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UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
  Washington, D.C. 20549



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FORM 10-Q   (MARK ONE)


|      |  |                                                                                                 
|----- |  | ------------------------------------------------------------------------------------------------
|[X]   |  | Quarterly report pursuant
        to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|      |  |                                                                                                 
|      |  | For the period ended: September 30,
        2001                                                
|      |  |                                                                                                 
|      |  | OR                                                                                              
|      |  |                                                                                                 
|[   ] |  | Transition report pursuant
        to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 33-90532

SPATIALIZER AUDIO LABORATORIES,
  INC.
(Exact name of registrant as specified in its charter)



|                                |  |                    
|------------------------------- |  | -------------------
|DELAWARE                        |  | 95-4484725         
|(State or other jurisdiction of |  | (IRS Employer      
|incorporation or organization)  |  | Identification No.)

920 HAMPSHIRE ROAD, SUITE A-34
WESTLAKE VILLAGE, CALIFORNIA 91361
(Address of principal executive offices)

900 LAFAYETTE STREET, SUITE 710
SANTA CLARA, CALIFORNIA 95050
(Address of principal corporate offices)

TELEPHONE NUMBER: (408) 296-0600
(Registrants telephone number, including area code)

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 [   ]

As of November 6, 2001 there were 47,406,939 shares of the Registrants Common
Stock outstanding.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS                   
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS         
|                              |                                                                                               | CONSOLIDATED STATEMENT OF CASH FLOWS          
|                              |                                                                                               | CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|                              |                                                                                               | Notes to Consolidated Financial Statements    
|                              | Item 2. Managements discussion and analysis of financial condition and results of operations
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2. CHANGES IN SECURITIES                                                                
|                              | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8K                                                      
|SIGNATURES                   



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |             |   | 
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------- | ------------- | - | ------------ | --------- | ----------- | - | 
|                                                       |                                                                                                                                                                                                                                                         |   |           | September
30, |   | December
31,
|                                                       |                                                                                                                                                                                                                                                         |   |           | 2001          |   | 2000        
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |             
|                                                       |                                                                                                                                                                                                                                                         |   |           | (unaudited)   |   |             
|Current
          Assets:                              |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|                                                       | Cash and
          Cash Equivalents                                                                                                                                                                                                                     |   | $         | 771,381       |   |              | $         | 1,467,988   |  
|                                                       | Accounts
          Receivable, net                                                                                                                                                                                                                      |   |           | 488,896       |   |              |           | 506,558     |  
|                                                       | Prepaid
          Expenses and Deposits                                                                                                                                                                                                                 |   |           | 55,083        |   |              |           | 26,458      |  
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|Total
          Current Assets                         |                                                                                                                                                                                                                                                         |   | 1,315,360 |               |   |              | 2,001,004 |            
|Property
          and Equipment, net                  |                                                                                                                                                                                                                                                         |   | 74,592    |               |   |              | 108,061   |            
|Capitalized
          Patent and Technology Costs, net |                                                                                                                                                                                                                                                         |   | 299,715   |               |   |              | 302,789   |            
|Other
          Assets                                 |                                                                                                                                                                                                                                                         |   | 52,762    |               |   |              | 45,170    |            
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|Total
          Assets                                 |                                                                                                                                                                                                                                                         | $ | 1,742,429 |               |   | $            | 2,457,024 |            
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|LIABILITIES
          AND SHAREHOLDERS EQUITY        
|Current
          Liabilities:                         |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|                                                       | Notes
          Payable to Related Parties                                                                                                                                                                                                              |   |           | 112,500       |   |              |           | 337,742     |  
|                                                       | Accounts
          Payable                                                                                                                                                                                                                              |   |           | 17,845        |   |              |           | 51,782      |  
|                                                       | Accrued
          Wages and Benefits                                                                                                                                                                                                                    |   |           | 26,680        |   |              |           | 61,390      |  
|                                                       | Accrued
          Expenses and Taxes                                                                                                                                                                                                                    |   |           | 30,975        |   |              |           | 99,595      |  
|                                                       | Net Liabilities
          of Discontinued Operation                                                                                                                                                                                                     |   |           | 170,049       |   |              |           | 255,840     |  
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|Total
          Current Liabilities                    |                                                                                                                                                                                                                                                         |   | 358,049   |               |   |              | 806,349   |            
|Shareholders
          Equity:                        |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|                                                       | Series B,
          10% Redeemable Convertible Preferred shares, $.01 par 
          value, 1,000,000 shares authorized, 87,967 and 102,967
          shares issued and outstanding at September 30, 2001
          and December 31, 2000, respectively |   |           | 880           |   |              |           | 1,030       |  
|                                                       | Common
          shares, $.01 par value, 65,000,000 shares
          authorized, 47,406,939 and 47,087,971 shares
          issued and outstanding at September 30, 2001 and
          December 31, 2000, respectively                                  |   |           | 474,070       |   |              |           | 470,880     |  
|                                                       | Additional
          Paid-In Capital                                                                                                                                                                                                                    |   |           | 46,402,852    |   |              |           | 46,404,892  |  
|                                                       | Accumulated
          Deficit                                                                                                                                                                                                                           |   |           | (45,493,422   | ) |              |           | (45,226,127 | )
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|Total
          Shareholders Equity                   |                                                                                                                                                                                                                                                         |   | 1,384,380 |               |   |              | 1,650,675 |            
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            
|Total
          Liabilities and Shareholders Equity   |                                                                                                                                                                                                                                                         | $ | 1,742,429 |               |   | $            | 2,457,024 |            
|                                                       |                                                                                                                                                                                                                                                         |   |           |               |   |              |           |            

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF
OPERATIONS
(unaudited)

|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |           | 
|--------------------------------------- | -------------------------- | - | -------------------------------- | ------- | ------------------------------- | - | ------------- | ------- | ------------- | - | ---------- | --------- |  | - | ---------- | --------- | 
|                                        |                            |   | For
the Three Month Period Ended |         | For
the Nine Month Period Ended
|                                        |                            |   |                                  |         |                                
|                                        |                            |   | September 30,                    |         | September
30,                   |   | September
30, |         | September
30,
|                                        |                            |   | 2001                             |         | 2000                            |   | 2001          |         | 2000         
|                                        |                            |   |                                  |         |                                 |   |               |         |              
|Revenues:                               |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|                                        | Royalty Revenues           |   | $                                | 302,665 |                                 |   | $             | 630,129 |               |   | $          | 1,214,639 |  |   | $          | 1,665,829 | 
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|                                        |                            |   | 302,665                          |         |                                 |   | 630,129       |         |               |   | 1,214,639  |           |  |   | 1,665,829  |          
|Cost of Revenues                        |                            |   | 12,500                           |         |                                 |   | 70,022        |         |               |   | 81,090     |           |  |   | 168,088    |          
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|Gross Profit                            |                            |   | 290,165                          |         |                                 |   | 560,107       |         |               |   | 1,133,549  |           |  |   | 1,497,741  |          
|Operating Expenses:                     |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|                                        | General and Administrative |   |                                  | 194,770 |                                 |   |               | 181,669 |               |   |            | 553,022   |  |   |            | 426,458   | 
|                                        | Research and Development   |   |                                  | 172,978 |                                 |   |               | 186,294 |               |   |            | 533,681   |  |   |            | 388,338   | 
|                                        | Sales and Marketing        |   |                                  | 101,462 |                                 |   |               | 90,172  |               |   |            | 330,448   |  |   |            | 276,858   | 
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|                                        |                            |   | 469,210                          |         |                                 |   | 458,135       |         |               |   | 1,417,151  |           |  |   | 1,091,654  |          
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|Operating Profit (Loss)                 |                            |   | (179,045                         | )       |                                 |   | 101,972       |         |               |   | (283,602   | )         |  |   | 406,087    |          
|Interest Income                         |                            |   | 7,220                            |         |                                 |   | 19,624        |         |               |   | 36,852     |           |  |   | 50,526     |          
|Interest Expense                        |                            |   | (2,813                           | )       |                                 |   | (8,782        | )       |               |   | (19,363    | )         |  |   | (25,953    | )        
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|                                        |                            |   | 4,407                            |         |                                 |   | 10,842        |         |               |   | 17,489     |           |  |   | 24,573     |          
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|Income (Loss) Before Income Taxes       |                            |   | (174,638                         | )       |                                 |   | 112,814       |         |               |   | (266,113   | )         |  |   | 430,660    |          
|Income Taxes                            |                            |   | (682                             | )       |                                 |   | (9,000        | )       |               |   | (1,182     | )         |  |   | (44,271    | )        
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|Net Income (Loss)                       |                            | $ | (175,320                         | )       |                                 | $ | 103,814       |         |               | $ | (267,295   | )         |  | $ | 386,389    |          
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|Basic/Diluted Earnings (Loss) Per Share |                            | $ | (0.00                            | )       |                                 | $ | 0.00          |         |               | $ | (0.01      | )         |  | $ | 0.01       |          
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          
|Weighted Average Shares
Outstanding     |                            |   | 47,406,939                       |         |                                 |   | 46,706,986    |         |               |   | 47,387,561 |           |  |   | 46,622,002 |          
|                                        |                            |   |                                  |         |                                 |   |               |         |               |   |            |           |  |   |            |          

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SPATIALIZER AUDIO LABORATORIES, INC.
  AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF CASH FLOWS
  (unaudited)

|                                                  |                                                                                                                      |   |                   |          |      |   |           |          |  
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | - | ----------------- | -------- | ---- | - | --------- | -------- | -
|                                                  |                                                                                                                      |   | Nine
Months Ended
|                                                  |                                                                                                                      |   | September
30,    
|                                                  |                                                                                                                      |   |                  
|                                                  |                                                                                                                      |   | 2001              |          | 2000
|                                                  |                                                                                                                      |   |                   |          |     
|Cash flows from operating activities:             |                                                                                                                      |   |                   |          |      |   |           |         
|                                                  | Net Income (Loss)                                                                                                    |   | $                 | (267,295 | )    |   | $         | 386,389  |  
|                                                  | Adjustments
          to reconcile net income (loss) to net cash 
          provided (used) in operating activities: |   |                   |          |      |   |           |          |  
|                                                  | Depreciation and Amortization                                                                                        |   |                   | 66,305   |      |   |           | 64,099   |  
|Net change in Assets and Liabilities:             |                                                                                                                      |   |                   |          |      |   |           |         
|                                                  | Accounts Receivable and Employee Advances                                                                            |   |                   | 17,662   |      |   |           | 106,592  |  
|                                                  | Prepaid Expenses, Deposits and Other                                                                                 |   |                   | (36,217  | )    |   |           | (40,586  | )
|                                                  | Accounts Payable                                                                                                     |   |                   | (33,937  | )    |   |           | (205,654 | )
|                                                  | Changes in Discontinued Operation                                                                                    |   |                   | (85,791  | )    |   |           | (122,214 | )
|                                                  | Accrued Liabilities                                                                                                  |   |                   | (103,330 | )    |   |           | (99,568  | )
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Net Cash Provided (Used) In Operating Activities  |                                                                                                                      |   | (442,603          | )        |      |   | 89,058    |         
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Cash Flows from Investing Activities:             |                                                                                                                      |   |                   |          |      |   |           |         
|                                                  | Purchase of Property and Equipment                                                                                   |   |                   | (7,000   | )    |   |           | (42,497  | )
|                                                  | Increase in Capitalized Patent and Technology Costs                                                                  |   |                   | (22,762  | )    |   |           | (15,097  | )
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Net Cash (Used) in Investing Activities           |                                                                                                                      |   | (29,762           | )        |      |   | (57,594   | )       
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Cash flows from Financing Activities:             |                                                                                                                      |   |                   |          |      |   |           |         
|                                                  | Issuance of Preferred Shares, Net                                                                                    |   |                   |         |      |   |           |         |  
|                                                  | Exercise of Options                                                                                                  |   |                   |         |      |   |           | 435,319  |  
|                                                  | Exercise of Warrants                                                                                                 |   |                   | 1,000    |      |   |           |         |  
|                                                  | Issuance of Notes Payable                                                                                            |   |                   |         |      |   |           |         |  
|                                                  | Issuance of Related Party Payable                                                                                    |   |                   |         |      |   |           |         |  
|                                                  | Repayment of Related Party Payable                                                                                   |   |                   | (225,242 | )    |   |           |          |  
|                                                  | Repayment of Notes Payable                                                                                           |   |                   |         |      |   |           |         |  
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Net Cash Provided (Used) by Financing Activities  |                                                                                                                      |   | (224,242          | )        |      |   | 435,319   |         
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Increase (Decrease) in Cash and Cash Equivalents  |                                                                                                                      |   | (696,607          | )        |      |   | 466,783   |         
|Cash and Cash Equivalents, Beginning of Period    |                                                                                                                      |   | 1,467,988         |          |      |   | 1,021,998 |         
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Cash and Cash Equivalents, End of Period          |                                                                                                                      | $ | 771,381           |          |      | $ | 1,488,781 |         
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         
|Supplemental Disclosure of Cash Flow Information: |                                                                                                                      |   |                   |          |      |   |           |         
|                                                  | Cash paid during the period for:                                                                                     |   |                   |          |      |   |           |          |  
|                                                  | Interest                                                                                                             |   | $                 | 19,363   |      |   | $         | 19,688   |  
|                                                  | Income Taxes                                                                                                         |   |                   | 682      |      |   |           | 1,500    |  
|                                                  |                                                                                                                      |   |                   |          |      |   |           |         

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(unaudited)

|                                  |  |                             |         |               |  |        |       |           |  |                 |            |         |  |            |         |             |  |               |            |   |  |   |             |   |  |   |           |  
|--------------------------------- |  | --------------------------- | ------- | ------------- |  | ------ | ----- | --------- |  | --------------- | ---------- | ------- |  | ---------- | ------- | ----------- |  | ------------- | ---------- | - |  | - | ----------- | - |  | - | --------- | -
|                                  |  | Series B, 10% Redeem. Conv. |         |               |  |        |       |           |  |                 |            |         |  |            |         |             |  |               |            |   |  |  
|                                  |  | Preferred Shares            |         | Common Shares |  |        |       |           |  |                 |            |         |  |            |         |            
|                                  |  |                             |         |               |  |        |       |           |  |                 |            |         |  | Total     
|                                  |  | Number of                   |         |               |  |        |       | Number of |  |                 |            |         |  | Additional |         | Accumulated |  | Shareholders'
|                                  |  | shares                      |         | Par value     |  | shares |       | Par Value |  | paid-in-capital |            | Deficit |  | Equity    
|                                  |  |                             |         |               |  |        |       |           |  |                 |            |         |  |           
|Balance, December 31, 2000        |  |                             | 102,967 |               |  | $      | 1,030 |           |  |                 | 47,087,971 |         |  | $          | 470,880 |             |  | $             | 46,404,892 |   |  | $ | (45,226,127 | ) |  |   | 1,650,675 |  
|Issuance of Preferred Shares, Net |  |                             |        |               |  |        |      |           |  |                 |           |         |  |            |        |             |  |               |           |   |  |   |            |   |  |   |          |  
|Options Exercised                 |  |                             |        |               |  |        |      |           |  |                 |           |         |  |            |        |             |  |               |           |   |  |   |            |   |  |   |          |  
|Warrants Exercised                |  |                             |        |               |  |        |      |           |  |                 | 5,000      |         |  |            | 50      |             |  |               | 950        |   |  |   |            |   |  |   | 1,000     |  
|Stock Issued for Services         |  |                             |        |               |  |        |      |           |  |                 |           |         |  |            |        |             |  |               |           |   |  |   |            |   |  |   |          |  
|Conv. of Pref. Shares, net        |  |                             | (15,000 | )             |  |        | (150  | )         |  |                 | 313,968    |         |  |            | 3,140   |             |  |               | (2,990     | ) |  |   |            |   |  |   |          |  
|Net Income                        |  |                             |         |               |  |        |      |           |  |                 |           |         |  |            |        |             |  |               |           |   |  |   | (267,295    | ) |  |   | (267,295  | )
|                                  |  |                             |         |               |  |        |       |           |  |                 |            |         |  |            |         |             |  |               |            |   |  |   |             |   |  |   |           |  
|Balance, September 30, 2001       |  |                             | 87,967  |               |  | $      | 880   |           |  |                 | 47,406,939 |         |  | $          | 474,070 |             |  | $             | 46,402,852 |   |  | $ | (45,493,422 | ) |  | $ | 1,384,380 |  
|                                  |  |                             |         |               |  |        |       |           |  |                 |            |         |  |            |         |             |  |               |            |   |  |   |             |   |  |   |           |  

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




Notes to Consolidated Financial Statements

(1) NATURE OF BUSINESS

Spatializer Audio Laboratories, Inc. and subsidiaries (the Company, our
and we) are in the business of developing and licensing technology.

Our wholly owned subsidiary Desper Products, Inc. (DPI) is in the business
of developing proprietary advanced audio signal processing technologies and
products for consumer electronics, entertainment, and multimedia computing.

Our wholly owned subsidiary, MultiDisc Technologies, Inc. (MDT) was in the
business of developing scaleable, modular compact disc (CD) and digital
versatile disc (DVD) server technologies associated with a network based CD
/ DVD server for internet and intranet applications. Operations of MDT were
discontinued in the fourth quarter of 1998. Our efforts to sell these assets,
though continuing, have not been successful to date.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim consolidated financial statements of the Company are condensed
and do not include some of the information necessary to obtain a complete
understanding of the financial data. Management believes that all
adjustments necessary for a fair presentation of results have been included
in the unaudited consolidated Financial Statements for the interim periods
presented. Operating results for the three-month and nine-month periods
ended September 30, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001. Accordingly, your
attention is directed to footnote disclosures found in the December 31, 2000
Annual Report and particularly to Note 2 which includes a summary of
significant accounting policies.

Basis of Consolidation

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

Revenue Recognition

We accrue revenues based on licensee royalty reports, management estimates
and reports from third parties. While management endeavors to minimize the
use of estimates, any deviation from estimates utilized are adjusted in the
subsequent quarter. Royalty income reported is based on the shipment of
product incorporating the related technology by the original equipment
manufacturer or foundries.

Research and Development Expenditures

We expense research and development expenditures as incurred.

(3) INCOME (LOSS) PER SHARE

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

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the issuance of common stock that then shared in the earnings of the entity.
Diluted earnings (loss) per share is computed similarly to fully diluted
earnings (loss) per share pursuant to the Accounting Principles Board (APB)
Opinion No. 15. The following table presents contingently issuable shares,
options and warrants to purchase shares of common stock that were outstanding
during the nine month periods ended September 30, 2001 and 2000 which were not
included in the computation of diluted loss per share because the impact would
have been antidilutive or insignificant:

|         |  |      |           |      |  |  |           | 
|-------- |  | ---- | --------- | ---- |  |  | --------- | 
|         |  | 2001 |           | 2000
|         |  |      |           |     
|Options  |  |      | 3,122,300 |      |  |  | 2,077,301 | 
|Warrants |  |      | 2,215,000 |      |  |  | 2,830,000 | 
|         |  |      |           |      |  |  |           | 
|         |  |      | 5,337,300 |      |  |  | 5,083,134 | 
|         |  |      |           |      |  |  |           | 

(4) COMPREHENSIVE INCOME (LOSS)

The Financial Accounting Standards Board issued Statement No. 130, Reporting
Comprehensive Income (SFAS 130), in June 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. We adopted SFAS No. 130 on January
1, 1998. Comprehensive income (loss) is the change in equity of a business
enterprise during a period from transactions and all other events and
circumstances from non-owner sources. Other comprehensive income (loss)
includes foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. We did not have components of other comprehensive (loss) income
during the nine-month periods ended September 30, 2001 and 2000. As a
result, comprehensive (loss) income is the same as the net income for the
nine-month periods ended September 30, 2001 and 2000.

(5) SEGMENT REPORTING

The Financial Accounting Standards Board issued Statement No. 131, Disclosures
about Segments of an Enterprise and Related Information(SFAS No. 131), in
June 1997. SFAS No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires enterprises to report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. It replaces the industry
segment concept of SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, with a management approach concept as to basis for identifying
reportable segments. SFAS 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. We adopted SFAS 131 in December 1997.
At September 30, 2001, we have only one operating segment, DPI, the Companys
Audio Signal Processing business.

(6) MAJOR CUSTOMERS

A substantial portion of our licensing and royalty revenues are derived from
three major customers. The following customers comprised greater than 10% of
total revenues during the nine months ended September 30, 2001 and 2000:

|           |  |      |    |      |  |  |    |  
|---------- |  | ---- | -- | ---- |  |  | -- | -
|           |  | 2001 |    | 2000
|           |  |      |    |     
|Customer A |  |      | 39 | %    |  |  | 39 | %
|Customer B |  |      | 13 | %    |  |  | 38 | %
|Customer C |  |      | 22 | %    |  |  | 13 | %
|Customer D |  |      | 17 | %    |  |  |   | %

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(7) CONTINGENCIES

Legal

In February 1999, a complaint was filed in the Superior Court of Los
Angeles County, Northwest District, by I.N. Associates, Inc., against the
Companys wholly owned subsidiary, MultiDisc Technologies, Inc. (MDT),
alleging breach of contract and fraud, and claiming $499,954 in damages,
attorneys fees, interest and the costs of suit. MDT has answered and denied the
claims. The matter was subject to a mediation preceding in March 2000, and has
been settled. The settlement specifies that I.N. will be entitled to a cash
less exercise of warrants for the 125,000 shares originally issued to them in
1997 and 1998, or a cash payment of $50,000 if the warrants remained
unexercised. In January 2001, the cash payment was made and no further
liabilities or contingencies exist.

In connection with the downsizing of the Company, a number of employees
were terminated and have filed, on various dates since the downsizing in 1998,
various employment and compensation related claims with the various State labor
authorities, all but two of which claims have either been settled or have been
paid as of the date of this report. In February, 2000, an appeal was heard in
the Superior Court of Orange County, California, relating to a claim filed by a
former employee of MDT for back vacation pay and penalties. In March 2000, both
parties agreed to dismiss the action as part of a settlement, which was not
material to the financial statements for the period ended March 31, 2000. In
July 2000, the Labor Commission of the State of California awarded $122,000 to
a claimant arising from a claim for commissions over a three-year period. We
appealed the order to the Superior Court of California, Santa Clara County,
since, under California law, the Labor Commission order will have no effect on
the courts consideration of the matter. On October 27, 2000, the matter was
settled by mutual release and payment in an amount which was not material to
the financial statements of the Company for the period ended September 30,
2000. Two former officers and employees of MDT initiated proceedings before the
Labor Commissioner in 2000 seeking amounts allegedly due under their employment
agreements, which claims, if resolved in favor of the claimants, could be
material to the financial statements of the Company. The Labor Commissioner
has postponed those proceedings. In that action, the claimants filed a motion
to strike the MDT complaint under the California anti-Slapp legislation. The
Court rejected that motion and the litigation is in the discovery stages.
Separately, MDT has initiated litigation in the Superior Court, Orange County
seeking declaratory relief to bar the labor claims, as well as return of
intellectual property and unspecified damages for breaches of the former
officers and employees employment agreements. The two employees have filed
for personal bankruptcy and as a result, the claims are inactive.

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

(8) SALE OF PREFERRED STOCK

In the December 1999, $895,000 in short term loan advances from officers,
directors and their affiliates and certain other securities holders, and
accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10 day average closing
bid price prior to the conversion, but subject

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to a minimum conversion of $.56 per share and a maximum of $1.12 per
share. We have a three year option to redeem any Series B Preferred Stock, not
sooner converted, in whole or in part, in cash.

(9) SALE OF COMMON STOCK

In December 1999, we completed a set of financial transactions (the
December Transactions) with certain existing holders of our equity and debt
and with new institutional investors. The December Transactions included the
private placement of 1,884,254 additional shares of our Common Stock ($1.05
million in new capital or $0.56 per share), the issuance of warrants to acquire
2,100,000 shares of Common Stock exercisable for three years at an exercise
price of $.67 per share), the cancellation of 500,000 warrants to acquire
Common Stock issued in the April 1998 financing. The placement of common
shares was at no discount to market. We have registered these shares and
warrants for resale under Form S-1, as required by the placement documents.

(10) DISCONTINUED OPERATIONS

In September, 1998, the Board of Directors approved a plan to refocus corporate
activities on our core audio business, Desper Products, Inc. In conjunction to
this strategic refocusing, we permanently suspended operations of MDT and
placed the business and its related patent portfolio up for sale. We are
accounting for the on-going operating and termination expenses of MDT as a
discontinued operation.

(11) NOTES PAYABLE TO RELATED PARTIES

In June, 2001, we repaid Notes Payable to Related Parties of $225,000 plus
accrued interest of approximately $33,000.

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Item 2. Managements discussion and analysis of financial condition and results
of operations

Results of Operations

Results of Operations

This form 10-Q contains forward-looking statements, within the meaning of the
Private Securities Reform Act of 1995, which are subject to a variety of risks
and uncertainties. Our actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements.

Revenues

Revenues for the three months ended September 30, 2001 were $303,000,
compared to revenues of $630,000 in the comparable period last year, a
decrease of 52%. Revenues for the nine months ended September 30, 2001 were
$1,215,000, compared with $1,666,000 in the comparable period last year, a
decrease of 27%.

The decrease in the three month revenues resulted primarily from adjustments to
revenues accrued in the prior quarter for actual cash receipts. Our policy is
to accrue revenue based on estimates derived from historical and current
information as available at the time of closing, since actual royalties are
often reported to us after SEC financial reporting deadlines. Effective in the
quarter ended June 30, 2001, the responsibility for the reporting and payment
of royalties was transferred, by mutual agreement from the one of our DSP
foundry accounts to two manufacturers responsible for product integration.
Previously, the DSP foundry had paid the royalties when it shipped the
processors to the manufacturers. On April 1, 2001, the manufacturers became
responsible and reported and paid the royalties only on shipment of the
consumer electronic devices (DVD players). This shift in timing and reporting
resulted in a decrease in second quarter royalties to the extent that the DSP
foundry had paid for processor inventory shipments during the first quarter,
which inventory was then incorporated by the manufacturers in the second
quarter. In addition, the manufacturers did not provide the Company with
timely inventory information and, in the absence of this information, the
Company used historical estimates for the accruals. An adjustment of
approximately $200,000 was made in the current quarter to reflect actual cash
for the second quarter period.

Revenues for the nine months ended September 30, 2001 were lower due to flat
fee royalties earned in the first half of 2000 from a license agreement for
which there were no comparable royalties, from this account, in the current
year. In addition, royalties on analog integrated circuits have declined from
a major account due to a continuing sales decline of audio related special
purpose ICs.

Gross Profit

Gross profit for the three months ended September 30, 2001 was $290,000 (96%
of revenue) compared to gross profit of $560,000 (89% of revenue) in the
comparable period last year, a decrease of 48%. Gross profit for the
nine-months ended September 30, 2000 were $1,136,000, compared with
$1,498,000 in the comparable period last year, a decrease of 24%. Gross
profit in the three and nine-month periods decreased primarily due to lower
revenue. Gross margin increased due to a change in mix to higher domestic
derived revenue, which is not commission bearing as well as modifications
made to our commission structure.

Operating Expenses

Operating expenses in the three months ended September 30, 2001 were $469,000
(155% of revenue) compared to operating expenses of $458,000 (73% of revenue)
in the comparable period last year, an increase of 2%. Operating expenses in
the nine months ended September 30, 2001 were

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$1,417,000 (117% of revenue) compared to operating expenses of $1,092,000 (66%
of revenue) in the comparable period last year, an increase of 30%. The
increase in operating expenses for the nine months ended September 30, 2001
resulted primarily from a significant expansion of the Companys research and
development staff and effort, increased sales and marketing activity, legal
expense and an ongoing investor relations program which was terminated in the
late second quarter. The increase in the three month period was insignificant.

General and Administrative

General and administrative expenses in the three months ended September 30,
2001 were $195,000 (64% of revenue) compared to general and administrative
expenses of $182,000 (29% of revenue in the comparable period last year, an
increase of 7%. General and administrative expenses in the nine months ended
September 30, 2001 were $553,000 (39% of revenue) compared to general and
administrative expenses of $426,000 (26% of revenue) in the comparable period
last year, an increase of 30%. The increase in general and administrative
expense in both current periods resulted from an increase in legal expenses
relating to corporate finance, transaction negotiations and settlements,
normalized operating activities and the investor relations program.

Research and Development

Research and development expenses in the three months ended September 30,
2001 were $173,000 (57% of revenue) compared to research and development
expenses of $186,000 (30% of revenue) in the comparable period last year, a
decrease of 7%. Research and development expenses in the nine months ended
September 30, 2001 were $534,000 (44% of revenue) compared to research and
development expenses of $388,000 (23% of revenue)in the comparable period
last year, an increase of 38%. The decrease in such expenses in the three
month period resulted primarily from reduced use of outside consultants. The
increase in such expenses in the nine months ended September 30, 2001 results
from significantly higher engineering headcount and consultants in 2001 as
compared with the comparable period last year.

Sales and Marketing

Sales and marketing expenses in the three months ended September 30, 2001
were $101,000 (33% of revenue) compared to sales and marketing expenses of
$90,000 (14% of revenue) in the comparable period last year, an increase of
12%. Sales and marketing expenses in the nine months ended September 30, 2001
were $330,000 (27% of revenue) compared to sales and marketing expenses of
$277,000 (17% of revenue) in the comparable period last year, an increase of
19%.The increase in sales and marketing expense in both periods resulted
primarily from greater international travel in the current period and
marketing support expense as compared with the comparable period last year.

Net Income

Net Loss in the three months ended September 30, 2001 was $175,000 (-58% of
revenues), $0.00 per share, compared to net income of $104,000 (16% of
revenues), $0.00 per share in the comparable period last year. Net Loss in
the nine months ended September 30, 2001 was $267,000 (-22% of revenues),
($0.01) per share, compared to net income of $386,000 (23% of revenues),
$0.01 per share in the comparable period last year. The increase in net loss
was the result of the decrease in revenues, partially offset by lower gross
margin and the increase in operating expenses.

Liquidity and Capital Resources

At September 30, 2001, we had $771,000 in cash and cash equivalents as compared
to $1,468,000 at December 31, 2000. The decrease in cash and cash equivalents
is attributed to the repayment of approximately $250,000 of short-term debt and
accrued interest, legal expenses relating to MultiDisc issues and cash used by
other operating activities. We had working capital of $957,000 at September 30,
2001 as compared with working capital of $1,195,000 at December 31, 2000. Our
future cash flow will come primarily from the audio signal processing licensing
business Foundry and Original

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Equipment Manufacturers (OEM) royalties and common stock issuances including
warrant and option exercises.

We repaid related party obligations of $225,000 plus accrued interest of
approximately $30,000, which were convertible into Common Stock at our or the
Lenders option in June 2001. The Company owed a total of $112,500 to related
parties as of September 30, 2001 and $337,5000 on December 31, 2000.

In December 1999, we completed a set of financial transactions (the December
Transactions) with certain existing holders of our equity and debt and with
new institutional investors. The December Transactions included the private
placement of 1,884,254 additional shares of our Common Stock ($1.05 million in
new capital or $0.56 per share), the issuance of warrants to acquire 2,100,000
shares of Common Stock exercisable for three years at an exercise price of $.67
per share), the cancellation of 500,000 warrants to acquire Common Stock issued
in that earlier financing, the conversion of $1 million of short term debt into
a new Series B Redeemable Convertible Preferred Stock (Series B Preferred
Stock) and the conversion of $225,000 of secured debt into secured convertible
debt.

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

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

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

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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

In February 1999, a complaint was filed in the Superior Court of Los
Angeles County, Northwest District, by I.N. Associates, Inc., against the
Companys wholly owned subsidiary, MultiDisc Technologies, Inc. (MDT),
alleging breach of contract and fraud, and claiming $499,954 in damages,
attorneys fees, interest and the costs of suit. MDT has answered and denied the
claims. The matter was subject to a mediation preceding in March 2000, and has
been settled. The settlement specifies that I.N. will be entitled to a cashless
exercise of warrants for the 125,000 shares originally issued to them in 1997
and 1998, or a cash payment of $50,000 if the warrants remained unexercised. In
January 2001, the cash payment was made and no further liabilities or
contingencies exist.

In connection with the downsizing of the Company, a number of employees
were terminated and have filed, on various dates since the downsizing in 1998,
various employment and compensation related claims with the various State labor
authorities, all but two of which claims have either been settled or have been
paid as of the date of this report. In February, 2000, an appeal was heard in
the Superior Court of Orange County, California, relating to a claim filed by a
former employee of MDT for back vacation pay and penalties. In March 2000, both
parties agreed to dismiss the action as part of a settlement, which was not
material to the financial statements for the period ended March 31, 2000. In
July 2000, the Labor Commission of the State of California awarded $122,000 to
a claimant arising from a claim for commissions over a three-year period. We
appealed the order to the Superior Court of California, Santa Clara County,
since, under California law, the Labor Commission order will have no effect on
the courts consideration of the matter. On October 27, 2000, the matter was
settled by mutual release and payment in an amount which was not material to
the financial statements of the Company for the period ended September 30,
2000. Two former officers and employees of MDT initiated proceedings before the
Labor Commissioner in 2000 seeking amounts allegedly due under their employment
agreements, which claims, if resolved in favor of the claimants, could be
material to the financial statements of the Company. The Labor Commissioner
has postponed those proceedings. In that action, the claimants filed a motion
to strike the MDT complaint under the California anti-Slapp legislation. The
Court rejected that motion and the litigation is in the discovery stages.
Separately, MDT has initiated litigation in the Superior Court, Orange County
seeking declaratory relief to bar the labor claims, as well as return of
intellectual property and unspecified damages for breaches of the former
officers and employees employment agreements. The two employees have filed
for personal bankruptcy and as a result, the claims are inactive.

No other matters occurred during the period covered by this report, nor
were there any other material developments to previously reported matters
during the period covered by this report.




ITEM 2. CHANGES IN SECURITIES

None




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None




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

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None




ITEM 5. OTHER INFORMATION

None




ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

None

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SIGNATURES

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

Dated: November 13, 2001

| |  |                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------
| |  | SPATIALIZER AUDIO LABORATORIES,
        INC. 
        (Registrant)                                     
| |  |                                                                                                        
| |  | /s/ HENRY R. MANDELL                                                                                   
| |  | HENRY R. MANDELLCHAIRMAN OF THE BOARD 
        Chief Executive Officer 
        Chief Financial Officer
| | 

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