<PAGE>
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q
(MARK ONE)

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

        For the quarterly period ended September 30, 2001

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

        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

Indicate by check mark whether the registrant (1) has filed 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 [ ]


The number of shares outstanding of the registrant's common stock as of
September 30, 2001 was 15,710,366 ($0.001 par value).

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

<PAGE>

                                 EUPHONIX, INC.

                                    FORM 10-Q
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                PAGE
                                                                                                ----
<S>                                                                                             <C>
Explanatory Note.................................................................................ii

PART I.  FINANCIAL INFORMATION...................................................................1


Item 1.  Condensed Consolidated Financial Statements.............................................1

        Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.....1
        Condensed Consolidated Statements of Operations for the three and nine months ended
               September 30, 2001 and 2000.......................................................2
        Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
        2001 and 2000............................................................................3
        Notes to Condensed Consolidated Financial Statements.....................................4

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations..12


Item 3.  Quantitative And Qualitative Disclosures About Market Risk.............................22


PART II.  OTHER INFORMATION.....................................................................23


Item 6.  Exhibits and Reports on Form 8-K.......................................................23


Signatures......................................................................................24
</TABLE>



                                      -i-
<PAGE>

EXPLANATORY NOTE

        This quarterly report on Form 10-Q reflects changes for the prior year
as a result of the restatement of our consolidated financial statements for the
year ended December 31, 2000 as further described in Note 5 of the Notes to
Condensed Consolidated Financial Statements in this Form 10-Q. The Company
intends to file a Form 10-K/A for the year ended December 31, 2000, and Forms
10-Q/A for the quarters ended March 31, 2001 and June 30, 2001 in the near
future to reflect the changes to the financial statements.



                                      -ii-
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                 EUPHONIX, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS EXCEPT SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,  DECEMBER 31,
                                                                       2001           2000
                                                                   -------------  ------------
                                                                                    RESTATED
<S>                                                                <C>            <C>
                                     ASSETS

Current assets:
   Cash and cash equivalents ..................................      $    636       $    587
   Accounts receivable (net of allowance for doubtful
   accounts of $100 in 2001 and $141 in 2000) .................           967          2,389
   Inventories ................................................         7,221          6,969
   Prepaid expenses and other current assets ..................           456            406
                                                                     --------       --------
      Total current assets ....................................         9,280         10,351
Property and equipment, net ...................................           788          1,127
Deposits and other assets .....................................           246            522
                                                                     --------       --------
         Total assets .........................................      $ 10,314       $ 12,000
                                                                     ========       ========

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Accounts payable ...........................................      $  1,380       $  1,841
   Accrued liabilities ........................................         1,334          1,174
   Short term notes payable ...................................         8,618             --
   Deferred revenue, net ......................................           790            882
   Customer deposits ..........................................           296            860
                                                                     --------       --------
      Total current liabilities ...............................        12,418          4,757
   Notes payable ..............................................            --          6,531
                                                                     --------       --------
   Total liabilities ..........................................        12,418         11,288
                                                                     --------       --------

Contingencies (Note 3)

Shareholders' equity (deficit):
Common stock, $0.001 par value: 35,000,000 authorized
   shares, 15,710,366 and 12,190,099 shares issued and
   outstanding in 2001 and 2000, respectively .................            16             12
   Additional paid-in capital .................................        27,228         24,191
   Unearned compensation ......................................           (59)           (53)
   Accumulated other comprehensive income .....................            31             42
   Accumulated deficit ........................................       (29,320)       (23,480)
                                                                     --------       --------
   Total shareholders' equity (deficit) .......................        (2,104)           712
                                                                     --------       --------
      Total liabilities and shareholders' equity (deficit) ....      $ 10,314       $ 12,000
                                                                     ========       ========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.



                                      -1-
<PAGE>

                                 EUPHONIX, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                        (IN THOUSANDS EXCEPT SHARE DATA)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                    Three Months Ended                     Nine Months Ended
                                                                       September 30,                          September 30,
                                                              -------------------------------       -------------------------------
                                                                  2001               2000               2001               2000
                                                              ------------       ------------       ------------       ------------
                                                                                                                         RESTATED
<S>                                                           <C>                <C>                <C>                <C>
Net revenues ...........................................      $      1,834       $      4,594       $     10,939       $      9,577
Cost of revenues .......................................             1,436              2,958              7,385              6,899
                                                              ------------       ------------       ------------       ------------
Gross margin ...........................................               398              1,636              3,554              2,678
                                                              ------------       ------------       ------------       ------------

Operating expenses:
   Research and development ............................               794                834              2,404              2,590
   Sales and marketing .................................             1,113              1,210              4,049              3,917
   General and administrative ..........................               493                407              1,689              1,333
                                                              ------------       ------------       ------------       ------------
Total operating expenses ...............................             2,400              2,451              8,142              7,840
                                                              ------------       ------------       ------------       ------------

Operating loss .........................................            (2,002)              (815)            (4,588)            (5,162)
Other expense, net .....................................              (315)              (105)              (915)            (1,562)
                                                              ------------       ------------       ------------       ------------

Loss before equity in net income (loss) of investee ....            (2,317)              (920)            (5,503)            (6,724)
Equity in net income (loss) of investee ................                 8                  8               (337)               (26)
                                                              ------------       ------------       ------------       ------------
Net loss ...............................................      $     (2,309)      $       (912)      $     (5,840)      $     (6,750)
                                                              ============       ============       ============       ============

Basic and diluted net loss per share ...................      $      (0.15)      $      (0.08)      $      (0.41)      $      (0.56)
                                                              ============       ============       ============       ============


Shares used in computing net loss per share, basic
   and diluted .........................................        15,710,366         12,158,443         14,387,544         11,966,039
                                                              ============       ============       ============       ============
</TABLE>


  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.



                                      -2-
<PAGE>

                                 EUPHONIX, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                        NINE MONTHS ENDED
                                                                           SEPTEMBER 30,
                                                                    ------------------------
                                                                      2001            2000
                                                                    --------        --------
                                                                                    RESTATED
<S>                                                                 <C>          <C>
Cash flows from operating activities:
Net loss .....................................................      $ (5,840)      $ (6,750)
                                                                    --------       --------
Adjustments to reconcile net loss to net cash used in
  operating activities:
   Depreciation and amortization .............................           434            454
   Impairment charge .........................................           213             --
   Loss on disposal of fixed assets ..........................           102             30
   Allowance for doubtful accounts ...........................           (42)           (10)
   Beneficial conversion on convertible note payable .........           181          1,279
   Interest accrued on notes payable .........................           460             --
   Amortization of unearned compensation .....................           116             58

Changes in assets and liabilities:
   Accounts receivable .......................................         1,463            924
   Inventory .................................................          (252)           417
   Prepaid expenses and other assets (including current) .....           315           (277)
   Accounts payable ..........................................          (461)           (10)
   Accrued liabilities .......................................           150            229
   Deferred revenue, net .....................................           (92)           508
   Customer deposits .........................................          (564)           534
                                                                    --------       --------
Total adjustments ............................................         2,023          4,136
                                                                    --------       --------

Net cash used in operating activities ........................        (3,817)        (2,614)
                                                                    --------       --------

Cash flows from investing activities:
Purchase of property and equipment ...........................          (138)          (157)
                                                                    --------       --------
Net cash used in investing activities ........................          (138)          (157)
                                                                    --------       --------

Cash flows from financing activities:
Proceeds from issuance of convertible notes ..................         4,004          2,300
Proceeds from sale of common stock ...........................            --            800
Proceeds from exercise of stock options ......................            --            110
Proceeds from related party ..................................            --            400
                                                                    --------       --------
Net cash provided by financing activities ....................         4,004          3,610
                                                                    --------       --------

Net increase in cash and cash equivalents ....................            49            839
Cash and cash equivalents at beginning of period .............           587            838
                                                                    --------       --------
Cash and cash equivalents at end of period ...................      $    636       $  1,677
                                                                    ========       ========
</TABLE>


  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.



                                      -3-
<PAGE>

                                 EUPHONIX, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1. - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

PRINCIPLES OF CONSOLIDATION

        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.

USE OF ESTIMATES

        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.

BASIS OF PRESENTATION

        The accompanying financial statements as of September 30, 2001 and for
the three and nine months ended September 30, 2001 and 2000 are unaudited and
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The December 31, 2000 Condensed
Consolidated Balance Sheet does not include all disclosures required by
generally accepted accounting principles. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
Condensed Consolidated Financial Statements should be read in conjunction with
the Condensed Consolidated Financial Statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000, filed with the SEC on March 28, 2001. Due to the revision of financial
results as discussed in Note 5 herein, the Company will be filing an amended
Annual Report on Form 10-K/A shortly, and the Condensed Consolidated Financial
Statements contained herein should be read in conjunction with those set forth
in the Form 10-K/A once it is filed. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present a fair statement of financial position as of September 30, 2001, results
of operations for the three and nine months ended September 30, 2001 and 2000,
and cash flows for the nine months ended September 30, 2001 and 2000 have been
made. The results of operations for the three and nine



                                      -4-
<PAGE>

                                 EUPHONIX, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


months ended September 30, 2001 are not necessarily indicative of
the operating results for the full fiscal year or any future periods.

        Unless the Company raises additional funds, the Company believes that
its available cash and cash equivalents and its current borrowing facility will
not be sufficient to meet its anticipated needs for working capital and capital
expenditures through the end of 2001. Moreover, the Company's outstanding
promissory notes will become due in early 2002. Although these 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.

        The financial statements have been presented on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or the amount and classification of liabilities or any adjustments that might be
necessary should the Company be unable to continue as a going concern.

RECLASSIFICATIONS

        Certain amounts from the previous periods have been reclassified to
conform to the current period presentation.

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 ("SEC
SAB 101"). Previously, the Company had 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,



                                      -5-
<PAGE>

                                 EUPHONIX, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


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.

        The effect of the retroactive application of SAB 101 for the quarter
ended September 30, 2000 and is as follows (in thousands, except share data):

<TABLE>
<CAPTION>
                                                                     THIRD QUARTER ENDED
                                                                      SEPTEMBER 30, 2000
                                                             --------------------------------------
                                                                 AS
                                                             PREVIOUSLY
                                                              REPORTED     ADJUSTMENT   AS RESTATED
                                                             ----------    ----------   -----------
<S>                                                          <C>           <C>          <C>
Net revenues ...........................................      $  3,568      $  1,026      $  4,594
                                                              --------                    --------
Gross margin ...........................................      $    934      $    702      $  1,636
                                                              --------                    --------
Net loss ...............................................      $ (1,614)     $    702      $   (912)
                                                              ========                    ========
Basic and diluted loss per share .......................      $  (0.13)                   $  (0.08)
                                                              ========                    ========
Shares used in computing basic and diluted net loss per
   share ...............................................        12,158                      12,158
                                                              ========                    ========
</TABLE>

        REVENUE FOR CONTRACTS THAT INCLUDE SALES OF SOFTWARE AND
        SOFTWARE MODIFICATION

        The Company recognizes revenue for contracts that 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 FASB 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. The Company adopted SFAS No. 133
January 1, 2001. The adoption of SFAS No. 133 did not have an impact on the
Company's financial position or results of operations.

        In July 2001, the FASB issued SFAS 141, "Business Combinations." SFAS
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
Management believes that the adoption of SFAS 141 will not have a significant
impact on the Company's financial statements.

        In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company will adopt SFAS 142 effective



                                      -6-
<PAGE>

                                 EUPHONIX, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


January 1, 2002. The adoption of SFAS 142 is not expected to have a material
impact on the Company's financial statements.

        On October 3, 2001, the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business. SFAS 144 develops one accounting model
for long-lived assets that are to be disposed of by sale. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, SFAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for the Company for all financial statements
issued in 2001. The adoption of SFAS 144 is not expected to have a material
impact on the Company's financial statements.

NOTE 2 - BALANCE SHEET COMPONENTS (IN THOUSANDS):

        (a)    Inventories:

<TABLE>
<CAPTION>
                                          SEPTEMBER 30, 2001   DECEMBER 31, 2000
                                          ------------------   -----------------
               <S>                        <C>                  <C>
               Raw materials ........          $  2,031            $  2,474
               Work-in-process ......             1,096               1,084
               Finished goods .......             4,094               3,411
                                               --------            --------
                                               $  7,221            $  6,969
                                               ========            ========
</TABLE>

        (b)    Accrued liabilities:

<TABLE>
<CAPTION>
                                                  SEPTEMBER 30, 2001   DECEMBER 31, 2000
                                                  ------------------   -----------------
               <S>                                <C>                  <C>
               Accrued compensation ...........        $    329            $    445
               Accrued warranty ...............             292                 265
               Accrued accounting and legal ...             220                 196
               Accrued royalty ................             180                  --
               Accrued accounts payable .......             134                  50
               Sales tax payable ..............              99                 149
               Other ..........................              80                  69
                                                       --------            --------
                                                       $  1,334            $  1,174
                                                       ========            ========
</TABLE>

        (c)     Other assets:

        In accordance with FAS 121, the Company evaluates the recoverability of
its long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Due to continuing losses
during the second quarter and other market conditions, the Company reviewed the
expected future cash flows of Euphonix Europe to determine whether the related
goodwill was



                                      -7-
<PAGE>

                                 EUPHONIX, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


impaired. Based on this review, the Company determined that future cashflows
were not sufficient to recover the remaining goodwill and accordingly recorded a
charge of $213,000 during the second quarter of 2001.

        (d)    Convertible notes payable:

        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 originally 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 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. On
April 15, 2001, the investors in the July 1999 promissory note agreed to convert
the entire amount of the principal of $2.1 million and accrued interest
outstanding of $276,000 into 3,168,267 shares of the Company's common stock at
the price of $0.75 per share.

        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 Company recorded a charge for a beneficial conversion feature in the
amount of $1,279,000 because the accounting conversion rate was lower than fair
market value of the Company's common stock at the commitment date. 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 February 2000.

        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 was subject to shareholder approval allowing the holder to
convert the note into common stock of the Company at a rate of $3.625 per share.
Approval was obtained at the Company's annual meeting of shareholders' on June
19, 2001. There was no beneficial conversion feature charge, because the
accounting conversion rate was higher than the fair market value of the
Company's common stock on the date of shareholder approval (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.



                                      -8-
<PAGE>

                                 EUPHONIX, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


        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 on July 31,
2001. The assets of the Company are pledged as collateral. The notes contain a
conversion feature, which was subject to shareholder approval allowing the
holder to convert the note into common stock of the Company at a rate of $2.3562
per share. Approval was obtained at the Company's annual meeting of
shareholders' on June 19, 2001. 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. There was no beneficial conversion
feature charge, because the accounting conversion rate was higher than the fair
market value of the Company's common stock on the date of shareholder approval
(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 on July 31, 2001. The
assets of the Company are pledged as collateral. The notes contain a conversion
feature, which was subject to shareholder approval allowing the holder to
convert the note into common stock of the Company at a rate of $1.26 per share.
Approval was obtained at the Company's annual meeting of shareholders' on June
19, 2001. 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. There was no beneficial conversion feature charge, because the
accounting conversion rate was higher than the fair market value of the
Company's common stock on the date of shareholder approval (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 March 2001, the Company issued convertible promissory notes to
existing investors under which the Company may borrow up to $3,500,000 in 2001.
The notes accrue interest at 10% per annum with principal and accrued interest
due March 31, 2002. The notes contain a conversion feature, which was subject to
shareholder approval allowing the holder to convert the note into common stock
of the Company at a rate of $0.75 per share. Approval was obtained at the
Company's annual meeting of shareholders' on June 19, 2001. The Company is
recording a beneficial conversion feature charge on the $2,000,000 advanced as
of June 19, 2001. The resulting beneficial conversion feature charge of $190,000
is being recorded over the life of the note, because the accounting conversion
rate was lower than the fair market value of the Company's common stock on the
date of shareholder approval (the commitment date). An additional $1,500,000
remaining on this facility was advanced in the third quarter of 2001 and as a
result the Company recorded a beneficial conversion feature of $113,000 to be
amortized over the remaining life of the note. The total beneficial conversion
feature charged in the third quarter of 2001 relating to the $3,500,000 facility
was $98,000.



                                      -9-
<PAGE>

                                 EUPHONIX, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


        The Company also issued 350,000 shares of common stock to these
investors in return for their agreement to loan the Company $3,500,000. The
commitment fee was measured at the fair market value of the common stock on the
date of the issuance of the shares and is being amortized over the term of the
loan commitment.

        The interest on these facilities is convertible and will be recorded on
conversion. As of September 30, 2001, the beneficial conversion feature on the
interest element is immaterial.

NOTE 3 - 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.

NOTE 4 - DERIVATIVE INSTRUMENTS

        Effective July 1, 2000, Euphonix adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and the
hedged item are recognized in earnings. If the derivative is designated as a
cash flow hedge, changes in the fair value of the derivative are recorded in
other comprehensive income (OCI) and are recognized in the income statement when
the hedged item affects earnings.

        The Company uses derivative instruments to manage exposures to foreign
currency risks. The Company's objectives for holding derivatives are to minimize
these risks using the most effective methods to eliminate or reduce the impact
of these exposures. During the third quarter of 2001, the Company entered into
three forward foreign exchange contracts with its Japanese subsidiary related to
the sale of equipment denominated in Japanese yen. These derivatives were not
designated as hedges, and therefore the Company is recognizing any foreign
exchange gain (loss) in other expense. The foreign exchange gain (loss) recorded
for the three months ended September 30, 2001 was immaterial.

NOTE 5 - RESTATEMENT OF FINANCIAL RESULTS FOR PRIOR PERIODS

     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 Company intends to file a
Form 10-K/A for the year ended December 31, 2000, and Forms 10-Q/A for the
quarters ended March 31, 2001 and June 30, 2001 to reflect the changes to the
financial statements. The restatement is the result of revenues of $322,000 and
$738,000 from a contractual



                                      -10-
<PAGE>

                                 EUPHONIX, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


arrangement with a single customer that had been previously recognized upon the
shipment and/or commissioning of the Company 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 contractual 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 ending December 31, 2001, and revenue of
$1,060,000 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 nine months ended September 30, 2000 is as follows:



<TABLE>
<CAPTION>
    ---------------------------------------------------------------
                              Nine months ended September 30, 2000
    ---------------------------------------------------------------
                               As reported*             As restated
    ---------------------------------------------------------------
                                 USD '000                USD '000
    ---------------------------------------------------------------
    <S>                        <C>                      <C>
    Net revenues............       10,637                   9,577
    ---------------------------------------------------------------
    Net loss ...............       (6,242)                 (6,750)
    ---------------------------------------------------------------
    Net loss per share .....        (0.52)                  (0.56)
    ---------------------------------------------------------------
</TABLE>

            * includes the effect of adopting SEC SAB 101 retroactive to January
            1, 2000 as described in notes 1 and 15 to the Company's Form 10-K.



                                      -11-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

        This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements
represent our expectations or beliefs concerning future events and include
statements, among others, concerning: our cash and cash equivalents will not be
sufficient to meet our anticipated need for working capital and capital
expenditures through the end of 2001; our need to raise additional funds in
order to meet our operating needs; and our attempt to secure a new borrowing
facility. Our results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Risk Factors
That May Affect Results of Operations and Financial Condition."

RESULTS OF OPERATIONS

Restatement of financial results

        As discussed in Note 5 to the interim consolidated financial statements
for the quarter ended September 30, 2001 in this Form 10-Q, 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). We intend to file a Form 10-K/A for the year
ended December 31, 2000, and Forms 10-Q/A for the quarters ended March 31, 2001
and June 30, 2001 to reflect the changes to the financial statements. 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 and/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
contractual 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 ending December 31,
2001, and revenue of $1,060,000 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 nine months ended September 30, 2000 is as follows:

<TABLE>
<CAPTION>
    --------------------------------------------------------------------------
                                          Nine months ended September 30, 2000
    --------------------------------------------------------------------------
                                          As reported*             As restated
                                            USD '000                USD '000
    --------------------------------------------------------------------------
    <S>                                   <C>                      <C>
    Net revenues ......................       10,637                   9,577
    --------------------------------------------------------------------------
    Net loss ..........................       (6,242)                 (6,750)
    --------------------------------------------------------------------------
    Net loss per share ................        (0.52)                  (0.56)
    --------------------------------------------------------------------------
</TABLE>



                                      -12-
<PAGE>
           * includes the effect of adopting SEC SAB 101 retroactive to January
           1, 2000 as described in notes 1 and 15 to our Form 10-K.

Net Revenues

        Net revenues were $1.8 million in the third quarter in 2001 down from
$4.6 million in the third quarter of 2000, representing a decrease of 60.1%. The
decrease resulted primarily from decreased domestic unit sales of our mixing
consoles and all other products due to the slump in the economy and the events
of September 11, 2001.

        International sales accounted for 78.8% of our third quarter 2001
revenues, compared to 34.6% in the third quarter of 2000. International sales
decreased by approximately $142,000, or 9.0% in the third quarter of 2001, as
compared to the similar period in 2000. The decrease in international sales in
2001, as compared to the similar period in 2000, was due to lower sales in
Europe and the Pacific Rim.

        Net revenues were $10.9 million in the first nine months of 2001, up
from $9.6 million in the first nine months of 2000, representing an increase of
14.2%. The increase in our net revenues during this period resulted primarily
from increased unit sales of our FC727 converters and other spares.

        International sales accounted for 56.3% of our revenues in the first
nine months of 2001 revenues, compared to 41.9% in the first nine months of
2000. International sales increased by approximately $2.1 million, or 53.4% in
the first nine months of 2001. The increase in international sales in the first
nine months of 2001 reflected higher sales in Europe, Pacific Rim and Japan.

Gross Margin

        Gross margin decreased to 21.7% in the third quarter of 2001 as compared
to 35.6% in the third quarter of 2000. The decrease in gross margin was
primarily due to lower sales volume and semi-fixed manufacturing overhead costs.
Gross margin increased to 32.5% in the first nine months of 2001, up from 28.0%
in the first nine months of 2000. The increase was primarily due to greater unit
volume and higher gross margins from the sales of System 5 all digital mixing
consoles.

Research and Development Expenses

        Research and development expenses decreased 4.8% in the third quarter of
2001, as compared to the third quarter of 2000. The decrease was primarily due
to the decrease in our overall headcount and due to the decreased rent at
Spectral Inc, our wholly owned subsidiary ("Spectral") in the third quarter in
2001. As a percentage of revenues, research and development expenses increased
to 43.3% in the third quarter of 2001, up from 18.2% in the third quarter of
2000. The increase was attributable primarily to lower revenues in the third
quarter of 2001 as compared to 2000.

        Research and development expenses decreased 7.2% in the first nine
months of 2001, as compared to the first nine months of 2000. The decrease was
primarily due to the reduction in headcount at Spectral and the cost savings
from the termination of certain development programs in the second quarter of
2001. As a percentage of revenues, research and development expenses decreased
to 22.0% in the first nine months of 2001, down from 27.0% in the first nine
months of 2000. The decrease was attributable primarily to higher revenues and
lower costs in the first nine months of 2001 as compared to 2000.



                                      -13-
<PAGE>

Sales and Marketing Expenses

        Sales and marketing expenses decreased by approximately 8.0% in the
third quarter of 2001 as compared to the same period in 2000. The decrease was
primarily due to the postponement of the New York Audio Electronic Society
tradeshow and associated travel in the third quarter of 2001 in the aftermath of
the events of September 11, 2001. As a percentage of revenues, sales and
marketing expenses increased to 60.7% in the third quarter of 2001, as compared
to 26.3% in the third quarter of 2000. The percentage increase in marketing and
selling expenses was due primarily to lower revenues in the third quarter of
2001, as compared to the same period in 2000.

        Sales and marketing expenses increased by 3.4% in the first nine months
of 2001 as compared to the first nine months of 2000. The increase was primarily
due to increased expenditures on travel related to international sales and sales
fees and commissions.

General and Administrative Expenses

        General and administrative expenses increased 21.2%, in the third
quarter of 2001, as compared to the same period in 2000. As a percentage of
revenues, general and administrative expenses increased to 26.9% in the third
quarter of 2001, as compared to 8.9% in the third quarter of 2000. The increase
resulted primarily from an increase in salary expenses in the third quarter of
2001 and an executive severance payment.

        General and administrative expenses increased 26.7%, in the first nine
months of 2001, as compared to the same period in 2000. As a percentage of
revenues, general and administrative expenses increased to 15.4% in the first
nine months of 2001, as compared to 13.9% in the first nine months of 2000. The
increase in the first nine months of 2001 was primarily due to higher salary and
benefits, additional personnel and bad debt expense.

Other expense, net

        Other expense, net charges were $0.3 million in the third quarter of
2001, as compared to $0.1 million in the third quarter of 2000. The increase was
due primarily to interest charges on the notes payable and amortization of the
commitment fee on the March 2001 notes payable. Other expense, net for the first
nine months of 2001, as compared to the first nine months of 2000, decreased by
41.4%, which was primarily attributable to the $1.3 million charge related to
the beneficial conversion feature associated with a convertible promissory note
and associated warrants issued on February 22, 2000.

Equity in net income (loss) of investee

        The equity in net income of investee for the three-month period
ended September 30, 2001 and corresponding period in 2000 is $8,000.

        The equity in net loss of investee for the nine months ended September
30, 2001 was $337,000, as compared to $26,000 for the same period in 2000. The
increase is primarily the result of the $213,000 write



                                      -14-
<PAGE>

off of goodwill relating to our investment in Euphonix Europe, which we recorded
during the three months ended June 30, 2001.

Provision/(benefit) for Income Taxes

        No provision for federal and state income taxes was recorded for the
first nine months in 2001 and 2000, as we incurred net losses during the period.

LIQUIDITY AND CAPITAL RESOURCES

        We have funded our operations primarily through private sale of equity
and debt securities. For the first nine months ended September 30, 2001, cash
and cash equivalents increased by $49,000 to approximately $636,000. In
addition, during this period working capital decreased by $8.7 million to
approximately $(3.1) million primarily due to the reclassification of long-term
convertible notes of $6.5 million to short-term notes payable.

        Our operating activities used cash of approximately $3.8 million in the
first nine months of 2001 and $2.6 million in the first nine months of 2000.
Cash used in operating activities for 2001 was comprised primarily of a net
loss, deferred revenue, a decrease in customer deposits and accounts payable and
offset partially by a decrease in accounts receivable. Cash used in operating
activities for the first nine months of 2000 was comprised primarily of a net
loss and an increase in prepaid expenses and other assets.

        Our investing activities used cash of $138,000 and $157,000 in the first
nine months of 2001 and 2000, respectively, due to the purchase of property and
equipment.

        Our financing activities provided $4.0 million in the first nine months
of 2001 and $3.6 million in the first nine months of 2000. We received proceeds
from the issuance of convertible notes in the first nine months of 2001 of $4.0
million, which included $0.5 million from the December 2000 note and $3.5
million from the March 2001 note, as compared to receiving $2.3 million in
proceeds from the issuance of convertible notes and $800,000 from the sale of
common stock in the first nine months of 2000.

        Unless we receive additional funding, we believe that our available cash
and cash equivalents and current borrowing facility 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. We are actively engaged in securing a new borrowing facility
although there is no assurance that we will be sucessful in doing so.

        The financial statements have been presented on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or the amount and classification of liabilities or any adjustments that might be
necessary should the Company be unable to continue as a going concern.

IMPACT OF RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS



                                      -15-
<PAGE>

        In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 FASB 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. The Company adopted SFAS No. 133
January 1, 2001. The adoption of SFAS No. 133 did not have an impact on the
Company's financial position or results of operations.

        In July 2001, the FASB issued SFAS 141, "Business Combinations." SFAS
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
Management believes that the adoption of SFAS 141 will not have a significant
impact on the Company's financial statements.

        In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company will adopt SFAS 142 effective January 1, 2002. The adoption of SFAS 142
is not expected to have a material impact on the Company's financial statements.

        On October 3, 2001, the FASB issued SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business. SFAS 144 develops one accounting model
for long-lived assets that are to be disposed of by sale. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, SFAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for the Company for all financial statements
issued in 2001. The adoption of SFAS 144 is not expected to have a material
impact on the Company's financial statements.

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:



                                      -16-
<PAGE>

IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
IMPLEMENT SIGNIFICANT REDUCTIONS IN THE MANNER IN WHICH WE CONDUCT BUSINESS,
INCLUDING WORKFORCE REDUCTIONS, AND FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES

        Unless we raise additional funds, we believe that our cash and cash
equivalents, and our current borrowing facility, together with cash flow from
operations, will not provide sufficient capital to fund our operations through
December 31, 2001 if our assumptions about our revenues and expenses are
generally accurate. Our actual funding requirements may differ materially as a
result of many factors, including the development of new products and
technologies and the continued growth of the company. Even if we are successful
funding our operations through December 31, 2001, we do not expect to be
profitable by the end of the year, so we will need to raise additional funds in
the future through public or private financings or other similar arrangements.
The capital markets have become increasingly constrained since the beginning of
this year, which has adversely affected the ability of many companies to raise
capital. Additional financing may not be available on acceptable terms, if at
all, and the inability to obtain that financing could adversely affect the
continued operation of our business. Without the proceeds from future
financings, we would likely continue to implement material changes to our
business plan to conserve cash resources, including staff reductions and other
spending reductions. If additional funds are raised through the issuance of
equity securities or securities convertible into equity, dilution to existing
shareholders may result and, if our stock price remains depressed, could be
significant. If insufficient funds are available, we may not be able to continue
to operate our business in an effective manner or to compete effectively.

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

        We incurred net losses of approximately $5.8 million in the first nine
months of 2001, $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. Although existing investors loaned us
$3.5 million during 2001, we now believe that we will need to raise additional
capital in order to fund operations in 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.

OUR COMMON STOCK HAS BEEN DELISTED FROM NASDAQ

        The shares of our common stock are currently listed on the Over The
Counter Market. Since our stock was delisted from Nasdaq, it may 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 in August 1995. 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



                                      -17-
<PAGE>

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

        Through part of 2000, the market demand, valuation and trading prices of
high technology companies were high. However, in 2000 and 2001, 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 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, the System 5 digital console, CS3000 console and R-1
recorder 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.

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 DECREASE, 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
decrease, 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
SHAREHOLDERS WILL INCUR ADDITIONAL DILUTION

        If we raise additional capital through the issuance of new securities,
our shareholders 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 shareholders.



                                      -18-
<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 that 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.



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<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 failures 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



                                      -20-
<PAGE>

there is no assurance that they will be adequate to prevent misappropriation. In
addition, significant and 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.

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.



                                      -21-
<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 hedged transactions with external parties. In the
third quarter of 2001 we recorded a currency exchange gain on our hedging
activities that was immaterial.

        Due to the events of September 11, 2001 and the following instability in
all financial markets, there may be future currency fluctuations around the
globe that would impact the economy and our business, which we are not aware of.

ITEM 3.  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 in
the third quarter of 2001, we entered into forward foreign exchange contracts to
mitigate the foreign currency risk with respect to such arrangements. 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 could be material.



                                      -22-
<PAGE>

                           PART II. OTHER INFORMATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

        (a)    EXHIBITS.

        The exhibits listed in the accompanying Index to Exhibits immediately
following the signature page are incorporated by reference as part of this Form
10-Q.

        (b)    REPORTS ON FORM 8-K.

        We did not file any reports on Form 8-K during the quarter ending
September 30, 2001.



                                      -23-
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                     Euphonix, Inc.

Date:  November 19, 2001             By: /s/  JEFFREY CHEW
                                         ---------------------------------------
                                     Jeffrey Chew, Chief Executive Officer
                                     (Principal Executive and Financial Officer)



                                      -24-
<PAGE>

                                INDEX TO EXHIBITS

        The following Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-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.
</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.



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