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



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FORM 10-Q


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(MARK ONE)

[ü]   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended: June 30, 2002

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
(State or other jurisdiction of
incorporation or organization) |  | 95-4484725
(IRS Employer
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: (818) 227-3370

(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[ü]                     NO   [     ]

As of August 6, 2002 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 I. FINANCIAL STATEMENTS                               
|                              |                                                             | CONSOLIDATED BALANCE SHEETS                   
|                              |                                                             | CONSOLIDATED STATEMENT OF OPERATIONS          
|                              |                                                             | CONSOLIDATED STATEMENT OF CASH FLOWS          
|                              |                                                             | CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|                              |                                                             | Notes to Consolidated Financial Statements    
|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                   
|EXHIBIT 99.1                 



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                                               |   |           |             |             |   |              |             |   |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------- | ----------- | ----------- | - | ------------ | ----------- | - |  | 
|                                           |                                                                                                                                                                                               |   |           |             | June 30,    |   | December 31,
|                                           |                                                                                                                                                                                               |   |           |             | 2002        |   | 2001        
|                                           |                                                                                                                                                                                               |   |           |             |             |   |             
|                                           |                                                                                                                                                                                               |   |           |             | (unaudited) |   |              |             |  
|                                          
|ASSETS                                    
|                                          
|Current Assets:                            |                                                                                                                                                                                               |   |           |             |             |   |              |            
|                                           | Cash and Cash Equivalents                                                                                                                                                                     |   | $         | 967,025     |             |   | $            | 869,478     |  
|                                           | Accounts Receivable                                                                                                                                                                           |   |           | 457,411     |             |   |              | 442,555     |  
|                                           | Prepaid and Deposits                                                                                                                                                                          |   |           | 50,314      |             |   |              | 133,251     |  
|                                           |                                                                                                                                                                                               |   |           |             |             |   |              |            
|Total Current Assets                       |                                                                                                                                                                                               |   | 1,474,750 |             |             |   | 1,445,284    |            
|Property and Equipment, net                |                                                                                                                                                                                               |   | 96,945    |             |             |   | 50,586       |            
|Intangible Assets, Net                     |                                                                                                                                                                                               |   | 233,261   |             |             |   | 255,726      |            
|Other Assets                               |                                                                                                                                                                                               |   |          |             |             |   | 1,510        |            
|                                           |                                                                                                                                                                                               |   |           |             |             |   |              |            
|Total Assets                               |                                                                                                                                                                                               | $ | 1,804,956 |             |             | $ | 1,753,106    |            
|                                           |                                                                                                                                                                                               |   |           |             |             |   |              |            
|                                          
|LIABILITIES AND SHAREHOLDERS EQUITY      
|                                          
|Current Liabilities:                       |                                                                                                                                                                                               |   |           |             |             |   |              |            
|                                           | Notes Payable to Related Parties                                                                                                                                                              |   |           | 112,500     |             |   |              | 112,500     |  
|                                           | Accounts Payable                                                                                                                                                                              |   |           | 67,274      |             |   |              | 14,872      |  
|                                           | Accrued Wages and Benefits                                                                                                                                                                    |   |           | 71,487      |             |   |              | 72,969      |  
|                                           | Accrued Expenses and Taxes                                                                                                                                                                    |   |           | 42,955      |             |   |              | 41,197      |  
|                                           | Net Liabilities of Discontinued Operation                                                                                                                                                     |   |           | 74,845      |             |   |              | 100,000     |  
|                                           |                                                                                                                                                                                               |   |           |             |             |   |              |            
|Total Current Liabilities                  |                                                                                                                                                                                               |   | 369,061   |             |             |   | 341,538      |            
|                                          
|Shareholders Equity:                      |                                                                                                                                                                                               |   |           |             |             |   |              |            
|                                           | Series B, 10% Redeemable Convertible Preferred shares, $.01 par
value, 1,000,000 shares authorized, 87,967
shares issued and outstanding at June 30, 2002
and December 31, 2001, respectively |   |           | 880         |             |   |              | 880         |  
|                                           | Common shares, $.01 par value, 50,000,000 shares
authorized, 47,406,939 shares
issued and outstanding at June 30, 2002 and
December 31, 2001, respectively                                    |   |           | 474,070     |             |   |              | 474,070     |  
|                                           | Additional Paid-In Capital                                                                                                                                                                    |   |           | 46,402,852  |             |   |              | 46,402,852  |  
|                                           | Accumulated Deficit                                                                                                                                                                           |   |           | (45,441,907 | )           |   |              | (45,466,234 | )
|                                           |                                                                                                                                                                                               |   |           |             |             |   |              |            
|Total Shareholders Equity                 |                                                                                                                                                                                               |   | 1,435,895 |             |             |   | 1,411,568    |            
|Total Liabilities and Shareholders Equity |                                                                                                                                                                                               | $ | 1,804,956 |             |             | $ | 1,753,106    |            
|                                           |                                                                                                                                                                                               |   |           |             |             |   |              |            

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)

|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|----------------------------------- | ---------------------------- | - | -------------------------------- | ------- | ------------------------------ | - | ---------- | ------- | -------- | - | ---------- | ------- |  | - | ---------- | ------- | 
|                                    |                              |   | For the Three Month Period Ended |         | For the Six Month Period Ended
|                                    |                              |   |                                  |         |                               
|                                    |                              |   | June 30,                         |         | June 30,                       |   | June 30,   |         | June 30,
|                                    |                              |   | 2002                             |         | 2001                           |   | 2002       |         | 2001    
|                                    |                              |   |                                  |         |                                |   |            |         |         
|Revenues:                           |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |        
|                                    | Royalty
and Product Revenues |   |                                  | 470,631 |                                |   |            | 485,893 |          |   |            | 911,112 |  |   |            | 911,974 | 
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|                                    |                              |   | 470,631                          |         |                                |   | 485,893    |         |          |   | 911,112    |         |  |   | 911,974    |        
|Cost of Revenues                    |                              |   | 39,719                           |         |                                |   | 41,090     |         |          |   | 67,921     |         |  |   | 68,590     |        
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|Gross Profit                        |                              |   | 430,912                          |         |                                |   | 444,803    |         |          |   | 843,191    |         |  |   | 843,384    |        
|Operating Expenses:                 |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |        
|                                    | General and Administrative   |   |                                  | 182,710 |                                |   |            | 207,355 |          |   |            | 318,044 |  |   |            | 358,252 | 
|                                    | Research and Development     |   |                                  | 119,437 |                                |   |            | 223,381 |          |   |            | 243,040 |  |   |            | 360,703 | 
|                                    | Sales and Marketing          |   |                                  | 125,986 |                                |   |            | 115,283 |          |   |            | 256,325 |  |   |            | 228,986 | 
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|                                    |                              |   | 428,133                          |         |                                |   | 546,019    |         |          |   | 817,409    |         |  |   | 947,941    |        
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|Operating Profit (Loss)             |                              |   | 2,779                            |         |                                |   | (101,216   | )       |          |   | 25,782     |         |  |   | (104,557   | )      
|Interest Income                     |                              |   | 3,079                            |         |                                |   | 11,775     |         |          |   | 6,569      |         |  |   | 29,632     |        
|Interest Expense                    |                              |   | (2,812                           | )       |                                |   | (8,068     | )       |          |   | (5,624     | )       |  |   | (16,550    | )      
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|                                    |                              |   | 267                              |         |                                |   | 3,707      |         |          |   | 945        |         |  |   | 13,082     |        
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|Income (Loss) Before Income Taxes   |                              |   | 3,046                            |         |                                |   | (97,509    | )       |          |   | 26,727     |         |  |   | (91,475    | )      
|Income Taxes                        |                              |   |                                 |         |                                |   |           |         |          |   | (2,400     | )       |  |   | (500       | )      
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|Net Income (Loss)                   |                              | $ | 3,046                            |         |                                | $ | (97,509    | )       |          | $ | 24,327     |         |  | $ | (91,975    | )      
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|Basic/Diluted Earnings Per Share    |                              | $ | 0.00                             |         |                                | $ | (0.00      | )       |          | $ | 0.00       |         |  | $ | (0.0       | )      
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 
|Weighted Average Shares
Outstanding |                              |   | 47,406,939                       |         |                                |   | 47,386,521 |         |          |   | 47,406,939 |         |  |   | 47,326,691 |        
|                                    |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |         | 

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)

|                                                  |                                                                             |   |                  |         |      |   |           |          |  
|------------------------------------------------- | --------------------------------------------------------------------------- | - | ---------------- | ------- | ---- | - | --------- | -------- | -
|                                                  |                                                                             |   | Six Months Ended
|                                                  |                                                                             |   | June 30,        
|                                                  |                                                                             |   |                 
|                                                  |                                                                             |   | 2002             |         | 2001
|                                                  |                                                                             |   |                  |         |     
|Cash flows from operating activities:             |                                                                             |   |                  |         |      |   |           |         
|                                                  | Net Income (Loss)                                                           |   | $                | 24,327  |      |   | $         | (91,975  | )
|                                                  | Adjustments to reconcile net loss to net cash
used in operating activities: |   |                  |         |      |   |           |          |  
|                                                  | Depreciation and Amortization                                               |   |                  | 48,803  |      |   |           | 44,435   |  
|Net change in Assets and Liabilities:             |                                                                             |   |                  |         |      |   |           |         
|                                                  | Accounts Receivable                                                         |   |                  | (14,856 | )    |   |           | (23,442  | )
|                                                  | Prepaid Expenses and Deposits                                               |   |                  | 84,447  |      |   |           | (35,002  | )
|                                                  | Accounts Payable                                                            |   |                  | 52,402  |      |   |           | (32,931  | )
|                                                  | Changes in Discontinued Operation                                           |   |                  | (25,155 | )    |   |           | (74,482  | )
|                                                  | Accrued Liabilities                                                         |   |                  | 276     |      |   |           | (57,868  | )
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Net
Cash Provided (Used) In Operating Activities  |                                                                             |   | 170,244          |         |      |   | (271,265  | )       
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Cash Flows from Investing Activities:             |                                                                             |   |                  |         |      |   |           |         
|                                                  | Purchase of Property and Equipment                                          |   |                  | (72,602 | )    |   |           | (5,000   | )
|                                                  | Increase in Capitalized Patent and Technology Costs                         |   |                  | (95     | )    |   |           | (22,863  | )
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Net Cash Used in Investing Activities             |                                                                             |   | (72,697          | )       |      |   | (27,863   | )       
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Cash flows from Financing Activities:             |                                                                             |   |                  |         |      |   |           |         
|                                                  | Exercise of Warrants                                                        |   |                  |        |      |   |           | 1,000    |  
|                                                  | Repayment of Related Party Payable                                          |   |                  |        |      |   |           | (225,000 | )
|                                                  | Repayment of Notes Payable                                                  |   |                  |        |      |   |           | (241     | )
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Net Cash Provided by Financing Activities         |                                                                             |   |                 |         |      |   | (224,241  | )       
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Increase (Decrease) in Cash and Cash Equivalents  |                                                                             |   | 97,547           |         |      |   | (523,369  | )       
|Cash and Cash Equivalents, Beginning of Period    |                                                                             |   | 869,478          |         |      |   | 1,467,988 |         
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Cash and Cash Equivalents, End of Period          |                                                                             | $ | 967,025          |         |      | $ | 944,619   |         
|                                                  |                                                                             |   |                  |         |      |   |           |         
|Supplemental Disclosure of Cash Flow Information: |                                                                             |   |                  |         |      |   |           |         
|                                                  | Cash paid during the period for:                                            |   |                  |         |      |   |           |          |  
|                                                  | Interest                                                                    |   | $                | 5,625   |      |   | $         | 16,550   |  
|                                                  | Income Taxes                                                                |   |                  | 2,400   |      |   |           |         |  
|                                                  |                                                                             |   |                  |         |      |   |           |         

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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, 2001        |  |                             | 87,967 |               |  | $      | 880 |           |  |                 | 47,406,939 |         |  | $          | 474,070 |             |  | $             | 6,402,852 |  |  | $ | (45,466,234 | ) |  |   | 1,411,568 | 
|Issuance of Preferred Shares, Net |  |                             |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |          |  |  |   |            |   |  |   |          | 
|Options Exercised                 |  |                             |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |          |  |  |   |            |   |  |   |          | 
|Warrants Exercised                |  |                             |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |          |  |  |   |            |   |  |   |          | 
|Options Issued for Services       |  |                             |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |          |  |  |   |            |   |  |   |          | 
|Conv. of Pref. Shares, net        |  |                             |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |          |  |  |   |            |   |  |   |          | 
|Net Income                        |  |                             |        |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |          |  |  |   | 24,327      |   |  |   | 24,327    | 
|                                  |  |                             |        |               |  |        |     |           |  |                 |            |         |  |            |         |             |  |               |           |  |  |   |             |   |  |   |           | 
|Balance, June 30, 2002            |  |                             | 87,967 |               |  | $      | 880 |           |  |                 | 47,406,939 |         |  | $          | 474,070 |             |  | $             | 6,402,852 |  |  | $ | (45,441,907 | ) |  | $ | 1,435,895 | 
|                                  |  |                             |        |               |  |        |     |           |  |                 |            |         |  |            |         |             |  |               |           |  |  |   |             |   |  |   |           | 

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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 scalable, 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 six-month periods ended
June 30, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002. Accordingly, your attention
is directed to footnote disclosures found in the December 31, 2001 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.

Intangible Assets

Intangible Assets consist primarily of patents.
Cost directly attributable to patents, consisting primarily of legal
and filing fees, are capitalized and amortized over the remaining
life of the patent (which range from 4 to 16 years) using the
straight-line method. In accordance with SFAS 142,
Goodwill and Other Intangible Assets, only intangible
assets with definite lives are amortized. Non-amortized intangible
assets are instead subject to annual impairment testing.

Intangible assets consist of the following:

|        |  |               |         |              |  |            |         |         |  |         |         |  |  |          |    | 
|------- |  | ------------- | ------- | ------------ |  | ---------- | ------- | ------- |  | ------- | ------- |  |  | -------- | -- | 
|        |  | June 30, 2002
|        |  |              
|        |  |               |         |              |  |            |         |         |  |         |         |  |  | Weighted
|        |  | Gross         |         |              |  |            |         | Net     |  | Average
|        |  | Intangible    |         | Accumulated  |  | Intangible |         | Life   
|        |  | Assets        |         | Amortization |  | Assets     |         | (Years)
|        |  |               |         |              |  |            |         |        
|Patents |  | $             | 424,831 |              |  | $          | 215,777 |         |  | $       | 209,054 |  |  |          | 12 | 
|Other   |  |               | 40,914  |              |  |            | 16,707  |         |  |         | 24,207  |  |  |          | 5  | 
|        |  |               |         |              |  |            |         |         |  |         |         |  |  |          |    | 
|Total   |  | $             | 465,745 |              |  | $          | 232,484 |         |  | $       | 233,261 |  |  |          |    | 
|        |  |               |         |              |  |            |         |         |  |         |         |  |  |          |    | 

|        |  |                   |         |              |  |            |         |         |  |         |         |  |  |          |    | 
|------- |  | ----------------- | ------- | ------------ |  | ---------- | ------- | ------- |  | ------- | ------- |  |  | -------- | -- | 
|        |  | December 31, 2001
|        |  |                  
|        |  |                   |         |              |  |            |         |         |  |         |         |  |  | Weighted
|        |  | Gross             |         |              |  |            |         | Net     |  | Average
|        |  | Intangible        |         | Accumulated  |  | Intangible |         | Life   
|        |  | Assets            |         | Amortization |  | Assets     |         | (Years)
|        |  |                   |         |              |  |            |         |        
|Patents |  | $                 | 424,736 |              |  | $          | 197,953 |         |  | $       | 226,783 |  |  |          | 12 | 
|Other   |  |                   | 40,914  |              |  |            | 11,971  |         |  |         | 28,943  |  |  |          | 5  | 
|        |  |                   |         |              |  |            |         |         |  |         |         |  |  |          |    | 
|Total   |  | $                 | 465,650 |              |  | $          | 209,924 |         |  | $       | 255,726 |  |  |          |    | 
|        |  |                   |         |              |  |            |         |         |  |         |         |  |  |          |    | 

Estimated amortization expense for each of the next five years ended
December 31, is as follows:

|                 |  |   |         | 
|---------------- |  | - | ------- | 
|2002 (12 months) |  | $ | 45,000  | 
|2003             |  |   | 48,000  | 
|2004             |  |   | 41,000  | 
|2005             |  |   | 23,000  | 
|2006             |  |   | 14,000  | 
|                 |  |   |         | 
|Total            |  | $ | 171,000 | 
|                 |  |   |         | 

Research and Development Expenditures

We expense research and development expenditures as incurred.

(3) INCOME (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of
the entity. The following table presents contingently issuable
shares, options and warrants to purchase shares of common stock that were
outstanding during the six month periods ended June 30, 2002 and 2001 which
were not included in the computation of diluted loss per share because the
impact would have been antidilutive or less than $0.01 per share:

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|         |  |      |           |      |  |  |           | 
|-------- |  | ---- | --------- | ---- |  |  | --------- | 
|         |  | 2002 |           | 2001
|         |  |      |           |     
|Options  |  |      | 2,510,000 |      |  |  | 3,122,300 | 
|Warrants |  |      | 2,100,000 |      |  |  | 2,215,000 | 
|         |  |      |           |      |  |  |           | 
|         |  |      | 4,610,000 |      |  |  | 5,337,300 | 
|         |  |      |           |      |  |  |           | 

During the six months ended June 30, 2002, 800,000 options were granted to officers and board members and 162,299 options had expired.

(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 six-month periods ended June 30, 2002 and 2001. As a result,
comprehensive (loss) income is the same as the net income for the six-month
periods ended June 30, 2002 and 2001.

(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 June 30, 2002, 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
four major customers. The following customers comprised greater than 10% of
total revenues during the six months ended June 30, 2002 and 2001:

|           |  |      |    |      |  |  |    |  
|---------- |  | ---- | -- | ---- |  |  | -- | -
|           |  | 2002 |    | 2001
|           |  |      |    |     
|Customer A |  |      | 36 | %    |  |  | 41 | %
|Customer B |  |      | 21 | %    |  |  | 36 | %
|Customer C |  |      | 7  | %    |  |  | 15 | %
|Customer D |  |      | 10 | %    |  |  | 0  | %

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##### Table of Contents



(7) CONTINGENCIES

Legal

In connection with the downsizing of the Company in 1998, a number of
employees were terminated and have filed, on various dates, employment and
compensation related claims with California State labor authorities, all but
two of which claims have been settled. Two former officers and employees of MDT
initiated proceedings before the Labor Commissioner in 2000 seeking amounts
allegedly due (aggregating approximately $800,000) 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 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. These
employees, however, have filed for personal bankruptcy and as a result, the
claims became inactive. At December 2001, bankruptcy for one such employee had
been dismissed and that proceeding could be reactivated. Should further action be taken by the ex-employees in this matter, management does not believe that the final result would have a material impact on its financial condition.

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

(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 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) 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.
There have been no material operating or terminating expenses of MDT
since 1998.

(10) 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

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated statements, which have been
prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. In consultation with
our Board of Directors and Audit Committee, we have identified three
accounting policies that we believe are key to an understanding of our
financial statements. These are important accounting policies that require
managements most difficult, subjective judgments.

The first critical accounting policy relates to revenue recognition.
We recognize revenue from product sales upon shipment to the customer.
License revenues are recognized when earned, in accordance with the
contractual provisions. Royalty revenues are recognized upon shipment of
products incorporating the related technology by the original equipment
manufacturers (OEMs) and foundries.

The second critical accounting policy relates to research and
development expenses. We expense all research and development expenses as
incurred. Costs incurred to establish the technological feasibility of our
algorithms (which is the primary component of our licensing) is
expensed as incurred and included in Research and Development expenses. Such
algorithms are refined based on customer requirements and licensed for
inclusion in the customers specific product. There are no production
costs
to capitalize as defined in Statement on Financial Accounting Standards
No. 86.

The third critical accounting policy relates to intangible assets. Our
intangible assets consist primarily of patents. We capitalize all
costs directly attributable to patents, consisting primarily of legal and
filing fees, and amortize such costs over the remaining life of the
patent (which range from 4 to 16 years) using the straight-line method. In
accordance with SFAS 142, Goodwill and Other Intangible Assets, only
intangible assets with definite lives are amortized. Non-amortized
intangible assets are instead subject to annual impairment testing.

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. The Companys actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements.

Revenues

Revenue decreased to $471,000 in the three months ended June 30, 2002 from
$486,000 in the comparable period last year, a decrease of 3%. Revenue in the
six-months ended June 30, 2002 decreased to $911,000 from $912,000 in the
comparable period last year. Revenues in 2002 were approximately flat on a
three and six month basis, as compared to the comparable periods in 2001. This
reflects the addition and ramp up from announced new accounts, offset by the
loss of a medium sized account in the second half of 2001. Further, we did not
have the effect of the royalty reporting transition which negatively impacted
our royalty estimates in the second quarter of 2001.

Gross Profit

Gross profit decreased to $431,000 (92% of revenue) in the three months
ended June 30, 2002 from $445,000 (92% of revenue) in the comparable period
last year, a decrease of 3%. Gross profit for the six-months ended June 30,
2002 was flat at $843,000 (92% of revenue) compared to $843,000 (92% of
revenue) in the comparable period last year.

Operating Expenses

Operating expenses decreased to $428,000 (91% of revenue) in the three
months ended June 30, 2002 from $546,000 (112% of revenue) in the comparable
period last year, a decrease of 22%. Operating expenses in the six-months ended
June 30, 2002 decreased to $817,000 (89% of revenue) from $948,000 (104% of
revenue) in the comparable period last year, a decrease of 14%. The decrease in
operating expenses for the three and six-months ended June 30, 2002 result
primarily from high research and development expenses in Q2 2001, which were
unusually high. At that time, we reported that we had stepped up our
engineering effort and our use of outside consultants to move several projects
closer to completion. These projects were completed in 2001 and research and
development have returned to normalized levels over the past several quarters.

General and Administrative

General and administrative expenses increased to $183,000 (39% of
revenue) in the three months ended June 30, 2002 from $207,000 (43% of
revenue) in the comparable period last year, an decrease of 12%. General and
administrative expenses decreased to $318,000 (35% of revenue) in the
six-months ended June 30, 2002 from $358,000 (35% of revenue) in the
comparable period last year, a decrease of 12%. The decrease in general and
administrative expense result from the discontinuation of use of an outside
investor relations consultant in May 2001.

Research and Development

Research and Development expenses decreased to $119,000 (46% of revenue)
in the three months ended June 30, 2002 from $223,000 (25% of revenue) in
the comparable period last year, a decrease of 47%. Research and Development
expenses decreased to $243,000 (27% of revenue) in the six-months ended June
30, 2002 from $361,000 (40% of revenue) in the comparable period last year, a
decrease of 33%. The decrease in research and development in the three and
six month periods result from the expansion of the audio engineering staff
and increased use of consultants to complete specialized projects during the
second quarter of 2001.

Research and Development activities comprised the Companys continued
efforts to identify, validate, and develop new products at Desper Products
Inc. Specific engineering efforts were directed toward productizing new
audio enhancement technology, including Spatializer PCE and Spatializer
Natural Headphone, porting support of Spatializer N-2-2 Ultra to current
and potential licensees during the quarter, development of products to
support the Companys Internet applications initiative, and support for the
recent Cirrus Logic and Texas Instruments and unannounced collaborations.

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Sales and Marketing

Sales and marketing expenses increased to $126,000 (27% of revenue) in
the three months ended June 30, 2002 from $115,000 (24% of revenue) in the
comparable period last year, an increase of 10%. Sales and marketing expenses
increased to $256,000 (28% of revenue) in the six-months ended June 30, 2002
from $229,000 (25% of revenue) in the comparable period last year, an
increase of 12%. The increase is attributed to expanded sales travel and
administrative staff.

Other Income and Expense

Income and other expense consists primarily of interest earned on
short-term investments and interest paid on related party debt. Other Income
and expense decreased to $267 from $3,707 in the prior year
comparable period. Other income and expense in the six months ended June 30,
2002 decreased to $944 from $13,082 in the comparable period last year. The
decrease is due to somewhat lower cash investments combined with significantly
lower interest rates. Further, we paid off $225,000 in term loans to Related
Parties in May, 2001.

Net Income (Loss)

Net income increased to $3,000 (1% of revenues), $0.00 per share, in the
three months ended June 30, 2002 from net loss of ($98,000) (-20% of
revenues), $0.00 per share in the comparable period last year. Net income
increased to $24,000 (0% of revenue), $0.00 per share, in the six-months
ended June 30, 2002 from net loss of $92,000 (-10% of revenue), $0.01 per
share in the comparable period last year. The increased net income for the
three and six month periods are primarily the result of the decrease in
operating expenses.

Liquidity and Capital Resources

At June 30, 2002, the Company had $967,000 in cash and cash equivalents
as compared to $869,000 at December 31, 2001. The increase in cash and cash
equivalents is derived from general operating activities. The Company had
working capital of $1,106,000 at June 30, 2002 as compared with a working
capital of $1,103,000 at December 31, 2001. The Companys future cash flows
are expected to come primarily from audio signal processing licensing,
Foundry and Original Equipment Manufacturers (OEM) royalties, debt
issuances, common and/or preferred stock issuances including warrant and
option exercises or through venture and/or strategic investors.

Like other operating enterprises, the events of September 11, 2001 in the
United States brought a degree of uncertainty to our operations and hindered
our ability to plan and meet with our contractual partners outside the United
States in this dynamic environment. The operations of our business, and those
of our competitors, may also be impacted by the continued trend in the
semiconductor industry to offer free, but minimal audio solutions to certain
product classes to maintain and attract market share. This challenges our
ability to convert business opportunities to licensing agreements in those
segments that allow us to maintain or rapidly increase revenue. As a result,
the Company must develop and license its products and software solutions in a
market that treats some audio products, including those of our competitors, on
a commodity basis in those cases where the OEM product is considered a
commodity product. While our software applications deliver what we and most
manufacturers who listen to it believe is a significantly superior audio
experience, the competitive market forces that pressure manufacturers to reduce
their costs may create some resistance to new technology adoption or use. In
addition, certain of our competitors appear to be pursuing a business plan that
disregards commercially reasonable pricing to achieve a larger market
penetration even if the penetration will not provide for viable margins or
returns. The Company has responded by offering additional products targeted to
each price/quality segment of the market and continues to aggressively pursue
new opportunities in emerging product categories and complements to our
existing core business. In addition, our products have been positioned as a
means for manufacturers to save money while delivering an enhanced audio
experience. Nevertheless, these market conditions and competitive forces make
it more challenging for the Company, and its rational commercial competitors,
to enhance their operating results.

We have a related party obligation of $112,500, which is due upon demand.
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 on December 31, 2001.

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 there
from not converted into cash, are

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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.

We have $75,000 in Net Liabilities of Discontinued Operation which
represents primarily accrued legal fees and is estimated to be sufficient
to pay such fees to address outstanding claims. We do not expect the
final liability to be in excess of this balance.

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

To the extent the Company maintains or exceeds its projected revenues
and is not required to fund significant contingencies, it expects to
continue to retain its current cash reserves and therefore, maintain its
liquidity position at a consistent level both on a short-term and
long-term basis. To the extent that the Company does not achieve current
operating levels or is required to fund contingencies, it will be required
to use some of its cash reserves and this could impact its longer term
liquidity.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

In connection with the downsizing of the Company in 1998, a number of
employees were terminated and have filed, on various dates, employment and
compensation related claims with California State labor authorities, all but
two of which claims have been settled. Two former officers and employees of MDT
initiated proceedings before the Labor Commissioner in 2000 seeking amounts
allegedly due (aggregating approximately $800,000) 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 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. These
employees, however, have filed for personal bankruptcy and as a result, the
claims became inactive. At December 2001, bankruptcy for one such employee had
been dismissed and that proceeding could be reactivated. Should further action be taken by the ex-employees in this matter, management does not believe that the final result would have a material impact on its financial condition.

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




ITEM 2. CHANGES IN SECURITIES

None




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None




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

(a)  On June 14, 2002 the Registrant held its Annual Meeting of Shareholders.

(b)  Proxies for the meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934. There was no solicitation in opposition to
managements nominees as listed in the Proxy Statement and all of such nominees
were elected.

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(c)  At the meeting, the following persons were elected by the vote
indicated as directors to serve until the next Annual Meeting of Shareholders
and their successors are duly elected and qualified:

|              |  |          |            |          |  |  |           | 
|------------- |  | -------- | ---------- | -------- |  |  | --------- | 
|Name          |  | Vote For |            | Withheld
|              |  |          |            |         
|Carlo Civelli |  |          | 28,570,112 |          |  |  | 1,362,957 | 




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: August 12, 2001





| | SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)
| | -------------------------------------------------





| | /s/ HENRY R. MANDELL
| | --------------------

| | 
| | 

| | HENRY R. MANDELL
| | ----------------

| | Chief Executive Officer
| | -----------------------

| | Chief Financial Officer
| | -----------------------

13