony Music          Tokyo, Japan                 Sony Music Entertainment will be installing a 202-channel System
Entertainment                                    5 into their state-of-the-art Tokyo facility.
-----------------------------------------------------------------------------------------------------------------
The Hit Factory     New York                     The world's largest commercial recording facility.
-----------------------------------------------------------------------------------------------------------------
</TABLE>


                                      -8-
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
 CUSTOMER              LOCATION                                           SAMPLE PROJECT/OTHER
-----------------------------------------------------------------------------------------------------------------
<S>                 <C>                          <C>
Brandon's Way       Los Angeles                  Ubiquitous producer, song writer and artist, Babyface's
                                                 commercial studio houses four Euphonix consoles.
-----------------------------------------------------------------------------------------------------------------
Fleetwood Mobile    London                       Mobile unit for concert recording.
-----------------------------------------------------------------------------------------------------------------
Jon Kelly           London                       Independent music producer for such artists as Paul McCartney,
                                                 Kate Bush, Tori Amos.
-----------------------------------------------------------------------------------------------------------------
Emerald             Nashville                    One of the largest recording and production companies in the
Entertainment                                    world. Twice named Billboard Magazine's Country Recording
Group                                            Studio of the Year.
-----------------------------------------------------------------------------------------------------------------
Cia. dos            Brazil                       High-end commercial recording facility.
Technicos
-----------------------------------------------------------------------------------------------------------------
Realsongs           Los Angeles                  Studio of multiple Grammy-winning songwriter, Diane Warren
                                                 (How Do I Live, Because You Loved Me).
-----------------------------------------------------------------------------------------------------------------
143 Records         Los Angeles                  Studio of producer, arranger, composer and musician, David
                                                 Foster (Because You Loved Me, The Power of Love).
-----------------------------------------------------------------------------------------------------------------
Tiger Recording     Australia                    High-profile commercial music facility.
-----------------------------------------------------------------------------------------------------------------
Seal                Los Angeles                  Internationally-renowned musician, who purchased a CS3000
                                                 for home studio.
-----------------------------------------------------------------------------------------------------------------
Thrill Hill         New Jersey                   Studio of superstar Bruce Springsteen.
Recording
-----------------------------------------------------------------------------------------------------------------
Carter Burwell      New York                     Film scores for Being John Malkovich, Three Kings and The
                                                 General's Daughter. Upgraded Euphonix CS series with System 5.
-----------------------------------------------------------------------------------------------------------------
Soundproof          Los Angeles                  First commercial recording facility to install System 5 in
Studios                                          Southern California.
-----------------------------------------------------------------------------------------------------------------
Laurent Voulzy      France                       Internationally-acclaimed vocalist.
-----------------------------------------------------------------------------------------------------------------
Hans Zimmer/        Los Angeles                  Academy Award Winning film scorer whose credits include
Media Ventures                                   Gladiator, The Lion King and The Prince of Egypt.
-----------------------------------------------------------------------------------------------------------------
James Newton        Los Angeles                  Academy Award Nominee film composer.  Scores include Dinosaur,
Howard                                           The Sixth Sense and Snow Falling on Cedars.
-----------------------------------------------------------------------------------------------------------------
Snuffy Walden       Los Angeles                  BMI Film & TV Music Award winner, whose television scores
Productions                                      include The West Wing, Once and Again and Felicity.
-----------------------------------------------------------------------------------------------------------------
Thomas Newman       Los Angeles                  Dual 1996 Academy Award Nominee.  Scored films such as The
                                                 Green Mile and American Beauty.
-----------------------------------------------------------------------------------------------------------------
LDS Motion          Salt Lake City               Motion Picture facility houses two CS series mixing consoles
Pictures                                         and one System 5.
-----------------------------------------------------------------------------------------------------------------
                                                 POST PRODUCTION
-----------------------------------------------------------------------------------------------------------------
Liberty Livewire    Los Angeles                  Liberty Livewire ordered three large-format System 5's for
                                                 installation at its Todd West Lantana facility. Recently,
                                                 one of the System 5's was used during pre-dubbing and re-mixing
                                                 of director Billy Bob Thornton's movie, "All the Pretty Horses"
                                                 starring Matt Damon, Ruben Blades and Sam Shepard.
-----------------------------------------------------------------------------------------------------------------
The Idea Room       Burbank                      Post Production for feature films and film trailers.
at Warner Bros.
-----------------------------------------------------------------------------------------------------------------
Cool Beans          New York                     Largest Post Facility in NYC.  Installed three Euphonix
Digital Audio                                    System 5's.
-----------------------------------------------------------------------------------------------------------------
Avenue Edit         Chicago                      Installed two Euphonix CS series mixing consoles and recently
                                                 purchased two System 5 digital consoles.
-----------------------------------------------------------------------------------------------------------------
</TABLE>


                                      -9-
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
 CUSTOMER              LOCATION                                           SAMPLE PROJECT/OTHER
-----------------------------------------------------------------------------------------------------------------
<S>                 <C>                          <C>
Aoi Studio          Tokyo                        Short-form post production facility first in Japan to install
Company, Ltd                                     System 5 and 48-track R-1.
-----------------------------------------------------------------------------------------------------------------
One Union           San Francisco                High profile post production facility clients include Microsoft,
Recorders                                        Sattchi & Sattchi and Hal Riney.
-----------------------------------------------------------------------------------------------------------------
                                                   FILM
-----------------------------------------------------------------------------------------------------------------
Deluxe Toronto      Toronto                      Deluxe Toronto is the premier film dubbing facility in Canada.
                                                 Owned by the Rank group, Deluxe has purchased 4 feature film
                                                 dubbing consoles. They have dubbed films such as "Dungeons and
                                                 Dragons", and the upcoming Sundance award winning Hedwig and the
                                                 Angry Inch.
-----------------------------------------------------------------------------------------------------------------
Media Principia     Montreal                     Media Principia is a state-of-the-art film production company.
                                                 The first Media Principia project mixed on the System 5 was
                                                 "The Baroness and The Pig" while shot on location in Hungary.
-----------------------------------------------------------------------------------------------------------------
                                                  BROADCAST
-----------------------------------------------------------------------------------------------------------------
World Wrestling     Connecticut                  WWF Entertainment installed System 5 for rigorous post and
Federation                                       ON-AIR broadcast schedule.
Entertainment
-----------------------------------------------------------------------------------------------------------------
China Television    People's Republic            On-Air Broadcaster.
                    of China
-----------------------------------------------------------------------------------------------------------------
Fisher              Seattle                      Full Digital On-Air Broadcast Studio.
Broadcasting
-- KOMO TV
-----------------------------------------------------------------------------------------------------------------
NBC                 Los Angeles                  TV show Tonight Show with Jay Leno.
-----------------------------------------------------------------------------------------------------------------
KTVT                Dallas/Fort Worth            On-Air Broadcaster.
-----------------------------------------------------------------------------------------------------------------
Tokyo Arvic         Japan                        On-Air Broadcaster.
-----------------------------------------------------------------------------------------------------------------
WMUR                New Hampshire                On-Air Broadcaster.
-----------------------------------------------------------------------------------------------------------------
Sky DTH             Florida                      Direct TV for South America.
Television
-----------------------------------------------------------------------------------------------------------------
                                            LIVE SOUND REINFORCEMENT
-----------------------------------------------------------------------------------------------------------------
The Gothenburg      Sweden                       Live sound reinforcement.
Opera House
-----------------------------------------------------------------------------------------------------------------
Royal Caribbean     Finland                      Live sound reinforcement.
Cruise Lines
-----------------------------------------------------------------------------------------------------------------
                                                   MULTIMEDIA
-----------------------------------------------------------------------------------------------------------------
Bull Frog Music     France                       Sound for multimedia games.
Studios (a
division of
Electronic Arts)
-----------------------------------------------------------------------------------------------------------------
Interplay           California                   Sound for multimedia games.
-----------------------------------------------------------------------------------------------------------------
SEGA                Tokyo                        Sound for multimedia games.
-----------------------------------------------------------------------------------------------------------------
                                                     OTHER
-----------------------------------------------------------------------------------------------------------------
Eastman School      University of Rochester      Sound recording education.
of Music
-----------------------------------------------------------------------------------------------------------------
Launch Media        Los Angeles                  Internet Music Magazine.
-----------------------------------------------------------------------------------------------------------------
University of       Ann Arbor                    Sound recording education.
Michigan
-----------------------------------------------------------------------------------------------------------------
Citrus College      Southern California          Sound recording education.
-----------------------------------------------------------------------------------------------------------------
</TABLE>


                                      -10-
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
 CUSTOMER              LOCATION                                           SAMPLE PROJECT/OTHER
-----------------------------------------------------------------------------------------------------------------
<S>                 <C>                          <C>
The Art Institute   Washington                   Sound recording education.
of Seattle
-----------------------------------------------------------------------------------------------------------------
Alchema College     London                       Sound recording education.
of the Arts
-----------------------------------------------------------------------------------------------------------------
</TABLE>

MARKETING

       Our marketing strategy has been to create awareness of our products and
to differentiate our products from those of our competitors in terms of
performance and cost-effectiveness. We participate in trade shows, direct-mail
advertising and selective advertisements in industry publications. We believe
that our high quality products, technical innovation, support and service result
in significant industry awareness of our products, and numerous word of mouth
referrals for our products. We differentiate our products through one-on-one
sessions with the key decision makers of our current and prospective customers
during which our trained engineers and distributors perform product
demonstrations.

       To address all markets during 2000, we produced market specific product
literature, broadened our base of publications in which we advertise, attended
trade shows and communicated through direct mail and email communications.

SALES AND DISTRIBUTION

       We sell our consoles through our direct sales organization in the United
States and Japan, and work with a network of international sales representatives
and distributors for sales in other countries. We conduct our direct sales
activity in the United States from our sales offices in Los Angeles, New York
and Nashville.

       Our international distributors typically cover an exclusive geographic
region. Distributors generally order and purchase systems from us based on
orders they receive for Euphonix systems. In many cases, we ship directly to our
end users. Some of our distributors provide direct customer support and
installation, while the other distributors receive customer support and
installation from our international sales offices. There were no customers who
accounted for 10.0% or more of our net revenues in fiscal 2000, 1999 or 1998.

       A key element of our strategy is to continue to build a worldwide
presence through our international sales presence and our network of sales
representatives in order to address fully our target markets and to serve
customers that operate on an international basis. We believe that revenues from
customers outside the United States will begin to account for a greater portion
of our revenues, due to improving economic conditions in many international
countries. We will continue to maintain sales efforts of our console in
international markets through our international sales presence and our network
of international distributors and sales representatives.

CUSTOMER SERVICE AND SUPPORT

       Providing excellent customer service and support is a key element of our
strategy to maintain and build our reputation for high quality and enhance brand
name loyalty. We provide service, support and training to our customers and
sales representatives through a wide range of support services, including
on-site and telephone support and training in the use of our consoles.

       Our customer service organization provides the following services:


                                      -11-
<PAGE>

       Systems Installation and Training. Our systems installation personnel
assist customers in the configuration, installation and testing of Euphonix
systems at the customer's site. The systems can usually be installed in less
than one day, which we believe to be considerably less time than required for
other manufacturers' large format consoles. We provide demonstration equipment
for use by customers as well as prospective purchasers at each of our sales
offices. We may also provide on-site training following installation of our
system, as well as advanced operations documentation regarding the Euphonix
system.

       Technical Support. Our technical support personnel provide telephonic
assistance to customers and sales representatives. These personnel assist
customers in the use of their systems, and diagnose and solve technical hardware
and application problems with the aid of self-diagnostic programs within the
Euphonix system. We provide a fifteen-month warranty on the Euphonix system
covering defects in materials and workmanship. This policy provides that within
the fifteen-month period, we repair or replace any defective products sold to
the customers. Technical support personnel maintain a supply of similar or spare
modules to deliver to customers if necessary for repair, and in more complicated
situations will dispatch an on-site technician to assist the customer. We also
offer an on-line 24-hour computer bulletin board to maintain communications with
our customers.

RESEARCH AND DEVELOPMENT

       Our research and development strategy is to develop high-quality
enhancements to our products, focusing on modularity and upgradeability of such
products, as well as new products for our target market segments. Our research
and development and engineering staff consists of highly trained software,
electronic and mechanical engineers and technicians with technical backgrounds
in computer software design, digital signal processing, analog audio processing
and high speed audio communications.

       Our research and development expenses for the years ended December 31,
2000, 1999 and 1998 were $3.6 million, $4.5 million, and $4.6 million.

PROPRIETARY RIGHTS

       We generally rely on a combination of trade secrets, copyright law and
trademark law, contracts and technical measures to establish and protect our
proprietary rights in our products and technologies. However, we believe that
such measures provide only limited protection of our proprietary information,
and there is no assurance that such measures will be adequate to prevent
misappropriation. We currently have two United States registered trademarks,
five issued United States patents and several applications for United States
patents pending with respect to certain elements of our hardware and software.
We have no foreign patents nor have we filed any applications for any foreign
patents.

       We believe that, due to the rapid proliferation of new technologies in
the audio, video and general software industries, intellectual property
protection of our proprietary technology will be less influential on our ability
to compete in our target markets than the ability of our research and
development personnel to design products that continue to address evolving
customer requirements, our ability to enter new markets and the ability of
Euphonix to service our customers.

MANUFACTURING AND SUPPLIERS

       Our manufacturing operations for mixing consoles, located in Palo Alto,
consist primarily of materials and procurement management, testing and final
assembly of products, quality assurance and


                                      -12-
<PAGE>

shipping. We subcontract other functions, including the production of printed
circuit boards, specialized metal finishing and other subassemblies, which
currently are not cost-effective for us to perform. Our systems undergo complete
testing and quality inspection at the board level and final assembly stages of
production.

       We and our manufacturing vendors are dependent upon single or limited
source suppliers, such as Analog Devices and Maxim Integrated Products, for
numerous components and parts used in our products, some of which are critical
to our continued uninterrupted production because they supply key components,
such as integrated circuits, included in our base system. See the section
entitled "Risk Factors That May Affect Results of Operations and Financial
Condition" for a discussion of the risks regarding our manufacturing and
supplies.

COMPETITION

       The markets for our mixing products are intensely competitive and
characterized by significant price competition. The markets for mixing consoles
can be classified based on price, as follows: (1) low-end range products with
prices up to $30,000; (2) mid-range products with prices from $30,000 to
$100,000; and (3) high-end range products with prices over $100,000. Prices for
mixing consoles generally vary based on the number of channels and the
processing power per channel, which directly affects the quality of the sound
output of the particular mixing consoles. Our products compete primarily with
other mixing consoles in the high-end price range of our targeted market
segments. We also have flexibility to compete with lower-priced products of our
competitors by scaling down our high-end products.

       Competing companies in the high-end price range include, among others,
Solid State Logic, (Owned by 3i, a venture capital company), AMS Neve, GLW
a.k.a. Harrison, Amek Technology Group, Sony Corporation, Calrec Ltd.,
Soundtracs, D&R, Trident, Cantus, Fairlight, and Studer. In addition, we believe
that, as technology in the professional audio industry advances, prices for
mixing consoles and other audio equipment, including our products, will
decrease, and as a result our products may increasingly compete against lower
priced products, as well as products in the high-end price range. There are
numerous companies, in addition to those listed above, that compete in the
low-end and mid-range of the professional audio market.

       The introduction of the R-1 brings on new competitive issues for us. The
R-1 allows us to sell to largely the same customer base that purchases our large
format consoles. Some of the traditional console manufacturers sell traditional
tape based multi-track tape machines. The primary competing companies in the
traditional tape based multi-track recorder market segment include, among
others, Studer and Sony. The R-1 is targeted as a direct replacement of
traditional tape based products. Additionally, the R-1 competes with an array of
companies producing other disk based products, that while technically similar,
are less focused on the direct replacement of a multi-track recorder and more
focused on editing of the audio than pure recording. These competitors include
Fairlight and Augan. See the section entitled "Risk Factors That May Affect
Results of Operations and Financial Condition" for a discussion of the risks
regarding our competitors.

BACKLOG

       An order is booked into backlog when a deposit or a purchase order is
received from the customer. Our products are typically delivered to customers
two to three months after receipt of an order. However, because shipment of the
product is dependent upon other customer requirements or changing situations,
the


                                      -13-
<PAGE>

product may not be delivered for more than a year after the receipt of the
order. We do not believe that our backlog at any particular point in time is
indicative of future sales levels.

EMPLOYEES

       As of December 31, 2000, we had 111 full-time employees and consultants.
None of our employees are represented by a labor union, and we have never
experienced a work stoppage, slowdown or strike. We consider our employee
relations to be good.

       In March 2001, we reduced the number of employees by nine, or
approximately 8% of the total workforce, through terminations and attrition. The
reduction in force affected personnel in sales/marketing, production support,
administration and engineering departments.

EXECUTIVE OFFICERS

       Our executive and other officers and their ages as of December 31, 2000
are as follows:

<TABLE>
<CAPTION>
             NAME                 AGE                     POSITION
----------------------------      ---        ------------------------------------
<S>                               <C>        <C>
Steven W. Vining                  45         Chief Executive Officer and Director
Paul L. Hammel                    55         Senior Vice President of Operations
Steven H. Milne                   42         Vice President of Engineering
Piers Plaskitt                    46         President
Scott W. Silfvast                 38         Chief Product Officer and Director
Jeffrey A. Chew*                  51         Chief Operating Officer
</TABLE>

----------
* Re-joined Euphonix in January 2001.

       Steven W. Vining was appointed as our Chief Executive Officer in October
2000 and has served as a director since November 2000. From 1996 to September
2000, he served as President of the Windham Hill Group. From 1993 to 1996, Mr.
Vining was Vice President and General Manager BMG Classics U.S. one of the
leading classical music labels worldwide. From 1991 to 1992, Mr. Vining was
Senior Director of Marketing at RCA Victor. Prior to that, Mr. Vining held a
variety of executive and managerial positions for Intersound International
Corporation, a leading independent classical, and jazz firm featuring all
digital recordings. Prior to that, Mr. Vining was employed by Pickwick Records.

       Paul L. Hammel joined us in February 1998 as Senior Vice President of
Operations. From 1994 to 1998, he was employed at Plantronics as Vice President
Customer Services and President of Walker Equipment Division of Plantronics,
Inc. From 1989 to 1994, Mr. Hammel was Vice President of Operations and Customer
Services for GO Corporation.

       Steven H. Milne joined us in April 1996 as Vice President of Engineering
From 1992 to 1996, he was employed at Taligent, most recently as Director, Media
Software Development. From 1986 to 1992, Mr. Milne was an engineer and manager
working on audio for Apple Computer. Prior to that, Mr. Milne was employed by
Sydis and Wang Laboratories, working on voice recording products.

       Piers Plaskitt joined us in August 1999 as President of Worldwide Sales
and Marketing. From 1998 to 1999, he was employed at The New York Media Group,
Inc. as Vice President, Director Sales and Marketing. From 1997 to 1998, Mr.
Plaskitt was Vice President, Worldwide Sales and Marketing for


                                      -14-
<PAGE>

Montage Group, Inc. From August 1983 to May 1997, Mr. Plaskitt was the President
and Chief Executive Officer of the US operation of Solid State Logic.

       Scott W. Silfvast founded Euphonix, Inc. in July 1988. He has been a
director since our inception, has served as Chief Product Officer since August
1999, Senior Vice President since June 1997 and served as President from March
1990 until May 1997. Mr. Silfvast also served as Chairman of the Board from July
1988 until February 1991. From 1983 to July 1988, he was an engineer for SRS, a
measurement instrumentation company.

       Jeffrey A. Chew rejoined Euphonix as Chief Operating Officer in January
2001. From August 1998 to September 2000, he was Chief Financial Officer and
Vice President of Finance for Sierra Imaging Inc., a supplier of embedded
imaging chip sets and imaging host software. From 1997 to 1998 Mr. Chew was
employed by Women.com Networks, Inc., a women's content provider on the
Internet, in the position of Chief Financial Officer and Vice President of
Finance. From 1991 to 1997, he was employed by Euphonix. In June 1991 he joined
Euphonix as Finance Director and was appointed Chief Financial Officer and
Director of Operations in January 1992 and Vice President of Finance in December
1993. From 1987 to 1991, he was a self-employed program management/financial
consultant. From 1983 to 1987, Mr. Chew served as Corporate Controller for
Akashic Memories Inc.

ITEM 2. PROPERTIES.

       We lease approximately 40,820 square feet of space at our headquarters
located on Portage Avenue in Palo Alto, California, under a lease expiring in
November 2001. Activities at this facility include engineering, manufacturing,
management information systems, customer service, distribution and general
administration. Of this 40,820 square feet of leased space, 13,377 square feet
is sub-leased. In addition, we lease an additional 1,776 square feet in Palo
Alto under a month-to-month lease.

       We also lease space for our sales and service offices in Los Angeles, New
York, Nashville and our subsidiary in Woodinville, Washington. In addition, we
rent an office for our subsidiary in Japan on a month to month basis.

ITEM 3. LEGAL PROCEEDINGS.

       On February 8, 2001, Euphonix, Inc. filed a legal complaint in New York
State Supreme Court in the county of Rockland against The Terminal Marketing
Company Inc. ("Terminal") regarding Terminal's failure to pay its outstanding
debts to Euphonix for equipment delivered to Terminal's client per the terms of
purchase orders issued to Euphonix by Terminal.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

       Not applicable.


                                      -15-
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

       We effected the initial public offering of our common stock on August 22,
1995, at a price to the public of $8.00 per share. The following table sets
forth, for the periods indicated, the high and low closing prices for our common
stock:

<TABLE>
<CAPTION>
                                                                HIGH        LOW
                                                                -----      -----
<S>                                                             <C>        <C>
FISCAL 1999
    First quarter ........................................      $1.44      $1.03
    Second quarter .......................................       1.25       0.63
    Third quarter ........................................       2.13       0.75
    Fourth quarter .......................................       1.69       0.75

FISCAL 2000
    First quarter ........................................       4.50       0.91
    Second quarter .......................................       4.09       2.25
    Third quarter ........................................       2.75       1.69
    Fourth quarter .......................................      $2.22      $1.00
</TABLE>

       As of February 15, 2001, there were approximately 99 holders of record of
our common stock. Our Common Stock is listed for quotation in the Nasdaq
SmallCap Market under the Symbol "EUPH".

       We have not paid any cash dividends on our common stock and currently
intend to retain any future earnings for use in our business. Accordingly, we do
not anticipate that any cash dividends will be declared or paid on the common
stock in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

       In February 2000, we issued 240,000 shares of common stock to a private
investor at a price of $1.25 per share, for total proceeds of $300,000.

       In February 2000, we executed Convertible Secured Promissory Notes for
$1,500,000 with private investors. These Notes accrue interest at a rate of
10.00% per annum. Upon obtaining approval from our shareholders, the principal
and accrued interest of the Note are convertible into shares of our common stock
at a price per share of $2.53125.

       In April 2000, we executed Convertible Secured Promissory Notes for
$800,000 with private investors. These Notes accrue interest at a rate of 10.00%
per annum. Upon obtaining approval from our shareholders, the principal and
accrued interest of the Note are convertible into shares of our common stock at
a price per share of $3.625.

       In June 2000, we issued 147,928 shares of common stock to private
investors at a price of $3.38 per share, for total proceeds of approximately
$500,000.

       In September 2000, we executed a Convertible Secured Promissory Note for
$400,000 with a private investor. This Note accrues interest at a rate of 8.00%
per annum. Upon obtaining approval from our


                                      -16-
<PAGE>

shareholders, the principal and accrued interest of the Note are convertible
into shares of our common stock at a price per share of $2.3562.

       In December 2000, we executed Convertible Secured Promissory Notes for
$1,800,000 with private investors. These Notes accrue interest at a rate of
8.00% per annum. Upon obtaining approval from our shareholders, the principal
and accrued interest of the Note are convertible into shares of our common stock
at a price per share of $1.26.

       All of the securities were issued pursuant to exemptions from
registration under Section 4(2) of the Securities Act. We made no public
solicitation in connection with the issuance of the above mentioned securities,
nor were there any other offerees. None of the offerings were underwritten. We
relied on representations from the recipients of the securities that they
purchased the securities for investment for their own account and not with a
view to, or for resale in connection with, any distribution thereof. The
investors also indicated to us that they were aware of our business affairs and
financial condition and had sufficient information to reach an informed and
knowledgeable decision regarding their acquisition of the securities.

ITEM 6. SELECTED FINANCIAL DATA.

       The following selected financial data for the five-year period ended
December 31, 2000, should be read in conjunction with our Consolidated Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operation" included in Item 7 of this report.

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31
                                                        --------------------------------------------------------------------
                                                          2000
                                                        RESTATED         1999           1998           1997           1996
                                                        --------       --------       --------       --------       --------
<S>                                                     <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .....................................      $ 14,779       $ 13,806       $ 15,614       $ 18,093       $ 18,237
Gross margin .....................................         4,468          5,697          7,014          8,859          9,396
Operating loss ...................................        (6,861)        (5,675)        (5,306)        (2,304)        (1,836)
Net loss .........................................        (8,821)        (6,329)        (5,240)        (1,932)        (1,398)
Net loss per share:
    Basic and diluted, as adjusted ...............      $  (0.73)      $  (0.74)      $  (0.82)      $  (0.35)      $  (0.25)
Shares used in computing net loss per share:
    Basic and diluted, as adjusted ...............        12,021          8,541          6,404          5,576          5,515
</TABLE>

<TABLE>
<CAPTION>
                                                 DECEMBER 31
                          ------------------------------------------------------------
                            2000
                          RESTATED        1999         1998         1997         1996
                          --------      -------      -------      -------      -------
<S>                       <C>           <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Working capital            $ 5,594      $ 6,993      $ 5,922      $ 9,095      $11,035
Total assets                12,000       12,300       11,031       13,208       15,466
Long-term obligations        6,531        2,166           --           32           66
Shareholders' equity       $   712      $ 6,797      $ 7,375      $10,487      $12,338
</TABLE>


                                      -17-
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

       Euphonix develops, manufactures and supports networked digital audio
systems for music, film and television post production, broadcast, sound
reinforcement and multimedia applications. As of December 31, 2000, we have
shipped over 500 of our mixing consoles worldwide.

       The price of our mixing consoles generally ranges from $100,000 to $1
million, and is often the most expensive piece of equipment in the studio. We
perform ongoing credit evaluations of our customers' financial condition prior
to shipping the product, and we require a firm purchase order and generally a
substantial deposit (anywhere from $10,000 up to 50% of the console's value).
From time to time and depending on the financial condition of the customer, we
may require an irrevocable letter of credit or a purchase order from a
third-party lessor.

       Effective January 1, 2000, we changed our method of accounting for
revenue recognition to comply with Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Previously, we recognized revenue generally upon shipment to customers
including cases when installation was a condition of payment, provided all other
revenue recognition criteria were met. Under the new accounting method adopted
retroactive to January 1, 2000, we now defer all revenue until installation is
complete (in those cases where installation is a condition of payment), provided
all other revenue recognition criteria are met. If installation is not a term of
our arrangement, we generally recognize revenue upon shipment.

ANNUAL RESULTS OF OPERATIONS

   Restatement of financial results for prior periods

       As discussed in note 16 the consolidated financial statements as of and
for the year ended December 31, 2000 have been restated to reverse previously
recognized revenue and related cost of revenues of $1,060,000 and $552,000,
respectively. As a result, the previously reported net loss for the year and
accumulated deficit at December 31, 2000 have each been increased by $508,000
and the loss per share for the year has been increased from $(0.69) to $(0.73).
The restatement is the result of revenues of $322,000 and $738,000 from a
contractual arrangement with a single customer that had been previously
recognized upon the shipment or commissioning of our products at the customer's
site in the quarters ended March 31, 2000 and June 30, 2000, respectively.
However, it has since been determined that we had additional software delivery
obligations that had not been fulfilled during the year ended December 31, 2000;
generally accepted accounting principles preclude the recognition of any revenue
from the arrangement until such obligations are satisfied. Those obligations
were satisfied in the quarter ended December 31, 2001 and revenue of
approximately $1 million and cost of revenue of $552,000 will be recognized in
that quarter. Inasmuch as the entire amount of revenue due under the arrangement
of $1,060,000 had been received at December 31, 2000, that amount and the
related cost of revenues of $552,000 is deferred in the restated consolidated
balance sheet as of that date.


                                      -18-
<PAGE>

       The effect of the restatement on previously reported revenue, net loss
and loss per share for the year ended December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                               Year ended December 31, 2000
                            ----------------------------------
                            As reported *          As restated
                              USD `000              USD `000
                            -------------          -----------
<S>                         <C>                    <C>
Net revenues                   15,839                14,779
Net loss                       (8,313)               (8,821)
Net loss per share              (0.69)                (0.73)
</TABLE>

            * includes the effect of adopting SAB 101 retroactive to January
            1, 2000, as described in Note 1 and Note 15.

       The effect of the restatement on previously reported revenue, net loss
and loss per share in each of the quarters ended March 31 and June 30, 2000 and
the six and nine month periods ended June 30, 2000 and September 30, 2000 is as
follows:

<TABLE>
<CAPTION>
                           Three months ended          Three months ended           Six months ended           Nine months ended
                             March 31, 2000              June 30, 2000               June 30, 2000            September 30, 2000
                        -----------------------     -----------------------      ----------------------     -----------------------
                            As            As           As             As            As            As           As             As
                        reported*      restated     reported*      restated      reported*     restated     reported*      restated
                        ---------      --------     ---------      --------      ---------     --------     ---------      --------
                         USD `000      USD `000     USD `000       USD `000      USD `000      USD `000     USD `000       USD `000
<S>                     <C>            <C>          <C>            <C>           <C>           <C>          <C>            <C>
Net revenues              1,835         1,513         4,208         3,470         6,043         4,983        10,637         9,577
Net Loss                 (3,862)       (4,039)       (1,468)       (1,799)       (5,330)       (5,838)       (6,242)       (6,750)
Net Loss per share        (0.33)        (0.34)        (0.12)        (0.15)        (0.45)        (0.49)        (0.52)        (0.56)
</TABLE>

* includes the effect of adopting SAB 101 retroactive to January 1, 2000, as
described in Notes 1 and 15.

   Net Revenues

       Net revenues in accordance with SAB 101 were $14.8 million in 2000.
Applying the Company's historical revenue recognition policy, revenue for 2000
was $14.5 million, as compared to $13.8 million in 1999 and $15.6 million in
1998. This represented an increase of 5% in 2000 from 1999 and a decrease of
11.5% in 1999 from 1998. The higher revenue in 2000 was due primarily to the
increased shipments of our System 5 all digital mixing console into the
film/post-production segment of the market. In 2000, we added new Tier 1
film/post production studios to our list of customers, which include Liberty
Livewire (formerly Todd-AO) and Deluxe Laboratories in Toronto, all of whom
purchased multiple systems. The decrease in revenues in 1999 as compared to 1998
was primarily due to not having an all digital console (System 5) available for
delivery until the second half of the year.

       International sales accounted for 42.8% of our 2000 revenues, compared to
33.4% in 1999 and 43.0% in 1998. International sales increased by approximately
$1.7 million, or 34%, in 2000 compared to 1999 and decreased $2.1 million, or
31.3%, in 1999 compared to 1998. The increase in international sales in 2000
compared to 1999 reflected higher sales in the Pacific Rim countries, especially
in Japan, which more than offset declining sales in Europe. In order to improve
our competitive position, in April 2000, we entered into a joint venture with
Audio Export. Pursuant to this joint venture, Audio Export now manages (as well
as owns 70% of) the Euphonix Europe sales and service organization, and is the
exclusive distributor of Euphonix products in all Europe, Middle East and
Africa. The decrease in international sales in 1999 compared to 1998 was
attributed to weak sales in the Pacific Rim and Europe. The decline in Pacific
Rim sales in


                                      -19-
<PAGE>

1999 was due to a weakness in the Asian economy. The decline in European sales
in 1999 was the result of employee turnover within the international sales
department and the loss of sales representatives, which limited our ability to
maintain existing market share and penetrate new markets abroad.

   Gross Margins

       Cost of revenues consists primarily of purchased parts, components,
assembly, test, procurement costs, production management/engineering,
warehousing, product installation costs, warranty and provisions for inventory
obsolescence. The resulting gross margins fluctuate based on factors such as the
mix of products sold, the amount of direct, end-user sales versus sales through
distributors, price discounts, sales promotion programs, and third-party
hardware included in the systems sold by us. Gross margins decreased to 30.2% in
2000, as compared to 41.3% in 1999 and 44.9% in 1998.

       The decrease in gross margins during 2000 was primarily due to increased
purchased parts and components costs. In 2000, we competed in an environment
where global demand for many of our materials was far in excess of supply. This
market situation, combined with slow payments to vendors due to cash flow
constra ints, led to higher prices in many instances and hampered us in our
efforts to procure our material at lower costs. Even though the System 5 and R-1
recorder were introduced in 1999, we were still on a learning curve, which
resulted in higher than normal warranty and scrap costs and labor
inefficiencies.

       The decrease in gross margins in 1999 was primarily due to initial costs
associated with shipments of the R-1 recorder, which began shipping in the first
quarter of 1999, and the new System 5, which began volume shipping in the second
half of 1999.

   Research and Development

       Research and development expenses decreased by $0.9 million, or 20.5%, in
the year ended December 31, 2000 compared to 1999 and decreased $0.1 million, or
2.2%, in the year ended December 31, 1999 compared to 1998. Research and
development expenses decreased as a percentage of revenues to 24.1% in 2000 from
32.5% in 1999 due to the decrease in research and development expenses in 2000
as noted above and higher revenues in 2000. Research and development expenses
increased as a percentage of revenues to 32.5% in 1999 from 29.4% in 1998
primarily due to lower revenues in 1999. The decreased expenditures in 2000 were
primarily due to a full twelve months of savings due to the reduction in force
in our Woodinville facility, as compared to three months of savings in 1999.
During 2000 we also experienced higher than normal employee turnover, resulting
in a reduced number of employees and lower costs for the year. The decrease in
1999 was primarily due to a winding down of engineering development of the new
R-1 Recorder and new System 5 digital console, both of which were under
development in 1998 and began shipment in the first and second quarter of 1999,
respectively.

   Sales and Marketing

       Marketing and selling expenses remained approximately the same in 2000 as
compared to 1999, and increased $0.1 million, or 2%, in 1999 as compared to
1998. In 2000, we realized eight months of savings relating to the joint venture
with Audio Export, which was partially offset by higher salary and commission
costs. The small increase in 1999 was primarily due to higher spending for
advertising, tradeshows, travel, other professional fees and product
demonstrations to support the new R-1 recorder and System 5 digital console
introductions.


                                      -20-
<PAGE>

       As a percentage of revenues, marketing and selling expenses decreased to
37.8% in 2000, as compared to 40.5% in 1999. As a percentage of revenues,
marketing and selling expenses increased to 40.5% in 1999, as compared to 34.9%
in 1998, primarily due to lower revenues in 1999. This was primarily due to the
savings relating to the joint venture with Audio Export, which was offset by
higher salary and commission costs in marketing and selling expenses in 2000,
and higher revenues in 2000.

   General and Administrative

       General and administrative expenses increased by $0.9 million, or 67.0%,
in 2000 as compared to 1999, and decreased $1.0 million, or 43.1% in 1999 as
compared to 1998. As a percentage of revenues, general and administrative
expenses increased to 14.7% in 2000 from 9.4% in 1999, and decreased to 9.4% in
1999 from 14.6% in 1998. The increase in 2000 was primarily due to higher salary
and benefits, recruitment expenses, outside accounting and legal expenses, and
goodwill amortization relating to the joint venture with Audio Export. The
decrease in 1999 was primarily due to a decrease in the allowance for doubtful
accounts reserve due to the collection of previously reserved for balances and a
reduction in payroll expenses.

   Interest expense and other charges

       Interest expense and other charges were $1.7 million in 2000, as compared
to $748,000 in 1999 and $8,000 in 1998. This represented an increase of 132.2%
in 2000 as compared to 1999, and 9,250% in 1999 as compared to 1998. As a
percent of net revenues, interest expense and other charges increased to 11.8%
in 2000 from 1999, and increased to 5.4% in 1999 from 0.05% in 1998. Interest
expense for 2000 included a charge of $1,279,000 related to the beneficial
conversion feature associated with the convertible promissory notes and attached
warrants issued on February 22, 2000. Interest expense for 1999 included a
charge of $613,000 related to the beneficial conversion feature associated with
the convertible promissory notes issued in July 1999.

   Equity in net loss of investee

       The equity in net loss of investee for the year ended December 31, 2000
was $105,000. There was no such amount for the year ended December 31, 1999.

   Provision/(benefit) for Income Taxes

       No provision for federal and state income taxes was recorded for the
years ended December 31, 2000, 1999 and 1998 as the Company incurred net
operating losses during the period.

LIQUIDITY AND CAPITAL RESOURCES

       We have funded our operations primarily through cash flows from
operations and the private sale of equity and debt securities. For the year
ended December 31, 2000, cash and cash equivalents decreased by $251,000 to
approximately $587,000. Also during this period, working capital decreased by
$1.4 million to approximately $5.6 million.

       Our operating activities used cash of approximately $4.9 million in 2000,
$7.4 million in 1999 and $2.6 million in 1998. Cash used in operating activities
for 2000 was comprised primarily of a net loss, and a decrease in accounts
payable, offset partially by an increase in customer deposits, an increase in
deferred revenue and a non cash charge related to the beneficial conversion
feature on convertible notes. Cash used in operating activities for 1999 was
comprised primarily of a net loss, an increase in inventory, an increase in
accounts receivable, a decrease in allowance for doubtful accounts, and a
decrease in accrued liabilities, offset partially by higher depreciation and
amortization expense,


                                      -21-
<PAGE>
an increase in accounts payable, an increase in customer deposits and a decrease
in prepaid expenses and other assets. Cash used in operating activities for 1998
was comprised primarily of net loss, a decrease in customer deposits and an
increase in prepaid expenses and other assets, offset partially by higher
depreciation and amortization expense, a decrease in income tax receivable and a
decrease in accounts receivable.

       Our investing activities used cash of $278,000 in 2000 and $530,000 in
1999 and provided cash of $452,000 in 1998. In 1999, we received $601,000 in
proceeds from the sales of short-term investments, as compared to $1.1 million
in 1998. In 2000, we purchased $278,000 of property and equipment as compared to
$1.1 million in 1999 and $657,000 in 1998.

       Our financing activities provided cash of $4.9 million in 2000, $7.2
million in 1999 and $1.9 million in 1998. Proceeds from the sale of common stock
provided cash of $800,000 in 2000, $3.1 million in 1999 and $1.9 million in
1998. Proceeds from the issuance of convertible promissory notes provided cash
of $4.0 million in 2000 and $4.1 million in 1999. Proceeds from the exercise of
stock options provided cash of $135,000 in 2000.

       In March 2001, we issued convertible promissory notes to existing
investors under which we borrowed $3,500,000. The notes accrue interest at 10%
per annum with principal and accrued interest due March 31, 2002.

       As of November 27, 2001, we believe that our available cash and cash
equivalents will not be sufficient to meet our anticipated needs for working
capital and capital expenditures through the end of 2001. We believe that
failure to generate sufficient revenues, reduce certain discretionary spending
or raise additional financing could have a material adverse effect on our
ability to continue as a going concern and achieve our intended business
objectives. In order to meet our long-term liquidity needs, we may need to
raise additional funds, establish a credit facility or seek other financing
arrangements. We are actively engaged in securing a new borrowing facility,
although there is no assurance that we will be successful in doing so.
Moreover, the maturity dates of our outstanding promissory notes will become
due in early 2002. Although the notes may be converted into shares of our
common stock, there is no assurance that the investors will choose to convert
their notes, and we may have to repay these loans in 2002.

   Impact of Recently Issued Accounting Pronouncements

       In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. In June
2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting
for Derivative Instruments and Hedging Activities -- An Amendment of FASB
Statement No. 133." SFAS No. 138 amends the accounting and reporting standards
for certain derivatives and hedging activities such as net settlement contracts,
foreign currency transactions and intercompany derivatives. Based on our current
operations, we have concluded that the future adoption of SFAS No. 133 will not
have a material impact on our financial position or results of operations.

       In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000, but certain conclusions
cover specific events that occur after either


                                      -22-
<PAGE>

December 15, 1998, or January 12, 2000. The adoption of FIN 44 has not had a
material effect on the financial statements.

       In November 2000, the Emerging Issues Task Force issue EITF 00-27
"Application of Issue No. 98-5 to Certain Convertible Instruments." EITF 00-27
provides additional guidance on accounting for convertible debt instruments and
convertible preferred stock with non detachable conversion options that are
in-the-money at the commitment date. The Task Force affirmed the use of the
accounting conversion price to calculate the beneficial conversion feature
charge. Accordingly, any issuances of convertible securities since May 20, 1999
that were accompanied by warrants or other securities requiring an allocation of
proceeds under APB 14, will require the application of the accounting conversion
price to (1) determine whether the security includes a beneficial conversion
feature or (2) to remeasure a previously measured beneficial conversion feature.
The adoption of EITF 00-27 has not had a material effect on the financial
statements.


                                      -23-
<PAGE>

RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

       A number of uncertainties exist that could affect our future operating
results, including, without limitation, the following:

WE HAVE INCURRED SIGNIFICANT LOSSES FOR THE PAST FIVE YEARS, AND MAY NEED TO
RAISE ADDITIONAL FUNDING IN ORDER TO FUND OUR OPERATIONS

       We incurred net losses of approximately $8.8 million in 2000, $6.3
million in 1999, $5.2 million in 1998, $1.9 million in 1997, and $1.4 million in
1996, and we will continue to expend substantial funds to increase the
versatility and functionality of the System 5 digital console in fiscal 2001. We
recently received commitments from existing investors to loan us $3.5 million
during 2001 and extended until early 2002 the maturity dates for all promissory
notes previously due in 2001. However, unless we raise additional funds, we
believe that our cash and cash equivalents, and our current borrowing facility,
together with cash flows from operations, will not provide sufficient capital to
fund our operations through December 31, 2001. Although we believe that
additional debt or equity financing will be available from existing investors
and others, there can be no assurance as to the terms and conditions of any such
financing and no certainty that funds would be available when needed. The
inability to obtain additional financing would cause a severe negative impact,
and we may be unable to fund operations.

THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN OUR SHARES BEING SUSPENDED OR
DELISTED FROM NASDAQ

       The shares of our common stock are currently listed on the Nasdaq
SmallCap Market. Due to their decline in price, our stock could be suspended or
delisted from Nasdaq, which requires a minimum bid per share of $1.00 and a
market capitalization of $35 million. If our stock is delisted from Nasdaq, it
would be much more difficult to purchase or sell our stock or obtain accurate
quotations as to our stock price.

OUR STOCK PRICE HAS RECENTLY TRADED FAR BELOW THE INITIAL OFFERING PRICE AND
COULD REMAIN AT THIS LOW PRICE, WHICH COULD AFFECT OUR ABILITY TO ACQUIRE OTHER
COMPANIES, LEAVE US VULNERABLE TO HOSTILE TAKE OVER ATTEMPTS AND RESULT IN
SECURITIES CLASS ACTION LITIGATION

       The market price of our common stock has traded at or significantly below
the initial offering price of $8.00 per share. If the price per share does not
increase, our investors may incur a substantial loss on their investment. In
addition, the sustained depression of the market price of our common stock
hampers our ability to conduct business, and in particular, could make it more
difficult to pursue acquisitions of potential complementary businesses, leave us
vulnerable to hostile takeovers and result in securities class action
litigation.

OUR STOCK PRICE MAY CONTINUE TO BE DEPRESSED DUE TO BROAD ECONOMIC, MARKET AND
INDUSTRY FACTORS BEYOND OUR CONTROL

       Until recently, the market demand, valuation and trading prices of high
technology companies was high. Recently, however, the share prices of
high-technology companies, such as ours, have significantly decreased, and these
stocks are now trading far below their historical highs. Our stock price may
continue to be depressed because the market may perceive us to be a
high-technology company. In addition, a variety of


                                      -24-
<PAGE>

other factors beyond our control, such as general economic conditions, could
cause our stock price to remain extremely low, regardless of our performance.

WE DERIVE ALL OF OUR REVENUES FROM SALES OF OUR DIGITALLY CONTROLLED AUDIO
MIXING CONSOLE AND RECORDING SYSTEMS, AND ANY FACTOR THAT ADVERSELY IMPACTS THIS
SYSTEM WILL SERIOUSLY HARM OUR BUSINESS

       Historically, we have derived virtually all of our revenues from sales of
our digitally controlled audio mixing console system, which is based upon our
hardware platform. We believe that sales of these systems, along with
enhancements thereof, and the R-1 recorder and new System 5 digital console will
continue to constitute a significant portion of our revenues. It is expected for
the foreseeable future that a greater proportion of our revenue will come from
the System 5 digital console. Accordingly, any factor adversely affecting our
base system, whether technical, competitive or otherwise, could significantly
harm our business and results of operations.

CHANGES IN GOVERNMENT REGULATION COULD LIMIT OUR INTERNET ACTIVITIES OR RESULT
IN ADDITIONAL COSTS OF DOING BUSINESS ON THE INTERNET

       Edeck enables audio files to be moved via the Internet. Our business
plans for, and the success of, Edeck is dependent upon the Internet, which is at
a relatively early stage of development. The enactment of any additional laws or
regulations may impede the growth of the Internet, and if this happens, our
operating expenses could increase and we may not be able to achieve
profitability. In addition, the movement of files via the Internet could subject
us to claims for defamation, negligence, copyright or trademark infringement,
personal injury, or other theories based on the nature, content, publication and
distribution of such materials.

WE DEPEND UPON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PERCENTAGE OF OUR
REVENUES. IF WE LOSE SIGNIFICANT CUSTOMERS, OR IF PURCHASES BY ONE OF OUR KEY
CUSTOMERS DECREASES, OUR NET SALES WILL DECLINE AND OUR BUSINESS WILL BE HARMED

       Due to high average sales prices, we depend upon a limited number of
customers for a substantial proportion of our revenues. If we lose one or more
of our significant customers, or if purchases by one of our key customers
decreases, our net sales will decline and our business will be harmed. In
addition, the timing of revenue is influenced by a number of other factors,
including the timing of individual orders and shipments, industry trade shows,
seasonal customer buying patterns, changes in product development and sales and
marketing expenditures, custom financing arrangements, production limitations
and international sales activity. Moreover, our expense levels are based in part
on our expectations of future revenue. Because our operating expenses are based
on anticipated revenue levels and because a high percentage of our expenses are
relatively fixed in the short term, variations in the timing of recognition of
revenue could cause significant fluctuations in operating results from quarter
to quarter and may result in unanticipated quarterly earnings shortfalls or
losses.

IF WE RAISE ADDITIONAL CAPITAL THROUGH THE ISSUANCE OF NEW SECURITIES, EXISTING
STOCKHOLDERS WILL INCUR ADDITIONAL DILUTION

       If we raise additional capital through the issuance of new securities,
our stockholders will be subject to additional dilution. In addition, any new
securities issued may have rights, preferences or privileges senior to those
securities held by our current stockholders.


                                      -25-
<PAGE>

WE RELY ON DISTRIBUTORS AND SALES REPRESENTATIVES FOR A SUBSTANTIAL PORTION OF
OUR INTERNATIONAL SALES

       In regions outside of the United States and Japan, we rely on
distributors and sales representatives to sell our products. Any disruptions to
these personnel may adversely affect our revenue and gross margins.

WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND THE INTENSE COMPETITION OF
THE HIGH TECH INDUSTRY IN ORDER TO SUCCEED

       The markets for our products are characterized by changing technologies
and new product introductions. Our success will depend in part upon our
continued ability to enhance our base system with features including new
software and hardware add-ons and to develop or acquire and introduce new
products and features which meet new market demands and changing customer
requirements on a timely basis. We are currently designing and developing new
products, primarily in the areas of recording, editing and mixing functions of
sound production as well as digital audio processing and networking systems.
There can be no assurance that products or technologies developed by others will
not render our products or technologies non-competitive or obsolete. If this
happens, our revenues will likely be lower and our business will suffer.

CURRENT AND POTENTIAL COMPETITORS COULD DECREASE OUR MARKET SHARE AND HARM OUR
BUSINESS

       The markets for our products are intensely competitive and characterized
by significant price competition. We believe that our ability to compete depends
on elements both within and outside our control, including the success and
timing of new product development and introduction by us and our competitors,
product performance and price, distribution, availability of lease or other
financing alternatives, resale of used systems and customer support. In
addition, although our products compete primarily with other mixing consoles in
the high-end price range of our targeted market segments, we also believe that,
as technology in the professional audio industry advances, prices for mixing
consoles and other audio equipment, including our products, will decrease. As a
result, our products may increasingly compete against lower-priced products, as
well as products in the high-end price range. Although we believe that our audio
mixing console has certain technological advantages over our competitors,
maintaining such advantages will require continued investment by us in research
and development, sales and marketing and customer service and support. There can
be no assurance that we will have sufficient resources to be able to maintain
such competitive advantages.

       There are numerous companies that compete in the professional audio
market. Many of our competitors are larger and have greater financial,
technical, manufacturing and marketing resources, broader product offerings,
more extensive distribution networks and larger installed bases than ours. We
believe that companies with large installed bases, in particular, may have a
competitive advantage since many potential customers in our targeted markets are
often reluctant to commit significant resources to replace their current
products and to retrain operators to use new products despite technological
advantages of such new alternative products. Some of our competitors also offer
customers leasing or refinancing packages in connection with the purchase of
their mixing consoles, which financing alternatives we do not generally offer.
Furthermore, we compete with resellers of used mixing consoles and equipment who
are able to sell high-end price range products at generally lower prices.

WE DEPEND ON SINGLE AND LIMITED SOURCES FOR KEY COMPONENTS, AND IF WE LOSE ONE
OR MORE OF THESE SOURCES, DELIVERY OF OUR PRODUCTS COULD BE DELAYED OR PREVENTED
AND OUR BUSINESS COULD SUFFER

       We and our manufacturing vendors are dependent upon single or limited
source suppliers, such as Analog Devices and Maxim Integrated Products, for
numerous components and parts used in our products.


                                      -26-
<PAGE>

Currently, we use many sole or limited source suppliers, some of which are
critical to our continued uninterrupted production because they supply key
components, such as integrated circuits, included in our base system. In
particular, we rely on single vendors to manufacture major subassemblies for our
products, and other components are critical to the integrated circuits included
in our base system. There can be no assurance that these suppliers will continue
to be able and willing to meet our requirements for any sole-sourced components.
We generally purchase these single or limited source components pursuant to
purchase orders and have no guaranteed supply arrangements with such suppliers.
In addition, the availability of many components to our subcontractors is
dependent in part on our ability to provide our subcontractors, and in turn the
subcontractor's ability to provide their suppliers, with accurate forecasts of
their future requirements. Major delays or terminations in supplies of such
components could significantly adversely affect our timely shipment of our
products, which in turn would adversely affect our business and results of
operations. The process of qualifying suppliers or designing out certain parts
could be lengthy, and no assurance can be given that any additional sources or
product redesign would be available to us or implemented on a timely basis. From
time to time in the past, we have experienced interruptions in the supply of
certain key components from suppliers, which delayed product shipments and there
can be no assurance that we will not experience significant shortages for these
components in the future. We do not maintain an extensive inventory of such
components and any extended interruption or reduction in the future supply or
increases in prices of any key components currently obtained from a single
limited source supplier could have a material adverse effect on our business and
results of operations for any given period. If we encounter shortages in
component supply, we may be forced to adjust our product designs and production
schedules. The failure of one or more of our key suppliers or vendors to fulfill
our orders in a timely manner could cause us to not meet our contractual
obligations, could damage our customer relationships and could harm our
business.

OUR SUPPLIERS' ABILITY TO PRODUCE COMPONENTS IS DEPENDENT ON OUR AND OUR
SUPPLIERS' ABILITY TO GENERATE ACCURATE FORECASTS, AND THE PROCESS OF QUALIFYING
NEW SUPPLIERS IS LENGTHY

       Our suppliers rely on subcontractors to provide them with components, and
their ability to timely procure such components is dependent in part on our
ability to provide our subcontractors, and in turn the subcontractor's ability
to provide their suppliers, with accurate forecasts of future requirements. The
process of qualifying suppliers or designing out certain parts could be lengthy,
and no assurance can be given that any additional sources or product redesign
would be available to us or implemented on a timely basis. If we are unable to
procure key components, shipments of our products would be delayed and revenues
would fall.

NEW LAWS COULD RESULT IN INCREASED EXPENDITURES, WHICH WOULD HARM OUR RESULTS OF
OPERATIONS

       If different electrical, radiation or other standards applicable to our
products are adopted in countries in which we sell our products, including the
United States, we may have to increase our expenditures in order to make our
products compliant with these laws. In addition, any failure to modify our
products, if necessary, to comply with such standards would potentially subject
us to fines and penalties, and would harm our business and results of
operations.

OUR INTELLECTUAL PROPERTY IS VERY IMPORTANT TO OUR BUSINESS, AND IF WE ARE
UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS WILL SUFFER

       We generally rely on a combination of trade secret, copyright law and
trademark law, contracts and technical measures to establish and protect our
proprietary rights in our products and technologies. We believe, however, that
these measures provide only limited protection of our proprietary information,
and there is no assurance that they will be adequate to prevent
misappropriation. In addition, significant and


                                      -27-
<PAGE>

protracted litigation may be necessary to protect our intellectual property
rights, to determine the scope of the proprietary rights of others or to defend
against claims of infringement. There can be no assurance that third-party
claims alleging infringement will not be asserted against us in the future. Any
such claims could seriously harm our business and results of operations. See
"Business -- Proprietary Rights".

WE MUST CONTINUALLY ATTRACT AND RETAIN OUR MANAGEMENT AND TECHNICAL PERSONNEL OR
WE WILL BE UNABLE TO EXECUTE OUR BUSINESS STRATEGY

       Our future success depends in part on our ability to attract, retain and
motivate key management and technical employees. Competition for such personnel
is intense in the high tech industry, especially in the Silicon Valley
employment market, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. We have experienced, and we expect to
continue to experience, difficulty in hiring and retaining highly skilled and
qualified employees.

WE MUST EFFECTIVELY MANAGE AND SUPPORT OUR GROWTH IN ORDER FOR OUR BUSINESS
STRATEGY TO SUCCEED

       We will need to continue to increase revenues and grow in all areas of
operation in order to execute our business strategy. Managing and sustaining our
growth will place significant demands on management as well as on our
administrative, operational and financial systems and controls. If we are unable
to do this effectively, we would have to divert resources such as management
time away from the continued growth of our business and implementation of our
business strategy, and our business and results of operations will be adversely
affected.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.

       California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the state of California fall below certain
critical levels, California has on some occasions implemented, and may in the
future continue to implement, rolling blackouts throughout California. We
currently do not have backup generators or alternate sources of power in the
event of a blackout, and our current insurance does not provide coverage for any
damages we or our customers may suffer as a result of any interruption in our
power supply. If blackouts interrupt our power supply, we would be temporarily
unable to continue operations at our California facilities. Any such
interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.

A DISASTER COULD SEVERELY DAMAGE OUR OPERATIONS

       A disaster could severely damage our ability to deliver our products to
our customers. Our products depend on our ability to maintain and protect our
facilities, which are primarily located in or near our principal headquarters in
Palo Alto, California. Palo Alto may exist on or near a known earthquake fault
zone. Although the facilities in which we host our computer systems are designed
to be fault tolerant, the systems are susceptible to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and similar events.
Although we maintain general business insurance against fires, floods and some
general business interruptions, there can be no assurance that the amount of
coverage will be adequate in any particular case.


                                      -28-
<PAGE>

CHANGES IN EXCHANGE RATES COULD HURT OUR REVENUES

       Our wholly-owned sales and service subsidiary in Japan conducts its
business in the local currency. Changes in the value of the Yen relative to the
value of the U.S. dollar, therefore, could adversely affect future revenues and
operating results. We have not hedged transactions with external parties.

EXISTING AND POTENTIAL LITIGATION MATTERS COULD SIGNIFICANTLY HARM OUR OPERATING
RESULTS

       As described elsewhere herein, we are involved in a legal proceeding. If
we do not achieve a favorable outcome in this litigation, or if we are involved
in other litigation matters, our business and results of operations could be
harmed. See "Legal Proceedings" and Notes to Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

       Sales through our Japanese subsidiary are denominated in Japanese Yen.
The receivables denominated in Yen are subject to foreign exchange risk, and we
do not enter into hedging arrangements to mitigate the foreign currency risk
with respect to such arrangements. Although an adverse change in the foreign
exchange rate would have an effect on the price of our consoles sold in Japan
and could result in foreign currency transaction losses, we believe that such
losses would not be material.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                             ----
<S>                                                                                                          <C>
Report of Independent Accountants..........................................................................   30

Report of Independent Auditors.............................................................................   31

Consolidated Balance Sheets as of December 31, 2000 and 1999...............................................   32

Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.................   33

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998.......   34

Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................   35

Notes to Consolidated Financial Statements.................................................................   36
</TABLE>


                                      -29-
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Euphonix, Inc.

       In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Euphonix, Inc. and its subsidiaries at December 31, 2000 and 1999 and the
results of their operations and their cash flows for each of the two years in
the period then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. The
financial statements of the Company as of December 31, 1998 and for the year
then ended were audited by other independent accountants whose report, dated
March 4, 1999, expressed an unqualified opinion on those statements.

       As discussed in Note 1 to the consolidated financial statements, during
the year ended December 31, 2000 the Company changed its method of recognizing
revenue.

       As discussed in Note 16 to the consolidated financial statements, the
Company has restated its 2000 consolidated financial statements.

       The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. Since the date of completion of
our audit of the accompanying consolidated financial statements and initial
issuance of our report thereon dated March 26, 2001, the Company, as discussed
in Note 1 to the consolidated financial statements, has suffered recurring
losses from operations which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 26, 2001 except as to Note 1 and Note 16, as to which the date is November
20, 2001


                                      -30-
<PAGE>

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Euphonix, Inc.

       We have audited the accompanying Euphonix, Inc. consolidated statements
of operations, shareholders' equity and cash flows for the year ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

       We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

       In our opinion, the Euphonix, Inc. consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
results of its operations and its cash flows for the year ended December 31,
1998 in conformity with accounting principles generally accepted in the United
States.

                                        /s/ ERNST & YOUNG LLP

San Jose, California
March 4, 1999


                                      -31-
<PAGE>

                                 EUPHONIX, INC.

                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                           -----------------------
                                                                                             2000           1999
                                                                                           RESTATED
                                                                                           --------       --------
<S>                                                                                        <C>            <C>
Current assets:
    Cash and cash equivalents .......................................................      $    587       $    838
    Accounts receivable, (net of allowance for doubtful accounts of $142 in 2000
      and $112 in 1999) .............................................................         2,389          2,354
    Inventories, net ................................................................         6,969          6,964
    Prepaid expenses and other current assets .......................................           406            174
                                                                                           --------       --------
          Total current assets ......................................................        10,351         10,330
Property and equipment, net .........................................................         1,127          1,881
Other assets ........................................................................           522             89
                                                                                           --------       --------
          Total assets ..............................................................      $ 12,000       $ 12,300
                                                                                           ========       ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable ................................................................      $  1,841       $  2,007
    Accrued liabilities .............................................................         1,174          1,090
    Deferred revenue, net ...........................................................           882             --
    Customer deposits ...............................................................           860            240
                                                                                           --------       --------
          Total current liabilities .................................................         4,757          3,337
Notes payable .......................................................................         6,531          2,166
                                                                                           --------       --------
          Total liabilities .........................................................        11,288          5,503
                                                                                           --------       --------
Commitments and contingencies (Note 6)
Shareholders' equity:
    Preferred stock, $0.001 par value: 2,000,000 authorized shares, none issued
      and outstanding ...............................................................            --             --
    Common stock, $0.001 par value: 20,000,000 authorized shares, 12,190,099 and
      11,591,000 shares issued and outstanding in 2000 and 1999, respectively .......            12             12
    Additional paid-in capital ......................................................        24,191         21,402
    Unearned compensation ...........................................................           (53)            --
    Accumulated other comprehensive income ..........................................            42             42
    Accumulated deficit .............................................................       (23,480)       (14,659)
                                                                                           --------       --------
          Total shareholders' equity ................................................           712          6,797
                                                                                           --------       --------
          Total liabilities and shareholders' equity ................................      $ 12,000       $ 12,300
                                                                                           ========       ========
</TABLE>

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                              FINANCIAL STATEMENTS.


                                      -32-
<PAGE>

                                 EUPHONIX, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                    --------------------------------------
                                                                                      2000           1999           1998
                                                                                    RESTATED
                                                                                    --------       --------       --------
<S>                                                                                 <C>            <C>            <C>
Net revenues .................................................................      $ 14,779       $ 13,806       $ 15,614
Cost of revenues .............................................................        10,311          8,109          8,600
                                                                                    --------       --------       --------
Gross margin .................................................................         4,468          5,697          7,014
                                                                                    --------       --------       --------
Operating expenses:
    Research and development .................................................         3,566          4,485          4,587
    Sales and marketing ......................................................         5,594          5,588          5,450
    General and administrative ...............................................         2,169          1,299          2,283
                                                                                    --------       --------       --------
          Total operating expenses ...........................................        11,329         11,372         12,320
                                                                                    --------       --------       --------
Operating loss ...............................................................        (6,861)        (5,675)        (5,306)
Interest and other income ....................................................            41             94             74
Interest expense and other charges ...........................................        (1,737)          (748)            (8)
                                                                                    --------       --------       --------
Loss before equity in net loss of investee and cumulative  effect of a
  change in accounting principle .............................................        (8,557)        (6,329)        (5,240)
Equity in net loss of investee ...............................................          (105)            --             --
                                                                                    --------       --------       --------
Loss before cumulative effect of a change in accounting  principle ...........        (8,662)        (6,329)        (5,240)
Cumulative effect of a change in accounting principle ........................          (159)            --             --
                                                                                    --------       --------       --------
Net loss .....................................................................      $ (8,821)      $ (6,329)      $ (5,240)
                                                                                    ========       ========       ========
Net loss per share, basic and diluted:
    Loss before cumulative effect of a change in accounting principle ........      $  (0.72)      $  (0.74)      $  (0.82)
                                                                                                   ========       ========
    Adjustment for effect of a change in accounting principle ................         (0.01)
                                                                                    --------
Net loss per share as adjusted, basic and diluted ............................      $  (0.73)
                                                                                    ========
Pro forma amounts assuming the accounting change is applied retroactively
  (Note 1):
    Net loss .................................................................      $ (8,662)      $ (5,978)      $ (5,664)
                                                                                    ========       ========       ========
    Net loss per share, basic and diluted ....................................      $  (0.72)      $  (0.70)      $  (0.88)
                                                                                    ========       ========       ========
Shares used in computing net loss per share, basic and diluted ...............        12,021          8,541          6,404
                                                                                    ========       ========       ========
</TABLE>

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                              FINANCIAL STATEMENTS.


                                      -33-
<PAGE>

                                 EUPHONIX, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                            ACCUMULATED
                                                 COMMON STOCK       ADDITIONAL                 OTHER
                                             --------------------    PAID-IN     UNEARNED   COMPENSATION  ACCUMULATED
                                              SHARES      AMOUNT     CAPITAL  COMPREHENSIVE INCOME (LOSS)   DEFICIT      TOTAL
                                             --------    --------   --------- ------------- ------------  -----------   --------
<S>                                          <C>         <C>        <C>       <C>           <C>           <C>           <C>
BALANCE AT DECEMBER 31, 1997 ..............     5,590    $      6    $ 13,723    $   (140)    $    (12)    $ (3,090)    $ 10,487
Issuance of common stock ..................     1,040           1       1,949          --           --           --        1,950
Exercise of stock options .................         5          --           1          --           --           --            1
Amortization of deferred compensation .....        --          --          --          90           --           --           90
Net loss ..................................        --          --          --          --           --       (5,240)
Foreign currency translation adjustment ...        --          --          --          --           87           --
Comprehensive loss ........................        --          --          --          --           --           --       (5,153)
                                             --------    --------    --------    --------     --------     --------     --------
BALANCE AT DECEMBER 31, 1998 ..............     6,635           7      15,673         (50)          75       (8,330)       7,375
Beneficial conversion feature on
  issuance of convertible note
  payable .................................        --          --         613          --           --           --          613
Issuance of common stock ..................     2,903           3       3,051          --           --           --        3,054
Conversion of note payable ................     1,981           2       2,065          --           --           --        2,067
Exercise of stock options .................        72          --          --          --           --           --           --
Amortization of deferred
  compensation ............................        --          --          --          50           --           --           50
Net loss ..................................        --          --          --          --           --       (6,329)
Foreign currency translation
  adjustment ..............................        --          --          --          --          (33)          --
Comprehensive loss ........................        --          --          --          --           --           --       (6,362)
                                             --------    --------    --------    --------     --------     --------     --------
BALANCE AT DECEMBER 31, 1999 ..............    11,591          12      21,402          --           42      (14,659)       6,797
Cumulative effect of a change in
  accounting principle ....................        --          --          --          --           --         (159)        (159)
Beneficial conversion feature on
  issuance of convertible note
  payable .................................        --          --       1,279          --           --           --        1,279
Issuance of common stock to existing
  investors ...............................       148          --         500          --           --           --          500
Issuance of common stock in connection
  with the joint venture ..................       240          --         660          --           --           --          660
Exercise of stock options .................       134          --         135          --           --           --          135
Unearned compensation .....................        77          --         215        (215)          --           --           --
Amortization of deferred
  compensation ............................        --          --          --         162           --           --          162
Restated net loss .........................        --          --          --          --           --       (8,662)
Foreign currency translation
  adjustment ..............................        --          --          --          --           --           --
Restated comprehensive loss ...............        --          --          --          --           --           --       (8,662)
                                             --------    --------    --------    --------     --------     --------     --------
BALANCE AT DECEMBER 31, 2000 AS
  RESTATED ................................    12,190    $     12    $ 24,191    $    (53)    $     42     $(23,480)    $    712
                                             ========    ========    ========    ========     ========     ========     ========
</TABLE>

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                              FINANCIAL STATEMENTS.


                                      -34-
<PAGE>

                                 EUPHONIX, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31
                                                                           -----------------------------------
                                                                             2000          1999          1998
                                                                           RESTATED
                                                                           --------      -------       -------
<S>                                                                        <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                   $(8,821)      $(6,329)      $(5,240)
Adjustments to reconcile net loss to net cash used in operating
  activities:
    Depreciation and amortization                                              652           625           595
    Deferred income taxes                                                       --            --            81
    Loss on disposal of fixed assets                                            54            --           161
    Allowance for doubtful accounts                                             30          (291)          180
    Beneficial conversion on convertible note payable                        1,279           613            --
    Interest accrued on notes payable                                          364            67            --
    Amortization of unearned compensation                                      162            50            90
    Changes in assets and liabilities:
           Accounts receivable                                                 (65)         (520)          187
           Inventory                                                           115        (1,405)         (248)
           Prepaid expenses and other assets (including  current)              (98)           53           (50)
           Income tax                                                           --            --           544
           Accounts payable                                                   (166)          371           712
           Accrued liabilities                                                  84          (614)          482
           Deferred revenue                                                    882          (185)           --
           Customer deposits                                                   620           142          (140)
                                                                           -------       -------       -------
                     Net cash used in operating activities                  (4,908)       (7,423)       (2,646)
                                                                           -------       -------       -------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sales of available-for-sale securities                        --           601         1,109
    Purchase of property and equipment, net of retirements                    (278)       (1,131)         (657)
                                                                           -------       -------       -------
                     Net cash provided by (used in) investing
                       activities                                             (278)         (530)          452
                                                                           -------       -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of notes payable                                  4,000         4,100            --
    Proceeds from sale of common stock                                         800         3,054         1,951
    Proceeds from exercise of stock options                                    135            --            --
    Proceeds from short-term borrowings                                         --            --           500
    Repayment of short-term borrowings                                          --            --          (500)
                                                                           -------       -------       -------
                     Net cash provided by financing activities               4,935         7,154         1,951
                                                                           -------       -------       -------
Net decrease in cash and cash equivalents                                     (251)         (799)         (243)
Cash and cash equivalents at beginning of year                                 838         1,637         1,880
                                                                           -------       -------       -------
Cash and cash equivalents at end of year                                   $   587       $   838       $ 1,637
                                                                           =======       =======       =======
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
    Conversion of notes payable into common stock                          $    --       $ 2,000            --
                                                                           -------       -------       -------
    Equity investment in joint venture                                     $   657       $    --       $    --
                                                                           -------       -------       -------
</TABLE>


        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
                              FINANCIAL STATEMENTS.


                                      -35-
<PAGE>

                                 EUPHONIX, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION

THE COMPANY

       Euphonix, Inc. (the "Company") was incorporated on July 6, 1988 in the
state of California. Euphonix develops, manufactures and supports networked
digital audio systems for music, film and television post production, broadcast,
sound reinforcement and multimedia applications.

BASIS OF PRESENTATION

       The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated on consolidation. Investments in which the
Company has between 20% and 50% ownership are accounted for using the equity
method. The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported period.
Significant estimates made by management include allowance for doubtful
accounts, inventory obsolescence, depreciation, amortization, taxes,
contingencies and product warranty. Actual results could differ from those
estimates.

       The Company continues to incur substantial losses and negative cash flows
from operations. For the year ended December 31, 2000, the Company incurred an
operating loss of $6,861,000 and negative cash flows from operations of
$4,908,000 and has an accumulated deficit of $23,480,000. Management expects
operating losses and negative cash flows to continue for the foreseeable future
due to the need to incur additional costs and expenses related to its operating
needs, develop new or enhance existing products, respond to competitive
pressures, or acquire or invest in complementary businesses, technologies,
services or products. Management plans to increase revenue, control costs and
raise additional financing. The Company is actively engaged in securing a new
borrowing facility, although there is no assurance that the Company will be
successful in doing so.

       The Company believes that its available cash and cash equivalents will
not be sufficient to meet its anticipated needs for working capital and capital
expenditures through the end of 2001. The Company believes that failure to
generate sufficient revenues, reduce certain discretionary spending or raise
additional financing could have a material adverse effect on the Company's
ability to continue as a going concern and achieve its intended business
objectives.

       In addition, in order to meet its long-term liquidity needs, the Company
may need to raise additional funds, establish a credit facility or seek other
financing arrangements. Additional funding may not be available on favorable
terms or at all. Moreover, the maturity dates of the Company's outstanding
promissory notes will become due in early 2002. Although, upon shareholder
approval, the notes may be converted into shares of the Company's common stock,
there is no assurance that the investors will choose to convert their notes, and
the Company may have to repay these loans in 2002.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FAIR VALUE OF FINANCIAL INSTRUMENTS

       The fair value of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate their carrying value due to the
short-term maturities.

FOREIGN CURRENCY TRANSLATION

       The functional currency for the Company's Japanese subsidiary is the Yen.
Assets and liabilities are translated at exchange rates prevailing at the
balance sheet dates. Revenues, costs and expenses are translated into United
States dollars at average exchange rates for the period. Gains and losses
resulting from translation are accumulated as a component of other comprehensive
income.


                                      -36-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOREIGN CURRENCY RISK

       The Company does not enter into hedging arrangements to mitigate the
foreign currency risk with respect to foreign currency denominated assets and
liabilities. An adverse change in the foreign exchange rate could result in
foreign currency transaction losses that could materially affect the Company's
operations, financial position and cash flows. Foreign exchange (loss) gains
were ($39,000), $48,000 and $14,000 for the years ended December 31, 2000, 1999
and 1998, respectively.

CASH AND CASH EQUIVALENTS

       Cash equivalents consist of short-term financial instruments that are
readily convertible into cash with original maturities of less then ninety days
from the date of acquisition. The carrying amount reported in the balance sheets
for cash and cash equivalents approximates fair value.

SHORT-TERM INVESTMENTS

       The Company accounts for its investments in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." At December 31, 1998,
the Company has categorized its short-term investments, which were substantially
money market funds, that invest in government obligations and corporate
securities, as available-for-sale, and had included them in short-term
investments. Available-for-sale securities are carried at fair value with
unrealized gains and losses, reported in a separate component of shareholders'
equity. Unrealized holding gains and losses at December 31, 1998 were not
material. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income. The Company sold its short-term investments in
1999, and as of December 31, 2000 and 1999, the Company no longer held
short-term investments.

INVENTORIES

       Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market (net realizable value).

PROPERTY AND EQUIPMENT, NET

       Property and equipment are stated at cost less accumulated depreciation.
The Company provides for depreciation by charges to expense which are sufficient
to write off the cost of the assets over their estimated useful lives on the
straight-line basis.

       Leasehold improvement are amortized over the lesser of the lease term or
the estimated useful life of the improvement. Useful lives by principal classes
of property and equipment are as follows:


                                      -37-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<S>                                                         <C>
Furniture and fixtures.................................       7 years
Computer equipment and purchased software..............       3 years
Leasehold improvements.................................     5-7 years
Demonstration equipment................................     3-5 years
</TABLE>

       When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the asset and allowance for depreciation accounts,
respectively, and any gain or loss on that disposal is credited or charged to
income.

       Maintenance, repairs and minor renewals are charged to expense as
incurred. Expenditures which substantially increase an asset's useful life are
capitalized.

ACCOUNTING FOR LONG-LIVED ASSETS

       The Company evaluates the recoverability of its long-lived assets and
goodwill related to those assets in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" ("SFAS 121"). SFAS 121
requires recognition of impairment of long-lived assets upon the occurrence of
certain events and in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.

WARRANTY

       The Company provides a fifteen-month parts and labor warranty on its
products. The Company accrues for estimated warranty costs upon shipment.

COMPREHENSIVE INCOME

       The Company has adopted SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes rules for the reporting and display of
comprehensive income and its components; however, the adoption of the Statement
had no impact on the Company's net loss or shareholders' equity. SFAS 130
requires foreign currency translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income.

REVENUE RECOGNITION

       Product Revenue and Change in Accounting Principle

       Effective January 1, 2000, the Company changed its method of accounting
for revenue recognition to comply with Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Previously, the Company has recognized revenue generally upon shipment to
customers including cases when installation was a condition of payment, provided
all other revenue recognition criteria were met. Under the new accounting method
adopted retroactive to January 1, 2000, the Company now defers all revenue until
installation is complete (in those cases where installation is a condition of
payment), provided all other revenue recognition criteria are met.


                                      -38-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

       The pro forma effect of the retroactive application for the years
December 31, 2000, 1999 and 1998 is shown as a footnote to the Statement of
Operations. The quarters for the year ended December 31, 2000, as restated for
the effects of the change in accounting principle are shown in Note 15.

       The pro forma effect of the retroactive application for the quarter ended
December 31, 1999 (the quarter in which SAB 101 was adopted) is as follows:

<TABLE>
<CAPTION>
                                                                         FOURTH QUARTER ENDED DECEMBER 31, 1999
                                                                        -----------------------------------------
                                                                        AS REPORTED     ADJUSTMENT      PRO FORMA
                                                                        -----------     ----------      ---------
                                                                          (in thousands, except per share data)
<S>                                                                     <C>             <C>             <C>
Revenue ............................................................      $  5,022       $   (289)      $  4,733
                                                                          --------                      --------
Gross margin .......................................................      $  2,686       $   (159)      $  2,527
                                                                          --------                      --------
Net loss ...........................................................      $   (771)      $   (159)      $   (930)
                                                                          ========                      ========
Basic and diluted loss per share ...................................      $  (0.07)                     $  (0.09)
                                                                          ========                      ========
Shares used in computing basic and diluted net loss per share ......        10,660                        10,660
                                                                          ========                      ========
</TABLE>

       Revenue for Contracts that Include Sales of Software and Software
Modification

       The Company recognizes revenue for contracts which include future sales
of software and software modification using the residual method in accordance
with Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," as
amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions." Under the residual method, revenue is
recognized in a multiple element arrangement in which Company-specific objective
evidence of fair value exists for all of the undelivered elements in the
arrangement, but does not exist for one or more of the delivered elements in the
arrangement. Company-specific objective evidence of fair value of maintenance
and other services is based on the Company's customary pricing for such
maintenance and/or services when sold separately. At the outset of the
arrangement with the customer, the Company defers revenue for the fair value of
its undelivered software and recognizes revenue for the remainder of the
arrangement fee attributable to the elements initially delivered in the
arrangement when the basic criteria in SOP 97-2 have been met. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered.

CONCENTRATION OF CREDIT RISK

       Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company manufactures and sells its products to
end-users, sales representatives, distributors and leasing companies in the
music, post production (film and television), and broadcast industries. The
Company performs ongoing credit evaluations of its customers' financial
condition, and prior to shipping the product, generally requires a substantial
deposit (anywhere from $10,000 up to 50% of the mixing console's value) and a
firm purchase order. From time to time and depending on the financial condition
of the customer, the Company may require payment of a substantial portion of the
purchase price, an irrevocable letter of credit or a purchase order from a
third-party lessor. The Company is exposed to credit risks in the event of
insolvency by its customers to the extent of


                                      -39-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

amounts recorded on the balance sheet. The Company maintains reserves for
potential credit losses, and such losses have historically been within
management's expectations.

ADVERTISING COSTS

       The Company expenses advertising costs as incurred. Advertising expense
was approximately $507,000, $457,000 and $504,000 in 2000, 1999 and 1998,
respectively.

RESEARCH AND DEVELOPMENT

       Research and development expenditures are charged to expense as incurred.

STOCK-BASED COMPENSATION

       The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and the Financial Accounting Standards Board
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB Opinion No. 25" and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No.
25, compensation expense is recognized based on the difference, if any, on the
date of grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock. The compensation expense is recognized
over the option vesting period.

       The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force in Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or
Services" and FIN 44.

NET LOSS PER SHARE

       Basic and diluted net loss per share is computed by dividing the net loss
available to holders of common stock for the period by the weighted average
number of shares of common stock outstanding during the period. The calculation
of diluted net loss per share excludes potential shares of common stock if their
effect is anti-dilutive. Potential common stock consists of shares of common
stock issuable upon the exercise of stock options and shares issuable upon the
conversion of convertible notes payable.

       The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share calculation because to do so
would be anti-dilutive for the period indicated:

<TABLE>
<CAPTION>
                                       DECEMBER 31
                               ---------------------------
                                2000       1999       1998
                               -----      -----      -----
<S>                            <C>        <C>        <C>
Convertible notes payable      5,199      2,888         --
Common stock options           3,279      2,558      1,800
                               -----      -----      -----
                               8,478      5,446      1,800
                               =====      =====      =====
</TABLE>


                                      -40-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEGMENT INFORMATION

       The Company follows the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). Based on business activities, management
responsibility, financial reporting structure and geographical location, the
Company has determined that it operates in a single business segment.

RECLASSIFICATIONS

       The Company has reclassified the presentation of certain 1999 and 1998
statement of cash flows information to conform to current year presentation. The
reclassifications had no effect on the previously reported financial position or
results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

       In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. In June
2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting
for Derivative Instruments and Hedging Activities -- An Amendment of FASB
Statement No. 133." SFAS No. 138 amends the accounting and reporting standards
for certain derivatives and hedging activities such as net settlement contracts,
foreign currency transactions and intercompany derivatives. Based on the
Company's current operations, management has concluded that the future adoption
of SFAS No. 133 will not have a material impact on the Company's financial
position or results of operations.

       In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. The adoption of FIN 44 has not had a material effect on the financial
statements.

       In November 2000, the Emerging Issues Task Force issued EITF 00-27
"Application of Issue No. 98-5 to Certain Convertible Instruments." EITF 00-27
provides additional guidance on accounting for convertible debt instruments and
convertible preferred stock with non detachable conversion options that are
in-the-money at the commitment date. The Task Force affirmed the use of the
accounting conversion price to calculate the beneficial conversion feature
charge. Accordingly, any issuances of convertible securities since


                                      -41-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

May 20, 1999 that were accompanied by warrants or other securities requiring an
allocation of proceeds under APB 14, will require the application of the
accounting conversion price to (1) determine whether the security includes a
beneficial conversion feature or (2) to remeasure a previously measured
beneficial conversion feature. The adoption of EITF 00-27 has not had a material
effect on the financial statements.

NOTE 3 -- BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
                                                               DECEMBER 31
                                                          ---------------------
                                                           2000           1999
                                                          -------       -------
                                                              (in thousands)
<S>                                                       <C>           <C>
INVENTORY, NET:
    Raw materials ..................................      $ 2,474       $ 2,878
    Work-in-progress ...............................        1,084         1,494
    Finished goods .................................        3,411         2,592
                                                          -------       -------
                                                          $ 6,969       $ 6,964
                                                          =======       =======
OTHER ASSETS:
    Equity investment in joint venture .............      $   462       $    --
    Other ..........................................           60            89
                                                          -------       -------
                                                          $   522       $    89
                                                          =======       =======
PROPERTY AND EQUIPMENT:
    Furniture and fixtures .........................      $   124       $   248
    Computer equipment and purchased software ......        2,080         2,226
    Leasehold improvements .........................          330           326
    Demonstration equipment ........................          647         1,059
                                                          -------       -------
                                                            3,181         3,859
    Accumulated depreciation .......................       (2,054)       (1,978)
                                                          -------       -------
                                                          $ 1,127       $ 1,881
                                                          =======       =======
</TABLE>

       Depreciation expense was $562,000, $610,000 and $536,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. The capital cost of assets
acquired under capital leases was $170,000 for the years ended December 31, 2000
and 1999. The accumulated depreciation for the assets acquired under capital
lease was $170,000 and $168,000 for the years ended December 31, 2000 and 1999,
respectively.

<TABLE>
<CAPTION>
                                              DECEMBER 31,
                                           ------------------
                                            2000        1999
                                           ------      ------
<S>                                        <C>         <C>
ACCRUED LIABILITIES:
    Accrued compensation and related       $  445      $  429
    Accrued warranty                          265         244
    Accrued commissions                        91          83
    Sales tax payable                         149          91
    Other                                     224         243
                                           ------      ------
                                           $1,174      $1,090
                                           ======      ======
</TABLE>


                                      -42-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- JOINT VENTURE:

       In February 2000, the Company entered into a joint venture arrangement
with Audio Export George Neumann & Company Gmbh ("Audio Export"). The joint
venture was formed by the contribution by the Company of property and equipment
with a net book value of $297,000 to its wholly owned subsidiary, Euphonix
Europe. Concurrently, Audio Export contributed $680,000 in cash in exchange for
common stock of Euphonix Europe, representing 70% of the outstanding common
stock of Euphonix Europe after the transaction. The joint venture arrangement
included a Shareholder Agreement between the Company and Audio Export and a
distribution agreement between the Company and Euphonix Europe.

       In addition, in February 2000, the President of Audio Export purchased
240,000 shares of the Company's common stock from the Company for $300,000 in
cash. The sale of the 240,000 shares was at a $360,000 discount from the quoted
market price of the Company's common stock on that date. As a result, in total
the Company contributed $657,000. The Company's carrying value in the investment
exceeds its interest in the underlying net book value of the investee by
approximately $273,000 at December 31, 2000. This excess is being amortized over
a period of 3 years.

       The Company's investment and ownership interest in Euphonix Europe
represents 30% of the outstanding shares of Euphonix Europe, and was accounted
for using the equity method commencing April 1, 2000, the effective date of the
joint venture arrangement. The Company's equity in the net loss of the investee
was $105,000 for the year ended December 31, 2000.

NOTE 5 -- NOTES PAYABLE:

       Notes payable comprised as follows:

<TABLE>
<CAPTION>
                                            DECEMBER 31
                                         ------------------
                                          2000        1999
                                         ------      ------
                                           (in thousands)
<S>                                      <C>         <C>
ISSUE DATE:
    July 30, 1999 .................      $2,100      $2,100
    February 22, 2000 .............       1,500          --
    April 14, 2000 ................         900          --
    September 7, 2000 .............         400          --
    December 29, 2000 .............       1,300          --
                                         ------      ------
                                          6,100       2,100
Accrued interest ..................         431          66
                                         ------      ------
Notes payable, long-term ..........      $6,531      $2,166
                                         ======      ======
</TABLE>

       In July 1999, the Company executed a promissory note with an existing
investor and other parties under which the Company was authorized to draw up to
$2,100,000 through October 31, 1999. The note accrues interest at 7.75% per
annum with principal and accrued interest due at July 30, 2001. The assets of
the Company are pledged as collateral. The note contains a conversion feature to
allow the holder to convert the note into common stock of the Company at a rate
of $0.75 per share. At the date of issuance of the note, the quoted market price
of the Company's common stock was $0.969 per share, resulting in a beneficial


                                      -43-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

conversion feature charge in the amount of $613,000. The beneficial conversion
feature charge was recorded as a credit to equity and a charge to interest
expense. In March 2001, the Company and the investors agreed to extend the due
date of the principal and accrued interest until March 31, 2002.

       In February 2000, the Company executed promissory notes with existing
investors under which the Company borrowed $1,500,000. The notes accrue interest
at 10% per annum with principal and accrued interest due at February 22, 2002.
The assets of the Company are pledged as collateral. The note contains a
conversion feature to allow the holder to convert the note into common stock of
the Company at a rate of $2.531 per share. In addition, this note provides that
upon conversion, if such conversion occurs, the Company will issue warrants to
purchase 1,185,185 shares of common stock at prices ranging from $3 to $5. The
warrants, if issued, will be exercisable at any time and from time to time in
part or in full on or before February 1, 2003. At the date of issuance of the
note, the quoted market price of the Company's stock was $2.531 per share,
resulting in a beneficial conversion feature of $1,279,000. The beneficial
conversion feature charge was recorded as a credit to equity and a charge to
interest expense at the time the notes were issued.

       In April 2000, the Company executed promissory notes with existing
investors under which the Company borrowed $800,000. The notes accrue interest
at 10% per annum with principal and accrued interest due at January 1, 2001. An
amendment to the April 2000 note extended the due date to July 31, 2001. The
assets of the Company are pledged as collateral. The notes contain a conversion
feature, which is subject to shareholder approval, and if approved, will allow
the holder to convert the note into common stock of the Company at a rate of
$3.625 per share. The Company expects that this note will be approved by the
shareholders, and upon approval the Company will measure and record a beneficial
conversion feature charge, if the accounting conversion rate is lower than the
fair market value of the Company's common stock on that date. In March 2001, the
Company and the investors agreed to extend the due date of the principal and
accrued interest until March 31, 2002.

       In September 2000, the Company executed a promissory note with an
existing investor under which the Company borrowed $400,000. The note accrues
interest at 8% per annum with principal and accrued interest due at July 31,
2001. The assets of the Company are pledged as collateral. The notes contain a
conversion feature, which is subject to shareholder approval, and if approved,
will allow the holder to convert the note into common stock of the Company at a
rate of $2.3562 per share. In addition this note provides that upon conversion,
if such conversion occurs, the Company will issue warrants to purchase 181,988
shares of common stock at a rate of $2.3562 per share. The warrants, if issued,
will be exercisable at any time and from time to time in part or in full before
September 7, 2005. The Company expects that this note will be approved by the
shareholders, and upon approval the Company will measure and record a beneficial
conversion feature charge, if the accounting conversion rate is lower than the
fair market value of the Company's common stock on that date (the commitment
date). In March 2001, the Company and the investors agreed to extend the due
date of the principal and accrued interest until March 31, 2002.

       In December 2000, the Company executed promissory notes with existing
investors under which the Company borrowed $1,800,000. The notes accrue interest
at 8% per annum with principal and accrued interest due at July 31, 2001. The
assets of the Company are pledged as collateral. As of December 31, 2000, the
remaining draw down balance of these notes was $500,000. The notes contain a
conversion feature,


                                      -44-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

which is subject to shareholder approval, and if approved, will allow the holder
to convert the note in common stock of the Company at a rate of $1.26 per share.
In addition this note provides that upon conversion, if such conversion occurs,
the Company will issue warrants to purchase 1,502,963 shares of common stock at
a rate of $1.26 per share. The warrants, if issued, will be exercisable at any
time and from time to time in part or in full before December 29, 2005. The
Company expects that this note will be approved by the shareholders, and upon
approval the Company will measure and record a beneficial conversion feature
charge, if the accounting conversion rate is lower than the fair market value of
the Company's common stock on that date (the commitment date). In March 2001,
the Company and the investors agreed to extend the due date of the principal and
accrued interest until March 31, 2002.

NOTE 6 -- COMMITMENTS AND CONTINGENCIES:

CONTINGENCIES

       From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The Company
accrues contingent liabilities when it is probable that future expenditures will
be made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.

LEASE COMMITMENTS

       The Company leases facilities for its headquarters in Palo Alto,
California, its subsidiary in Woodinville, Washington, and its sales offices in
Los Angeles, Nashville, New York and Tokyo. The operating lease agreement for
Palo Alto expires in November 2001, and the other leases expire at various dates
through August 2003. All leases contain renewal options. Certain leases contain
provisions for rental adjustments and require the Company to pay property taxes,
insurance and normal maintenance costs. In September 1998, the Company
sub-leased portions of its facilities in Palo Alto and New York.

       The aggregate future minimum lease payments under operating leases are as
follows (in thousands):

NET

<TABLE>
<CAPTION>
                              FACILITIES   SUBLEASES  COMMITMENTS
                              ----------   ---------  -----------
                                        (in thousands)
<S>                           <C>          <C>        <C>
2001 .....................      $  925      $  390      $  535
2002 .....................         125          --         125
2003 .....................          76          --          76
2004 .....................          --          --          --
2005 .....................          --          --          --
Thereafter ...............          --          --          --
                                ------      ------      ------
           Total .........      $1,126      $  390      $  736
                                ======      ======      ======
</TABLE>

       Total rent expense was approximately $1,190,000, $967,000 and $744,000 in
2000, 1999 and 1998, respectively.


                                      -45-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- PREFERRED STOCK AND COMMON STOCK:

PREFERRED STOCK

       The Company is authorized to issue 2,000,000 shares of undesignated
preferred stock. Preferred stock may be issued from time to time in one or more
series. The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions granted to and imposed upon any wholly
unissued series of preferred stock and to fix the number of shares of any series
of preferred stock and the designation of any such series without any vote or
action by the Company's shareholders.

COMMON STOCK:

       In April 1999, the Company executed a convertible promissory note with
certain new and existing investors for $2,000,000, which was due on April 23,
2001 which accrued interest at 7.75% per annum, and which was convertible at the
rate of $1.03 per share. In October 1999, the holders of the note converted the
$2,000,000 principal amount and $67,000 accrued interest into 1,981,000 shares
of common stock.

NOTE 8 -- STOCK OPTION PLANS:

1990 STOCK PLAN

       The 1990 Stock Plan (the "1990 Plan") provides for the grant of incentive
stock options, nonstatutory stock options and stock purchase rights to employees
of the Company. The Company has authorized 2,042,281 shares of common stock for
issuance under the 1990 Plan. At December 31, 2000, the 1990 Stock Plan had
expired with 234,004 stock option shares remaining in the available for grant
pool. Options issued under the 1990 Plan are exercisable upon vesting, which is
generally four to five years.

1995 PERFORMANCE BASED STOCK OPTION PLAN

       The 1995 Performance Based Stock Option Plan (the "1995 Plan") provides
for the grant of incentive stock options and nonstatutory options to employees
of the Company. A total of 50,000 shares of common stock has been reserved for
issuance under the 1995 Plan. At December 31, 2000, 22,500 stock option shares
were available for grant under the Plan. Options granted under the 1995 Plan
prior to 1997 vest at the rate of one-third of the shares one year following the
vesting commencement date, with one thirty-sixth of the shares vesting each
month thereafter. All options granted under the 1995 Plan during 1997 vested on
December 11, 2000. All options granted under the 1995 Plan during 2000 are fully
vested and exercisable as of the date of grant.

1995 NEW DIRECTOR OPTION PLAN

       The 1995 New Director Option Plan (the "Directors' Plan") authorizes the
Company to issue nonstatutory stock options to purchase up to 50,000 shares of
the Company's common stock at an exercise price equal to the fair market value
of the common stock on the grant date. At December 31, 2000, 29,792 stock option
shares were available to grant under the Plan. The Directors' Plan provides that
each person who is an outside director on the effective date of the Directors'
Plan and each outside director who subsequently becomes a member of the Board of
Directors shall be automatically granted an option to purchase 5,000 shares.
Additionally, each outside director shall be automatically granted an option to
purchase 5,000 shares


                                      -46-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

on the date of each annual shareholders' meeting provided he is an outside
director as of the date of such meeting and is reelected to the Board of
Directors at such meeting. Options under the plan are fully vested and
exercisable as of the date of grant.

1997 NONSTATUTORY STOCK OPTION PLAN

       The 1997 Nonstatutory Stock Plan (the "1997 Plan") authorizes the Company
to issue nonstatutory stock options to employees of the Company. A total of
750,000 shares of common stock have been reserved for issuance under the 1997
Plan. At December 31, 2000, 168,211 stock option shares were available to grant
under the Plan. Options granted under the 1997 Plan during 1997 vested on
December 11, 2000. Options granted under the 1997 Plan during 2000 generally
vest over four years.

1999 STOCK PLAN

       The 1999 Stock Plan (the "1999 Plan") provides for the grant of incentive
stock options, nonstatutory stock options and stock purchase rights and common
stock equivalents to employees of the Company. The Company has authorized
750,000 shares of common stock for issuance under the 1999 Plan. In April 2000,
an amendment to the 1999 Plan increased the shares authorized to 1,750,000. At
December 31, 2000, 906,493 stock option shares were available for grant under
the Plan. Options issued under the 1999 Plan are exercisable upon vesting, which
is generally four years.

2000 NONSTATUTORY STOCK OPTION PLAN

       The 2000 Nonstatutory Stock Plan (the "2000 Plan") authorizes the Company
to issue nonstatutory stock options to the CEO of the Company under an
employment agreement dated October 2, 2000. A total of 1,000,000 shares of
common stock have been reserved for issuance under the 2000 Plan. At December
31, 2000, there were no shares remaining available to grant under the Plan.
Options issued under the 2000 Plan are exercisable upon vesting, which is
twenty-four months.

       A summary of the Company's stock option activity for all of its stock
option plans, is as follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                                  OUTSTANDING OPTIONS
                                      -------------------------------------------------------------------------------
                                      SHARES AVAILABLE     NUMBER OF SHARES                          WEIGHTED AVERAGE
                                          FOR GRANT          OUTSTANDING        PRICE PER SHARE       EXERCISE PRICE
                                      ----------------     ----------------     ---------------      ----------------
<S>                                   <C>                  <C>                  <C>                  <C>
BALANCE AT DECEMBER 31, 1997 ......           935               1,166             $0.100-5.375           $  2.77
    Granted .......................          (654)                654              0.938-2.500              1.27
    Exercised .....................            --                  (5)             0.150-0.200              0.18
    Canceled ......................            15                 (15)             0.150-5.375              2.13
                                           ------              ------

BALANCE AT DECEMBER 31, 1998 ......           296               1,800              0.100-5.375              2.25
    Authorized ....................           750                  --                  --                     --
    Granted .......................          (938)                938              0.001-1.250              0.93
    Exercised .....................            --                 (72)             0.001-0.200             0.003
    Canceled ......................           108                (108)             0.200-5.375              1.88
                                           ------              ------
BALANCE AT DECEMBER 31, 1999.......           216               2,558              0.001-5.375              2.77
    Authorized.....................         2,000                  --                  --                     --
    Granted........................        (1,285)              1,285              0.100-4.250              2.15
    Exercised......................            --                (134)             0.100-3.000              1.02
    Canceled.......................           430                (430)             0.750-5.375              2.08
                                           ------              ------
BALANCE AT DECEMBER 31, 2000.......         1,361               3,279             $0.100-5.375           $  2.18
                                           ======              ======
</TABLE>


                                      -47-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

       The following table summarizes information about stock options
outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                  OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                                         -----------------------------------   -------------------------------------
                                         WEIGHTED AVERAGE
                     NUMBER OF SHARES       REMAINING                          NUMBER OF SHARES
RANGE OF EXERCISE      OUTSTANDING       CONTRACTUAL LIFE   WEIGHTED AVERAGE      OUTSTANDING       WEIGHTED AVERAGE
      PRICE           (IN THOUSANDS)        (IN YEARS)       EXERCISE PRICE     (IN THOUSANDS)       EXERCISE PRICE
-----------------    ----------------    ----------------   ----------------   ----------------     ----------------
<S>                  <C>                 <C>                <C>                <C>                  <C>
   $0.10-0.15                  4                2.0              $0.15                  4               $0.15
    0.16-1.25              1,150                8.2               1.01                628                1.01
    1.26-2.00                567                7.1               1.68                435                1.77
    2.01-4.00              1,270                9.5               2.20                 52                2.94
   $4.01-5.38                288                5.2               5.32                278                5.34
                          ------                                                   ------
      Total                3,279                8.3              $1.96              1,397               $2.18
                          ======                                                   ======
</TABLE>

       Pro forma information regarding net loss and net loss per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method. The fair value for options
granted prior to the initial public offering was estimated at the date of grant
using the minimum value method. The fair value for options granted subsequent to
the initial public offering was estimated at the date of grant using the
Black-Scholes option-pricing model. The minimum value method differs from the
Black-Scholes option-pricing model because it does not consider the effect of
expected volatility. The Company calculated the fair value of each option grant
on the date of grant using the Black-Scholes option pricing model as prescribed
by SFAS No. 123 using the following assumptions:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                               ----------------------------------------
                                               2000              1999              1998
                                               ----              ----              ----
                                                            (IN THOUSANDS)
<S>                                            <C>               <C>               <C>
Risk-free rates ................               5.88%             6.44%             5.59%
Expected lives (in years) ......                  6                 6                 6
Dividend yield .................                  0%                0%                0%
Expected volatility ............                 83%               78%               90%
</TABLE>

       The weighted-average grant-date fair value of options granted during the
years ended December 31, 2000, 1999 and 1998 were $2.15, $0.93 and $0.94,
respectively. The effects on pro forma disclosures of applying FAS 123 are not
likely to be representative of the effects on pro forma disclosures in future
years.

       The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation


                                      -48-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

       For the purposes of FAS 123 pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
The Company's pro forma information follows:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                            -------------------------------------------
                                                               2000            1999             1998
                                                             RESTATED
                                                            ---------        ---------        ---------
                                                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                         <C>              <C>              <C>
Net loss ..............................................     $  (8,821)       $  (6,329)       $  (5,240)
Net loss per share as adjusted, basic and diluted .....     $   (0.73)       $   (0.74)       $   (0.82)
Pro forma net loss ....................................     $  (9,601)       $  (7,213)       $  (6,220)
Pro forma net loss per share, basic and diluted .......     $   (0.80)       $   (0.84)       $   (0.97)
</TABLE>

NOTE 9 -- BENEFIT PLANS:

DEFINED CONTRIBUTION PLAN

       The Company has an employee 401(k) salary deferral plan (the "Plan") that
allows voluntary contributions by all full-time U.S. employees. Eligible
employees may contribute from 1% to 20% of their respective compensation. The
Company does not contribute to the Plan.

NOTE 10 -- INCOME TAXES:

       No provision for federal and state income taxes was recorded for the
years ended December 31, 2000, 1999 and 1998 as the Company incurred net
operating losses during the period.

       Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                        -----------------------
                                                         2000             1999
                                                        -------         -------
                                                             (IN THOUSANDS)
<S>                                                     <C>             <C>
Deferred tax assets:
    Net operating loss carryforwards ...........        $ 6,830         $ 4,185
    Credit carryforwards .......................          1,144             862
    Capitalized research and development .......            518             514
    Reserves and other .........................            926             737
                                                        -------         -------
       Deferred tax assets .....................          9,418           6,298
Deferred tax liabilities .......................             --              --
Gross deferred tax asset .......................          9,418           6,298
Valuation allowance ............................          9,418         (6,298)
                                                        -------         -------
Net deferred tax assets ........................        $    --         $    --
                                                        =======         =======
</TABLE>


                                      -49-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

       The deferred tax assets valuation allowance at December 31, 2000 and 1999
is attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regard to the realizability of these tax
assets such that a full valuation allowance is necessary. These factors include
the lack of a significant history of consistent profits and the lack of
carryback capacity to realize these assets. Based on this absence of objective
evidence, management is unable to assert that it is more likely than not that
the Company will generate sufficient taxable income to realize the Company's net
deferred tax assets.

       Reconciliation of the statutory federal income tax to the Company's
effective tax:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31
                                                     ------------------------------
                                                     2000         1999         1998
                                                     ----         ----         ----
<S>                                                  <C>          <C>          <C>
Tax at federal statutory rate ...............        (34)%        (34)%        (34)%
State taxes .................................         --           --           (6)%
Research and development credits ............         --           --          (10)%
Other .......................................         --           --           (4)%
Beneficial conversion of note payable .......          5%           3%          --
Non-recognition of tax benefit ..............         29%          31%          54%
                                                     ---          ---          ---
    Total ...................................         --           --           --
                                                     ===          ===          ===
</TABLE>

       As of December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $18,487,000. The Company also had federal
research and development tax credit carryforwards of approximately $637,000. The
net operating loss and credit carryforwards will expire at various dates
beginning on 2005 through 2019, if not utilized.

NOTE 11 -- RELATED PARTY TRANSACTIONS:

       In February 2000, April 2000, September 2000 and December 2000, the
Company issued convertible promissory notes with certain new and existing
investors for $1,500,000, $800,000, $400,000 and $1,800,000, respectively (Note
5).

       In February 2000, in connection with the joint venture with Audio Export,
the President of Audio Export purchased 240,000 shares of common stock for
$300,000 (Note 4).

       In December 1999, the Company sold a System 5 digital console and R-1
multitrack recorder for $481,000 to Soundproof Studios, of which a shareholder
is the majority owner.

       In April 1999, the Company issued a convertible promissory note with
certain new and existing investors for $2,000,000. As more fully described in
Note 7, in October 1999, the note was converted into 1,981,000 shares of common
stock. In connection with this transaction, a director who had loaned $400,000,
as part of the issuance of the note, converted his portion of the note into
395,741 shares of common stock. Onset Enterprises Associates III L.P. also
participated in this convertible promissory note, and received 991,051 shares of
common stock upon conversion of its portion of the note. The managing director
of Onset Enterprises Associates III L.P. is also a director of the Company.

       During the year ended December 31, 2000, the Company sold product to
Euphonix Europe (the joint venture) for $530,000. As of December 31, 2000,
Euphonix Europe owed the Company $40,100.


                                      -50-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 -- CONCENTRATION OF OTHER RISKS:

PRODUCTS

       The Company has derived substantially all of its revenues to date from
sales of its digitally controlled audio mixing console system. The Company
expects that its ability to maintain or expand its current levels of revenues
and profits, if any, in the future will depend upon, among other things, its
success in selling its System 5 digital console and R-1 multitrack recorder,
enhancing its System 5 digital system with features including new software and
hardware add-ons and developing and marketing new products and features which
meet new market demands and changing customer requirements on a timely basis.

MARKETS

       The markets for the Company's products are characterized by rapidly
changing technologies, significant price competition and frequent new product
introductions. The Company believes that it must continue to gain market share
in all markets. If, in the future, there should be a significant downturn in any
of the markets, the Company's business could be materially and adversely
affected.

INVENTORIES

       The Company makes inventory provisions for potentially excess and
obsolete inventory based on backlog and forecasted demand. Actual demand will
inevitably differ from such anticipated demand, and such differences may have a
material effect on the financial statements.

CUSTOMERS

       The Company markets and sells its products primarily to a broad base of
customers comprised of end-users and sales representatives. No one end-user or
distributor constituted 10% or more of net revenues in 2000, 1999, and 1998.

EXPORT SALES

       If in the future, there should be a downturn in the music, post
production (film and television) or broadcast industries, or in the economic
conditions, the Company's business could be materially and adversely affected.
With the exception of an increase in Japan sales in 2000, a substantial decline
in export sales has occurred in Europe over the last three years and Japan in
1999 and 1998. With the exception of sales to customers through the Japanese
subsidiary, sales in all foreign countries are denominated in U.S. dollars.
Sales through the Japanese subsidiary are denominated in Yen.

MATERIALS

       Currently, the Company uses many sole or limited source suppliers,
certain of which are critical to integrated circuits included in the Company's
base system. If there were to be major delays or terminations in supplies of
such components, the Company could experience a delay in the shipment of its
products, which could have a materially adverse affect on its financial
statements. The Company generally purchases these


                                      -51-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

single or limited source components pursuant to purchase orders and has no
guaranteed supply arrangements with such suppliers.

NOTE 13 -- SEGMENT DISCLOSURES:

       The Company operates in a single industry segment, designing, developing,
manufacturing and marketing of digitally controlled audio mixing consoles for
use in the production of audio content for the music, post production (film and
television) and broadcast industries.

       The Company markets its products in the United States and in foreign
countries through its sales personnel, sales representatives and distributors.
The Company's geographic information is as follows:

REVENUES

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31,
                                      -------------------------------------
                                       2000           1999           1998
                                     (RESTATED)
                                      -------        -------        -------
                                                 (IN THOUSANDS)
<S>                                   <C>            <C>            <C>
United States ................        $ 8,460        $ 9,196        $ 8,903
Export:
    Japan ....................          2,515          1,594          3,361
    Others ...................          3,804          3,016          3,350
                                      -------        -------        -------
                                      $14,779        $13,806        $15,614
                                      =======        =======        =======
</TABLE>

LONG-LIVED ASSETS

<TABLE>
<CAPTION>
                                     YEAR ENDED DECEMBER 31,
                                     ----------------------
                                       2000          1999
                                     -------        -------
                                         (IN THOUSANDS)
<S>                                  <C>            <C>
United States ................        $1,614        $1,772
Other ........................            35           198
                                      ------        ------
                                      $1,649        $1,970
                                      ------        ------
</TABLE>

NOTE 14 -- SUBSEQUENT EVENTS:

       In March 2001, the Company issued convertible promissory notes to
existing investors under which the Company borrowed $3,500,000. The notes accrue
interest at 10% per annum with principal and accrued interest due March 31,
2002. The notes contain a conversion feature which allows the holder to convert
the principal plus interest into common stock of the Company at a rate of $0.75
per share at any time after the shareholders of the Company approve the notes.
The Company also issued 350,000 shares of common stock to these investors in
return for their commitment to loan $3,500,000 to the Company.

       In March 2001, the Company and the investors agreed to extend the due
date of the principal and accrued interest of the notes executed in July 1999,
April 2000, September 2000 and December 2000 until March 31, 2002. To the extent
that the Company has obtained, or will obtain in 2001, stockholder approval for
the notes, such notes are convertible into common stock of the Company pursuant
to the terms of the notes.


                                      -52-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 -- QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

       The following tables present certain unaudited consolidated quarterly
financial information for each of the eight quarters ended December 31, 2000. In
the opinion of the Company's management, this quarterly information has been
prepared on the same basis as the consolidated financial statements and includes
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information for the period presented. The results of
operations for any quarter are not necessarily indicative of results for the
full year or for any future period.

       The Company's business is not seasonal; therefore year-over-year
quarterly comparisons of the Company's results of operations may not be as
meaningful as the sequential quarterly comparisons set forth below which tend to
reflect the cyclical activity of the business as a whole. Quarterly fluctuations
in expenses are related directly to sales activity and volume and may also
reflect the timing of operating expenses incurred throughout the year.

CHANGE IN ACCOUNTING PRINCIPLE

       As discussed in Note 1, the Company changed its accounting method for
revenue recognition in the fourth quarter of the year ended December 31, 2000,
effective January 1, 2000. Accordingly, the following unaudited quarterly
consolidated financial data for the first three quarters of the year ended
December 31, 2000 have been restated to reflect the impact of the change in
accounting method as if adopted on January 1, 2000.

<TABLE>
<CAPTION>
                                                      FIRST QUARTER ENDED MARCH 31, 2000    SECOND QUARTER ENDED JUNE 30, 2000
                                                      -----------------------------------   ----------------------------------
                                                          AS                                    AS
                                                      PREVIOUSLY                    AS      PREVIOUSLY                   AS
                                                       REPORTED    ADJUSTMENT    RESTATED    REPORTED   ADJUSTMENT    RESTATED
                                                      ----------   ----------    --------   ----------  ----------    --------
<S>                                                   <C>          <C>           <C>        <C>         <C>           <C>
Revenues ...........................................    $  2,835    $ (1,000)    $  1,835    $  4,241    $    (33)    $  4,208
                                                        --------    --------     --------    --------    --------     --------
Gross margin .......................................         760        (664)          96       1,488         (34)       1,454
                                                        --------    --------     --------    --------    --------     --------
Loss before cumulative effect of change in
  accounting principle .............................      (3,198)       (664)      (3,862)     (1,434)        (34)      (1,468)

Cumulative effect of a change in accounting
  principle ........................................          --          --           --          --          --           --
                                                        --------    --------     --------    --------    --------     --------
Net Loss ...........................................    $ (3,198)   $   (664)    $ (3,862)   $ (1,434)   $    (34)    $ (1,468)
                                                        --------    --------     --------    --------    --------     --------
Basic and diluted loss per share:
Loss before cumulative effect of a change in
  accounting principle .............................    $  (0.27)                $  (0.33)   $  (0.12)                $  (0.12)
Adjustment for effect of a change in accounting
  principle ........................................
Basic and diluted loss per share as
  adjusted .........................................    $  (0.27)                $  (0.33)   $  (0.12)                $  (0.12)
                                                        --------                 --------    --------                 --------
Shares used in computing basic and diluted net
  loss per share ...................................      11,719                   11,719      12,021                   12,021
                                                        --------                 --------    --------                 --------
</TABLE>


                                      -53-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                    FOURTH QUARTER
                                                                                                         ENDED
                                                                     THIRD QUARTER ENDED             DECEMBER 31,
                                                                      SEPTEMBER 30, 2000                  2000            TOTAL
                                                          ----------------------------------------  ---------------    -----------
                                                              AS
                                                          PREVIOUSLY
                                                           REPORTED*     ADJUSTMENT    AS RESTATED    AS REPORTED      AS REPORTED
                                                          ----------     ----------    -----------    -----------      -----------
<S>                                                       <C>            <C>           <C>            <C>              <C>
Revenues ...............................................   $  3,568       $  1,026      $  4,594       $  5,202         $ 15,839
                                                           --------       --------      --------       --------         --------
Gross margin ...........................................        934            702         1,636          1,790            4,976
                                                           --------       --------      --------       --------         --------
Loss before cumulative effect of change in
    accounting principle ...............................     (1,614)           702          (912)        (1,912)          (8,154)
Cumulative effect of a change in accounting
    principle ..........................................         --             --            --             --             (159)*
                                                           --------       --------      --------       --------         --------
Net Loss ...............................................   $ (1,614)      $    702      $   (912)      $ (1,912)        $ (8,313)*
                                                           --------       --------      --------       --------         --------
Basic and diluted loss per share:

Loss before cumulative effect of a change in
    accounting principle ...............................   $  (0.13)                    $  (0.08)      $  (0.16)        $  (0.68)

Adjustment for effect of a change in accounting
    principle ..........................................                                                                   (0.01)

Basic and diluted loss per share as adjusted ...........   $  (0.13)                    $  (0.08)      $  (0.16)        $  (0.69)
                                                           --------                     --------       --------         --------
Shares used in computing basic and diluted net loss
    per share ..........................................     12,158                       12,158         12,184           12,021
                                                           --------                     --------       --------         --------
</TABLE>

----------
*      The cumulative effect arose as a result of deferring $289,000 of revenues
       and related cost of revenues of $130,000, which was originally recorded
       in the fourth quarter of 1999.

As previously reported:

<TABLE>
<CAPTION>
                                                                                        QUARTERS ENDED
                                                                ---------------------------------------------------------------
                                                                MARCH 31,    JUNE 30,   SEPTEMBER 30,   DECEMBER 31,
                                                                  1999         1999         1999           1999          TOTAL
                                                                --------     --------   -------------   ------------   --------
<S>                                                             <C>          <C>        <C>             <C>            <C>
Revenues ...............................................        $  2,159     $  2,861     $  3,764       $  5,022      $ 13,806
Gross margin ...........................................             397        1,033        1,581          2,686         5,697
Net loss ...............................................          (2,584)      (1,695)      (1,279)          (771)       (6,329)
Basic and diluted loss per share .......................        $  (0.34)    $  (0.21)    $  (0.16)      $  (0.07)     $  (0.74)
Shares used in computing basic and diluted net loss
  per share ............................................           7,589        7,956        7,956         10,660         8,541
</TABLE>


EFFECT OF RESTATEMENT OF FINANCIAL RESULTS

       As discussed in note 16, the Company has restated its 2000 consolidated
financial statements. The effect of the restatement on previously reported
revenue, net loss and loss per share in each of the quarters ended March 31 and
June 30, 2000 and the six and nine month periods ended June 30, 2000 and
September 30, 2000 is as follows:

<TABLE>
<CAPTION>
                           Three months ended          Three months ended          Six months ended            Nine months ended
                             March 31, 2000              June 30, 2000               June 30, 2000            September 30, 2000
                         ---------------------       ---------------------       ---------------------      ----------------------
                            As           As             As           As             As            As           As            As
                         reported*    restated       reported*    restated       reported*    restated      reported*     restated
                         ---------    --------       ---------    --------       ---------    --------      ---------     --------
                         USD `000     USD `000       USD `000     USD `000       USD `000     USD `000      USD `000      USD `000
<S>                      <C>          <C>            <C>          <C>            <C>          <C>           <C>           <C>
Revenue                   1,835         1,513         4,208         3,470         6,043         4,983        10,637         9,577
Net Loss                 (3,862)       (4,039)       (1,468)       (1,799)       (5,330)       (5,838)       (6,242)       (6,750)
Net Loss per share        (0.33)        (0.34)        (0.12)        (0.15)        (0.45)        (0.49)        (0.52)        (0.56)
</TABLE>


                                      -54-
<PAGE>

                                 EUPHONIX, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

       * includes the effect of adopting SAB 101 retroactive to January 1, 2000,
as described in Notes 1 and 15.

NOTE 16 -- RESTATEMENT OF FINANCIAL RESULTS

          The consolidated financial statements as of and for the year ended
December 31, 2000 have been restated to reverse previously recognized revenue
and related cost of revenues by $1,060,000 and $552,000, respectively. As a
result, the previously reported net loss for the year and accumulated deficit at
December 31, 2000 have each been increased by $508,000 and the loss per share
for the year has been increased from $(0.69) to $(0.73). The restatement is the
result of revenues of $322,000 and $738,000 from a contractual arrangement with
a single customer that had been previously recognized upon the shipment or
commissioning of the Company's products at the customer's site in the quarters
ended March 31, 2000 and June 30, 2000, respectively. However, it has since been
determined that the Company had additional software delivery obligations that
had not been fulfilled during the year ended December 31, 2000; generally
accepted accounting principles preclude the recognition of any revenue from the
arrangement until such obligations are satisfied. Those obligations were
satisfied in the quarter ended December 31, 2001 and revenue of approximately $1
million and cost of revenue of $552,000 will be recognized in that quarter.
Inasmuch as the entire amount of revenue due under the arrangement of $1,060,000
had been received at December 31, 2000, that amount and the related cost of
revenues of $552,000 is deferred in the restated consolidated balance sheet as
of that date.

       The effect of the restatement on previously reported revenue, net loss
and loss per share for the year ended December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                        Year ended December 31, 2000
                        ----------------------------
                        As reported*     As restated
                          USD `000        USD `000
                        ------------     -----------
<S>                     <C>              <C>
Net revenues               15,839          14,779
Net loss                   (8,313)         (8,821)
Net loss per share          (0.69)          (0.73)
</TABLE>

              * includes the effect of adopting SAB 101 retroactive to
              January 1, 2000, as described in Note 1 and Note 15


                                      -55-
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

       None.


                                      -56-
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

       The information required by this Item is incorporated by reference to the
Proxy Statement. In addition, please see the section entitled "Management --
Executive Officers" in Part I, Item 1 hereof.

ITEM 11. EXECUTIVE COMPENSATION.

       The information required by this Item is incorporated by reference to the
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       The information requested by this Item is incorporated by reference to
the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       The information requested by this Item is incorporated by reference to
the Proxy Statement.


                                      -57-
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 10-K.

(a)    DOCUMENTS FILED AS PART OF THIS REPORT.

       1.     FINANCIAL STATEMENTS.

       The financial statements of the Company as set forth under Item 8 of this
Annual Report on Form 10-K are presented herein at the pages noted and are
incorporated herein by reference.

<TABLE>
<S>                                                                                                            <C>
Report of Independent Accountants............................................................................  30
Report of Independent Auditors...............................................................................  31
Consolidated Balance Sheets as of December 31, 2000 and  1999................................................  32
Consolidated Statements of Operations for the years ended  December 31, 2000, 1999 and 1998..................  33
Consolidated Statements of Shareholders' Equity for the  years ended December 31, 2000, 1999 and 1998........  34
Consolidated Statements of Cash Flows for the years ended  December 31, 2000, 1999 and 1998..................  35
Notes to Consolidated Financial Statements as of and for the  years ended December 31, 2000 and 1999.........  36
</TABLE>

       The following financial statements were audited by PricewaterhouseCoopers
LLP:

       -      Consolidated Balance Sheets as of December 31, 2000 and 1999

       -      Consolidated Statements of Operations for each of the years ended
              December 31, 2000 and December 31, 1999

       -      Consolidated Statements of Shareholders' Equity for each of the
              years ended December 31, 2000 and December 31, 1999

       -      Consolidated Statements of Cash Flows for each of the years ended
              December 31, 2000 and December 31, 1999

       -      Notes to Consolidated Financial Statements as of and for the year
              ended December 31, 2000 and 1999

       The following financial statements were audited by Ernst & Young LLP:

       -      Consolidated Statement of Operations for the year ended December
              31, 1998

       -      Consolidated Statement of Shareholders' Equity for the year ended
              December 31, 1998

       -      Consolidated Statement of Cash Flows for the year ended December
              31, 1998

       -      Notes to Consolidated Financial Statements as of and for the year
              ended December 31, 1998


                                      -58-
<PAGE>


       2.     FINANCIAL STATEMENT SCHEDULES

       Financial statement schedules have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

       3.     EXHIBITS

       The exhibits set forth below, and listed on the accompanying index to
exhibits, are filed as part of, or incorporated by reference into, this Annual
Report on Form 10-K.

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                            DESCRIPTION OF DOCUMENT
  -------       ----------------------------------------------------------------
<S>             <C>
  3.1(1)        Amended and Restated Articles of Incorporation of the
                Registrant.

  3.2(1)        Bylaws of the Registrant.

  10.1(1)       Form of Indemnification Agreement between the Registrant and
                each of its directors and officers.

  10.2(3)       1990 Stock Plan and forms of stock option agreement and
                restricted stock purchase agreement thereunder.

  10.3(1)       1995 Performance Based Stock Option Plan and form of stock
                option Agreement thereunder.

  10.4(1)       1995 New Director Option Plan and form of stock option agreement
                thereunder.

  10.5(4)       1997 Nonstatutory Stock Option Plan and form of stock option
                agreement thereunder.

  10.6(7)       1999 Stock Option Plan and from of agreements thereunder.

  10.7(8)       2000 Nonstatutory Stock Option Plan.

  10.8(8)       Stock Option Agreement dated October 2, 2000, by and between the
                Registrant and Steven W. Vining.

  10.9(8)       Employment Agreement dated October 2, 2000, by and between the
                Registrant and Steven W. Vining.

  10.10(1)      Modification Agreement dated November 6, 1991, among the
                Registrant and certain shareholders of the Registrant

  10.11(1)      Credit Agreement dated September 30, 1994 between the Registrant
                and Bank of the West, as amended.

  10.12(1)      Lease Agreement dated December 31, 1990, as amended May 14,
                1993, by and between the Registrant and El Camino Center.

  10.13(2)      Agreement and Plan of Reorganization dated January 15, 1996 by
                and among the Registrant, Spectral, Incorporated, Euphonix
                Acquisition Corporation and certain shareholders of Spectral,
                Incorporated.

  10.14(6)      Common Stock Purchase Agreement dated January 26, 1999, by and
                between the Registrant and Dieter Meier and Stephen D. Jackson.

  10.15(6)      Registration Rights Agreement dated January 26, 1999, by and
                between the Registrant and Dieter Meier and Stephen D. Jackson.

  10.16(5)      Secured Promissory Note dated April 23, 1999, by and between the
                Registrant and Onset Enterprise Associates, Milton M.T. Chang,
                Dieter Meier, Stephen D. Jackson and Pegasus Capital II, L.P.

  10.17(7)      Secured Promissory Note dated July 30, 1999, by and between the
                Registrant and Taurean Investments AG and Pegasus Capital II,
                L.P.

  10.18(7)      First Amendment dated October 11, 1999 to Common Stock Purchase
                Agreement
</TABLE>

                                      -59-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                            DESCRIPTION OF DOCUMENT
  -------       ----------------------------------------------------------------
<S>             <C>
                dated January 26, 1999, by and between the Registrant and Onset
                Enterprise Associates, Linda Wei-Lee Chang 1998 Trust, Michael
                Minhall Chang 1998 Trust, Milton M.T. Chang, Scott Silfvast, Amy
                Silfvast and Onset Enterprise Associates.

  10.19(7)      First Amendment dated October 11, 1999 to Registration Rights
                Agreement dated January 26, 1999, by and between the Registrant
                and Dieter Meier, Stephen D. Jackson, Dieter Meier, Stephen D.
                Jackson and Pegasus Capital II, L.P. and purchasers thereunder.

  10.20(7)      Common Stock Purchase Agreement dated November 9, 1999, by and
                between the Registrant and Dieter Meier, Onset Enterprise
                Associates III, LP, Stephen D. Jackson and Walter Bosch.

  10.21(7)      Registration Rights Agreement dated November 9, 1999, by and
                between the Registrant and Dieter Meier, Onset Enterprise
                Associates III, LP, Stephen D. Jackson and Walter Bosch.

  10.22(8)      Common Stock Purchase Agreement dated February 18, 2000, by and
                between the Registrant and Willy Gunther.

  10.23(8)      Registration Rights Agreement dated February 18, 2000, by and
                between the Registrant and Willy Gunther.

  10.24(8)      Secured Promissory Note dated February 22, 2000, by and between
                the Registrant and Dieter Meier, Walter Bosch, Stephen D.
                Jackson and Milton Chang and Onset Ventures.

  10.25(8)      Registration Rights Agreement dated February 22, 2000, by and
                between the Registrant and Dieter Meier, Walter Bosch, Stephen
                D. Jackson and Milton Chang and Onset Ventures.

  10.26(8)      Voting Agreement dated February 22, 2000, by and between the
                Registrant and James Dobbie, Scott Silfvast and Barry Margerum.

  10.27(8)      Subordination Agreement dated February 22, 2000, by and between
                Taurean Investments AG and Pegasus Capital II, LP, on the one
                hand, and Dieter Meier, Walter Bosch, Stephen D. Jackson and
                Milton Chang and Onset Ventures, on the other hand.

  10.28(8)      Secured Promissory Note dated April 14, 2000, by and between the
                Registrant and Dieter Meier, Walter Bosch and Onset Ventures.

  10.29(8)      Registration Rights Agreement dated April 14, 2000, by and
                between the Registrant and Dieter Meier, Walter Bosch and Onset
                Ventures.

  10.30(8)      Subordination Agreement dated April 14, 2000, by and among
                Taurean Investments AG, Pegasus Capital II, LP, Dieter Meier,
                Walter Bosch, Stephen D. Jackson and Milton Chang and Onset
                Ventures, on the one hand, and Dieter Meier, Walter Bosch and
                Onset Ventures, on the other hand.

  10.31(8)      Common Stock Purchase Agreement dated June 1, 2000, by and
                between the Registrant and Dieter Meier and Walter Bosch.

  10.32(8)      Registration Rights Agreement dated June 1, 2000, by and between
                the Registrant and Dieter Meier and Walter Bosch.

  10.33(8)      Secured Promissory Note dated September 7, 2000, by and between
                the Registrant and Walter Bosch.


  10.34(8)      Form of Registration Rights Agreement to be executed upon
                conversion of the Secured Promissory Note dated September 7,
                2000, by and between the Registrant
</TABLE>


                                      -60-
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                            DESCRIPTION OF DOCUMENT
  -------       ----------------------------------------------------------------
<S>             <C>

                and Walter Bosch.

  10.35(8)      Form of Common Stock Warrant to be executed upon conversion of
                the Secured Promissory Note dated September 7, 2000, by and
                between the Registrant and Walter Bosch.

  10.36(8)      Secured Promissory Note dated December 29, 2000, by and between
                the Registrant and Dieter Meier, Walter Bosch, Stephen and
                Kathryn Jackson as Trustees of the Jackson Trust dated
                5/31/2000, Onset Enterprise Associates, L.P. and Onset
                Enterprise Associates III, L.P.

  10.37(8)      Form of Registration Rights Agreement to be executed upon
                conversion of the Secured Promissory Note dated December 29,
                2000, by and between the Registrant and Dieter Meier, Walter
                Bosch, Stephen and Kathryn Jackson as Trustees of the Jackson
                Trust dated 5/31/2000, Onset Enterprise Associates, L.P. and
                Onset Enterprise Associates III, L.P.

  10.38(8)      Form of Common Stock Warrant to be executed upon conversion of
                the Secured Promissory Note dated December 29, 2000, by and
                between the Registrant and Dieter Meier, Walter Bosch, Stephen
                and Kathryn Jackson as Trustees of the Jackson Trust dated
                5/31/2000, Onset Enterprise Associates, L.P. and Onset
                Enterprise Associates III, L.P.

  10.39(8)      Amendment dated January 12, 2001 to the Secured Promissory Note
                dated April 14, 2000, by and among the Registrant and Dieter
                Meier, Walter Bosch and Onset Ventures.

  23.1          Consent of PricewaterhouseCoopers, LLP, Independent Accountants.

  23.2          Consent of Ernst & Young LLP, Independent Auditors.

  24.1          Power of Attorney (see page 63).
</TABLE>

----------

(1)    Incorporated by reference to the exhibit filed with the Registrant's
       Registration Statement on Form SB-2 (File No. 33-994898-LA), effective
       August 21, 1995.

(2)    Incorporated by reference to the exhibit filed with the Registrant's
       current report on Form 8-K filed on February 7, 1996.

(3)    Incorporated by reference to the exhibit filed with the Registrant's
       Registration Statement on From S-8 (File No. 333-17545), effective
       December 10, 1996.

(4)    Incorporated by reference to the exhibit filed with the Registrant's
       Registration Statement on Form S-8 (File No. 333-68425), effective
       December 4, 1998.

(5)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K filed on April 26, 1999.

(6)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K/A filed on May 10, 1999.

(7)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K filed on March 30, 2000.

(8)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K filed on March 28, 2001.


(b)    REPORTS ON FORM 8-K


                                      -61-
<PAGE>

       The Company filed one report on Form 8-K on October 27, 2000, which was
during the last quarter of the period covered by this report. The Company
disclosed that effective as of September 29, 2000, James Dobbie resigned as the
Company's Chief Executive Officer and resigned from the Board of Directors in
order to retire. The Company also disclosed that effective as of October 2,
2000, Euphonix hired Steve Vining as Chief Executive Officer.


                                      -62-
<PAGE>

                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Palo Alto, State of California, on the 27th day of November, 2001.

                                        EUPHONIX, INC.

                                        By: /s/ JEFFREY CHEW
                                           -------------------------------------
                                           Jeffrey Chew
                                           Chief Executive Officer

                                POWER OF ATTORNEY

       KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Dieter Meier and Jeffrey Chew, and
each of them acting individually, as his attorney-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K/A, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
             SIGNATURE                                              TITLE                                  DATE
             ---------                                              -----                                  ----
<S>                                               <C>                                               <C>
                                                  Chairman                                          November 27, 2001
-------------------------------------
           Dieter Meier

       /s/ STEVEN W. VINING                       Director                                          November 27, 2001
-------------------------------------
         Steven W. Vining

                                                  Chief Product Officer and Director                November 27, 2001
-------------------------------------
          Martin Kloiber

        /s/ WALTER BOSCH                          Director                                          November 27, 2001
-------------------------------------
           Walter Bosch

         /s/ JAMES DOBBIE                         Director                                          November 27, 2001
-------------------------------------
           James Dobbie

         /s/ JEFFREY CHEW                         Chief Executive Officer                           November 27, 2001
-------------------------------------             (Principal Executive and Financial Officer)
           Jeffrey Chew

       /s/ HARRIET N. DIETZ                       Controller                                        November 27, 2001
-------------------------------------             (Principal Accounting Officer)
         Harriet N. Dietz
</TABLE>


                                      -63-
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                            DESCRIPTION OF DOCUMENT
 -------        ----------------------------------------------------------------
<S>             <C>
  3.1(1)        Amended and Restated Articles of Incorporation of the
                Registrant.

  3.2(1)        Bylaws of the Registrant.

  10.1(1)       Form of Indemnification Agreement between the Registrant and
                each of its directors and officers.

  10.2(3)       1990 Stock Plan and forms of stock option agreement and
                restricted stock purchase agreement thereunder.

  10.3(1)       1995 Performance Based Stock Option Plan and form of stock
                option Agreement thereunder.

  10.4(1)       1995 New Director Option Plan and form of stock option agreement
                thereunder.

  10.5(4)       1997 Nonstatutory Stock Option Plan and form of stock option
                agreement thereunder.

  10.6(7)       1999 Stock Option Plan and from of agreements thereunder.

  10.7(8)       2000 Nonstatutory Stock Option Plan.

  10.8(8)       Stock Option Agreement dated October 2, 2000, by and between the
                Registrant and Steven W. Vining.

  10.9(8)       Employment Agreement dated October 2, 2000, by and between the
                Registrant and Steven W. Vining.

  10.10(1)      Modification Agreement dated November 6, 1991, among the
                Registrant and certain shareholders of the Registrant

  10.11(1)      Credit Agreement dated September 30, 1994 between the Registrant
                and Bank of the West, as amended.

  10.12(1)      Lease Agreement dated December 31, 1990, as amended May 14,
                1993, by and between the Registrant and El Camino Center.

  10.13(2)      Agreement and Plan of Reorganization dated January 15, 1996 by
                and among the Registrant, Spectral, Incorporated, Euphonix
                Acquisition Corporation and certain shareholders of Spectral,
                Incorporated.

  10.14(6)      Common Stock Purchase Agreement dated January 26, 1999, by and
                between the Registrant and Dieter Meier and Stephen D. Jackson.

  10.15(6)      Registration Rights Agreement dated January 26, 1999, by and
                between the Registrant and Dieter Meier and Stephen D. Jackson.

  10.16(5)      Secured Promissory Note dated April 23, 1999, by and between the
                Registrant and Onset Enterprise Associates, Milton M.T. Chang,
                Dieter Meier, Stephen D. Jackson and Pegasus Capital II, L.P.

  10.17(7)      Secured Promissory Note dated July 30, 1999, by and between the
                Registrant and Taurean Investments AG and Pegasus Capital II,
                L.P.

  10.18(7)      First Amendment dated October 11, 1999 to Common Stock Purchase
                Agreement dated January 26, 1999, by and between the Registrant
                and Onset Enterprise Associates, Linda Wei-Lee Chang 1998 Trust,
                Michael Minhall Chang 1998 Trust, Milton M.T. Chang, Scott
                Silfvast, Amy Silfvast and Onset Enterprise Associates.

  10.19(7)      First Amendment dated October 11, 1999 to Registration Rights
                Agreement dated January 26, 1999, by and between the Registrant
                and Dieter Meier, Stephen D. Jackson, Dieter Meier, Stephen D.
                Jackson and Pegasus Capital II, L.P. and
</TABLE>


                                      -64-
<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                            DESCRIPTION OF DOCUMENT
 -------        ----------------------------------------------------------------
<S>             <C>
                purchasers thereunder.

  10.20(7)      Common Stock Purchase Agreement dated November 9, 1999, by and
                between the Registrant and Dieter Meier, Onset Enterprise
                Associates III, LP, Stephen D. Jackson and Walter Bosch.

  10.21(7)      Registration Rights Agreement dated November 9, 1999, by and
                between the Registrant and Dieter Meier, Onset Enterprise
                Associates III, LP, Stephen D. Jackson and Walter Bosch.

  10.22(8)      Common Stock Purchase Agreement dated February 18, 2000, by and
                between the Registrant and Willy Gunther.

  10.23(8)      Registration Rights Agreement dated February 18, 2000, by and
                between the Registrant and Willy Gunther.

  10.24(8)      Secured Promissory Note dated February 22, 2000, by and between
                the Registrant and Dieter Meier, Walter Bosch, Stephen D.
                Jackson and Milton Chang and Onset Ventures.

  10.25(8)      Registration Rights Agreement dated February 22, 2000, by and
                between the Registrant and Dieter Meier, Walter Bosch, Stephen
                D. Jackson and Milton Chang and Onset Ventures.

  10.26(8)      Voting Agreement dated February 22, 2000, by and between the
                Registrant and James Dobbie, Scott Silfvast and Barry Margerum.

  10.27(8)      Subordination Agreement dated February 22, 2000, by and between
                Taurean Investments AG and Pegasus Capital II, LP, on the one
                hand, and Dieter Meier, Walter Bosch, Stephen D. Jackson and
                Milton Chang and Onset Ventures, on the other hand.

  10.28(8)      Secured Promissory Note dated April 14, 2000, by and between the
                Registrant and Dieter Meier, Walter Bosch and Onset Ventures.

  10.29(8)      Registration Rights Agreement dated April 14, 2000, by and
                between the Registrant and Dieter Meier, Walter Bosch and Onset
                Ventures.

  10.30(8)      Subordination Agreement dated April 14, 2000, by and among
                Taurean Investments AG, Pegasus Capital II, LP, Dieter Meier,
                Walter Bosch, Stephen D. Jackson and Milton Chang and Onset
                Ventures, on the one hand, and Dieter Meier, Walter Bosch and
                Onset Ventures, on the other hand.

  10.31(8)      Common Stock Purchase Agreement dated June 1, 2000, by and
                between the Registrant and Dieter Meier and Walter Bosch.

  10.32(8)      Registration Rights Agreement dated June 1, 2000, by and between
                the Registrant and Dieter Meier and Walter Bosch.

  10.33(8)      Secured Promissory Note dated September 7, 2000, by and between
                the Registrant and Walter Bosch.

  10.34(8)      Form of Registration Rights Agreement to be executed upon
                conversion of the Secured Promissory Note dated September 7,
                2000, by and between the Registrant and Walter Bosch.

  10.35(8)      Form of Common Stock Warrant to be executed upon conversion of
                the Secured Promissory Note dated September 7, 2000, by and
                between the Registrant and Walter Bosch.

  10.36(8)      Secured Promissory Note dated December 29, 2000, by and between
                the Registrant and Dieter Meier, Walter Bosch, Stephen and
                Kathryn Jackson as Trustees of the Jackson Trust dated
                5/31/2000, Onset Enterprise Associates, L.P. and Onset
</TABLE>


                                      -65-
<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                            DESCRIPTION OF DOCUMENT
 -------        ----------------------------------------------------------------
<S>             <C>
                Enterprise Associates III, L.P.

  10.37(8)      Form of Registration Rights Agreement to be executed upon
                conversion of the Secured Promissory Note dated December 29,
                2000, by and between the Registrant and Dieter Meier, Walter
                Bosch, Stephen and Kathryn Jackson as Trustees of the Jackson
                Trust dated 5/31/2000, Onset Enterprise Associates, L.P. and
                Onset Enterprise Associates III, L.P.

  10.38(8)      Form of Common Stock Warrant to be executed upon conversion of
                the Secured Promissory Note dated December 29, 2000, by and
                between the Registrant and Dieter Meier, Walter Bosch, Stephen
                and Kathryn Jackson as Trustees of the Jackson Trust dated
                5/31/2000, Onset Enterprise Associates, L.P. and Onset
                Enterprise Associates III, L.P.

  10.39(8)      Amendment dated January 12, 2001 to the Secured Promissory Note
                dated April 14, 2000, by and among the Registrant and Dieter
                Meier, Walter Bosch and Onset Ventures.

  23.1          Consent of PricewaterhouseCoopers, LLP, Independent Accountants.

  23.2          Consent of Ernst & Young LLP, Independent Auditors.

  24.1          Power of Attorney (see page 63).
</TABLE>

----------
(1)    Incorporated by reference to the exhibit filed with the Registrant's
       Registration Statement on Form SB-2 (File No. 33-994898-LA), effective
       August 21, 1995.

(2)    Incorporated by reference to the exhibit filed with the Registrant's
       current report on Form 8-K filed on February 7, 1996.

(3)    Incorporated by reference to the exhibit filed with the Registrant's
       Registration Statement on From S-8 (File No. 333-17545),
      effective December 10, 1996.

(4)    Incorporated by reference to the exhibit filed with the Registrant's
       Registration Statement on Form S-8 (File No. 333-68425), effective
       December 4, 1998.

(5)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K filed on April 26, 1999.

(6)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K/A filed on May 10, 1999.

(7)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K filed on March 30, 2000.

(8)    Incorporated by reference to the exhibit filed with the Registrant's
       annual report on Form 10-K filed on March 28, 2001.


                                      -66-