##### Table of Contents



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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: June 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
incorporation or organization) | (IRS Employer
Identification No.)

20700 VENTURA BOULEVARD, SUITE 140
WOODLAND HILLS, CALIFORNIA 91364-2357

(Address of principal executive 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  [X] |  | NO  [   ]

As of July 25, 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 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    
|                              | 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 I.  FINANCIAL STATEMENTS







SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |             |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ----------- | ------------ | - | --------- | ----------- | -
|                                           |                                                                                                                                                                                                           |   | June 30,    |             | December 31,
|                                           |                                                                                                                                                                                                           |   | 2001        |             | 2000        
|                                           |                                                                                                                                                                                                           |   |             |             |             
|                                           |                                                                                                                                                                                                           |   | (unaudited) |             |              |   |          
|Current Assets:                            |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|                                          
|                                          
|                                          
|                                          
|                                           | Cash and Cash Equivalents                                                                                                                                                                                 |   | $           | 944,619     |              |   | $         | 1,467,988   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts Receivable, net                                                                                                                                                                                  |   |             | 530,000     |              |   |           | 506,558     |  
|                                          
|                                          
|                                          
|                                          
|                                           | Prepaid and Deposits                                                                                                                                                                                      |   |             | 89,543      |              |   |           | 26,458      |  
|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|Total Current Assets                       |                                                                                                                                                                                                           |   | 1,564,162   |             |              |   | 2,001,004 |            
|                                          
|                                          
|                                          
|                                          
|Property and Equipment, net                |                                                                                                                                                                                                           |   | 89,586      |             |              |   | 108,061   |            
|                                          
|                                          
|                                          
|                                          
|Intangible Assets, Net                     |                                                                                                                                                                                                           |   | 304,692     |             |              |   | 302,789   |            
|                                          
|                                          
|                                          
|                                          
|Other Assets                               |                                                                                                                                                                                                           |   | 17,087      |             |              |   | 45,170    |            
|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|Total Assets                               |                                                                                                                                                                                                           | $ | 1,975,527   |             |              | $ | 2,457,024 |            
|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|LIABILITIES
AND SHAREHOLDERS EQUITY      
|                                          
|                                          
|                                          
|                                          
|Current Liabilities:                       |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|                                          
|                                          
|                                          
|                                          
|                                           | Notes Payable                                                                                                                                                                                             |   |             |            |              |   |           |            |  
|                                          
|                                          
|                                          
|                                          
|                                           | Notes Payable to Related Parties                                                                                                                                                                          |   |             | 112,500     |              |   |           | 337,742     |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts Payable                                                                                                                                                                                          |   |             | 18,851      |              |   |           | 51,782      |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued Wages and Benefits                                                                                                                                                                                |   |             | 50,432      |              |   |           | 61,390      |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued Expenses and Taxes                                                                                                                                                                                |   |             | 52,686      |              |   |           | 99,595      |  
|                                          
|                                          
|                                          
|                                          
|                                           | Net Liabilities of Discontinued Operation                                                                                                                                                                 |   |             | 181,358     |              |   |           | 255,840     |  
|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|Total Current Liabilities                  |                                                                                                                                                                                                           |   | 415,827     |             |              |   | 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 June 30, 2001
and December 31, 2000, respectively |   |             | 880         |              |   |           | 1,030       |  
|                                          
|                                          
|                                          
|                                          
|                                           | Common shares, $.01 par value, 50,000,000 shares
authorized, 47,406,939 and 47,087,971 shares
issued and outstanding at June 30, 2001 and
December 31, 2000, respectively                                 |   |             | 474,070     |              |   |           | 470,880     |  
|                                          
|                                          
|                                          
|                                          
|                                           | Additional Paid-In Capital                                                                                                                                                                                |   |             | 46,402,852  |              |   |           | 46,404,892  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accumulated Deficit                                                                                                                                                                                       |   |             | (45,318,102 | )            |   |           | (45,226,127 | )
|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|Total
Shareholders Equity                 |                                                                                                                                                                                                           |   | 1,559,700   |             |              |   | 1,650,675 |            
|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |            
|Total Liabilities and Shareholders Equity |                                                                                                                                                                                                           | $ | 1,975,527   |             |              | $ | 2,457,024 |            
|                                           |                                                                                                                                                                                                           |   |             |             |              |   |           |            

2



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##### Table of Contents









SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIESCONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)

|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |           | 
|--------------------------------------- | ---------------------------- | - | -------------------------------- | ------- | ------------------------------ | - | ---------- | ------- | -------- | - | ---------- | ------- |  | - | ---------- | --------- | 
|                                        |                              |   | For the Three Month Period Ended |         | For the Six Month Period Ended
|                                        |                              |   |                                  |         |                               
|                                        |                              |   | June 30,                         |         | June 30,                       |   | June 30,   |         | June 30,
|                                        |                              |   | 2001                             |         | 2000                           |   | 2001       |         | 2000    
|                                        |                              |   |                                  |         |                                |   |            |         |         
|Revenues:                               |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|                                       
|                                       
|                                       
|                                       
|                                        | License Revenues             |   | $                                |        |                                |   | $          |        |          |   | $          |        |  |   | $          |          | 
|                                       
|                                       
|                                       
|                                       
|                                        | Royalty Revenues             |   |                                  | 485,893 |                                |   |            | 530,050 |          |   |            | 911,974 |  |   |            | 1,035,700 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Product Development Revenues |   |                                  |        |                                |   |            |        |          |   |            |        |  |   |            |          | 
|                                       
|                                       
|                                       
|                                       
|                                        | Product Revenues             |   |                                  |        |                                |   |            |        |          |   |            |        |  |   |            |          | 
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|                                        |                              |   | 485,893                          |         |                                |   | 530,050    |         |          |   | 911,974    |         |  |   | 1,035,700  |          
|                                       
|                                       
|                                       
|                                       
|Cost of Revenues                        |                              |   | 41,090                           |         |                                |   | 65,589     |         |          |   | 68,590     |         |  |   | 98,066     |          
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|Gross Profit                            |                              |   | 444,803                          |         |                                |   | 464,461    |         |          |   | 843,384    |         |  |   | 937,634    |          
|                                       
|                                       
|                                       
|                                       
|Operating Expenses:                     |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|                                       
|                                       
|                                       
|                                       
|                                        | General and Administrative   |   |                                  | 207,355 |                                |   |            | 172,601 |          |   |            | 358,252 |  |   |            | 244,789   | 
|                                       
|                                       
|                                       
|                                       
|                                        | Research and Development     |   |                                  | 223,381 |                                |   |            | 88,850  |          |   |            | 360,703 |  |   |            | 202,044   | 
|                                       
|                                       
|                                       
|                                       
|                                        | Sales and Marketing          |   |                                  | 115,283 |                                |   |            | 87,151  |          |   |            | 228,986 |  |   |            | 186,686   | 
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|                                        |                              |   | 546,019                          |         |                                |   | 348,602    |         |          |   | 947,941    |         |  |   | 633,519    |          
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|Operating
Profit (Loss)                 |                              |   | (101,216                         | )       |                                |   | 115,859    |         |          |   | (104,557   | )       |  |   | 304,115    |          
|                                       
|                                       
|                                       
|                                       
|Interest Income                         |                              |   | 11,775                           |         |                                |   | 17,232     |         |          |   | 29,632     |         |  |   | 30,902     |          
|                                       
|                                       
|                                       
|                                       
|Interest Expense                        |                              |   | (8,068                           | )       |                                |   | (9,047     | )       |          |   | (16,550    | )       |  |   | (17,171    | )        
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|                                        |                              |   | 3,707                            |         |                                |   | 8,185      |         |          |   | 13,082     |         |  |   | 13,731     |          
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|Income (Loss) Before Income Taxes       |                              |   | (97,509                          | )       |                                |   | 124,044    |         |          |   | (91,475    | )       |  |   | 317,846    |          
|                                       
|                                       
|                                       
|                                       
|Income Taxes                            |                              |   |                                 |         |                                |   | (12,000    | )       |          |   | (500       | )       |  |   | (35,271    | )        
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|Net Income (Loss)                       |                              | $ | (97,509                          | )       |                                | $ | 112,044    |         |          | $ | (91,975    | )       |  | $ | 282,575    |          
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|Basic/Diluted
Earnings (Loss) Per Share |                              | $ | (0.00                            | )       |                                | $ | 0.00       |         |          | $ | (0.00      | )       |  | $ | 0.01       |          
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          
|Weighted Average Shares
Outstanding     |                              |   | 47,386,521                       |         |                                |   | 46,661,002 |         |          |   | 47,326,691 |         |  |   | 46,518,032 |          
|                                        |                              |   |                                  |         |                                |   |            |         |          |   |            |         |  |   |            |          

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##### Table of Contents









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

|                                                    |                                                                                      |   |                  |          |      |   |           |          |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------ | - | ---------------- | -------- | ---- | - | --------- | -------- | -
|                                                    |                                                                                      |   | Six Months Ended
|                                                    |                                                                                      |   | June 30,        
|                                                    |                                                                                      |   |                 
|                                                    |                                                                                      |   | 2001             |          | 2000
|                                                    |                                                                                      |   |                  |          |     
|Cash flows from operating activities:               |                                                                                      |   |                  |          |      |   |           |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net Income (Loss)                                                                    |   | $                | (91,975  | )    |   | $         | 282,575  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Adjustments
to reconcile net (loss) income to net cash
used in operating activities: |   |                  |          |      |   |           |          |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Depreciation and Amortization                                                        |   |                  | 44,435   |      |   |           | 42,229   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Options Issued for Services                                                          |   |                  |         |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net change in Assets and Liabilities:               |                                                                                      |   |                  |          |      |   |           |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accounts Receivable and Employee Advances                                            |   |                  | (23,442  | )    |   |           | 190,736  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Inventory                                                                            |   |                  |         |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Prepaid Expenses and Deposits                                                        |   |                  | (35,002  | )    |   |           | (36,850  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Deferred Transaction Costs                                                           |   |                  |         |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accounts Payable                                                                     |   |                  | (32,931  | )    |   |           | (200,486 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Deferred Revenue                                                                     |   |                  |         |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Changes in Discontinued Operation                                                    |   |                  | (74,482  | )    |   |           | (82,541  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accrued Liabilities                                                                  |   |                  | (57,868  | )    |   |           | (109,153 | )
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Net
Cash (Used In) Provided by Operating Activities |                                                                                      |   | (271,265         | )        |      |   | 86,510    |         
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Cash Flows from Investing Activities:               |                                                                                      |   |                  |          |      |   |           |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Purchase of Property and Equipment                                                   |   |                  | (5,000   | )    |   |           | (11,879  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Increase in Capitalized Patent and Technology Costs                                  |   |                  | (22,863  | )    |   |           | (15,097  | )
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Net Cash Used in Investing Activities               |                                                                                      |   | (27,863          | )        |      |   | (26,976   | )       
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Cash flows from Financing Activities:               |                                                                                      |   |                  |          |      |   |           |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Issuance of Preferred Shares, Net                                                    |   |                  |         |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Exercise of Options                                                                  |   |                  |         |      |   |           | 423,460  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Exercise of Warrants                                                                 |   |                  | 1,000    |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Issuance of Notes Payable                                                            |   |                  |         |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Repayment of Related Party Payable                                                   |   |                  | (225,000 | )    |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Repayment of Bank Line of Credit                                                     |   |                  |         |      |   |           |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Repayment of Notes Payable                                                           |   |                  | (241     | )    |   |           |         |  
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Net
Cash (Used in) Provided by Financing Activities |                                                                                      |   | (224,241         | )        |      |   | 423,460   |         
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Increase (Decrease) in Cash and Cash Equivalents    |                                                                                      |   | (523,369         | )        |      |   | 482,994   |         
|                                                   
|                                                   
|                                                   
|                                                   
|Cash and Cash Equivalents, Beginning of Period      |                                                                                      |   | 1,467,988        |          |      |   | 1,021,998 |         
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Cash and Cash Equivalents, End of Period            |                                                                                      | $ | 944,619          |          |      | $ | 1,504,992 |         
|                                                    |                                                                                      |   |                  |          |      |   |           |         
|Supplemental Disclosure of Cash Flow Information:   |                                                                                      |   |                  |          |      |   |           |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Cash paid during the period for:                                                     |   |                  |          |      |   |           |          |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Interest                                                                             |   | $                | 16,550   |      |   | $         | 16,875   |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Income Taxes                                                                         |   |                  |         |      |   |           |         |  
|                                                    |                                                                                      |   |                  |          |      |   |           |         

4



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##### Table of Contents









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     |  
|                                 
|                                 
|                                 
|                                 
|Options Issued for Services       |  |                             |        |               |  |        |      |           |  |                 |           |         |  |            |        |             |  |               |           |   |  |   |            |   |  |   |          |  
|                                 
|                                 
|                                 
|                                 
|Conv. of Pref. Shares, net        |  |                             | (15,000 | )             |  |        | (150  | )         |  |                 | 313,968    |         |  |            | 3,140   |             |  |               | (2,990     | ) |  |   |            |   |  |   |          |  
|                                 
|                                 
|                                 
|                                 
|Net
Income (Loss)                 |  |                             |         |               |  |        |      |           |  |                 |           |         |  |            |        |             |  |               |           |   |  |   | (91,975     | ) |  |   | (91,975   | )
|                                  |  |                             |         |               |  |        |       |           |  |                 |            |         |  |            |         |             |  |               |            |   |  |   |             |   |  |   |           |  
|Balance, June 30, 2001            |  |                             | 87,967  |               |  | $      | 880   |           |  |                 | 47,406,939 |         |  | $          | 474,070 |             |  | $             | 46,402,852 |   |  | $ | (45,318,102 | ) |  | $ | 1,559,700 |  
|                                  |  |                             |         |               |  |        |       |           |  |                 |            |         |  |            |         |             |  |               |            |   |  |   |             |   |  |   |           |  

5



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##### Table of Contents



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, 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 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 six month periods ended June 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:

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##### Table of Contents



|         |  |      |           |      |  |  |           | 
|-------- |  | ---- | --------- | ---- |  |  | --------- | 
|         |  | 2001 |           | 2000
|         |  |      |           |     
|Options  |  |      | 3,122,300 |      |  |  | 2,353,134 | 
|        
|        
|        
|        
|Warrants |  |      | 2,215,000 |      |  |  | 2,730,000 | 
|         |  |      |           |      |  |  |           | 
|         |  |      | 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 six-month periods ended June 30, 2001 and 2000. As a result,
comprehensive (loss) income is the same as the net income (loss) for the six-month
periods ended June 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 June 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 six months ended June 30, 2001 and 2000:

|           |  |      |    |      |  |  |    |  
|---------- |  | ---- | -- | ---- |  |  | -- | -
|           |  | 2001 |    | 2000
|           |  |      |    |     
|Customer A |  |      | 41 | %    |  |  | 39 | %
|          
|          
|          
|          
|Customer B |  |      | 36 | %    |  |  | 26 | %
|          
|          
|          
|          
|Customer C |  |      | 15 | %    |  |  | 7  | %

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##### Table of Contents



(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 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.

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 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.

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(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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##### Table of Contents









Item 2. Managements discussion and analysis of financial condition and 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. 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 $485,000 in the three months ended June 30, 2001
from $530,000 in the comparable period last year, a decrease of 8%. Revenue
in the six-months ended June 30, 2001 decreased to $912,000 from $1,036,000
in the comparable period last year, a decrease of 12%. The decrease in
revenues in the three and six month periods result primarily from (i) flat
fee royalty buy-out from a particular customer in the three and six month
periods ended June 30, 2000, for which there were no revenues from that
customer in the current periods, (ii) weakness in the sale of analog ICs by a
major account with its resulting impact on royalties and (iii) continued
weakness in PC sales worldwide and its impact on royalties from another major
account.

Gross Profit

Gross profit decreased to $445,000 (92% of revenue) in the three months
ended June 30, 2001 from $464,000 (88% of revenue) in the comparable period
last year, a decrease of 4%. Gross profit for the six-months ended June 30,
2001 decreased to $843,000 (92% of revenue) from $938,000 (91% of revenue) in
the comparable period last year, a decrease of 10%. Gross profit decreased
due to the decrease in revenue. Gross Margin percentage increased due to
efficiencies achieved as a result of realignment of the international sales
rep force.

Operating Expenses

Operating expenses increased to $546,000 (112% of revenue) in the three
months ended June 30, 2001 from $348,000 (66% of revenue) in the comparable
period last year, an increase of 57%. Operating expenses in the six-months
ended June 30, 2001 increased to $948,000 (104% of revenue) from $634,000
(61% of revenue) in the comparable period last year, an increase of 50%. The
increase in operating expenses for the three and six-months ended June 30,
2001 result primarily from (i) an expansion of our research and development
activities and staff and (ii) investor relations expense which we did not
incur in most of the second quarter 2000. It must be noted as a point of
reference that our operating expenses in the first six-months of 2000
reflected a ramp up of basic operations and were not indicative of the
operating structure necessary to support a proactive and effective business
effort.

General and Administrative

General and administrative expenses increased to $207,000 (43% of
revenue) in the three months ended June 30, 2001 from $173,000 (33% of
revenue) in the comparable period last year, an increase of 20%. General and
administrative expenses increased to $358,000 (35% of revenue) in the
six-months ended June 30, 2001 from $244,789 (24% of revenue) in the
comparable period last year, an increase of 46%. The increase in general and
administrative expense result from (i) the implementation of an investor
relations program in mid-May 2000, (ii) increased legal expenses and (iii)
increased international travel.

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Research and Development

Research and Development expenses increased to $223,000 (46% of revenue)
in the three months ended June 30, 2001 from $89,000 (17% of revenue) in the
comparable period last year, an increase of 151%. Research and Development
expenses increased to $361,000 (40% of revenue) in the six-months ended June
30, 2001 from $202,000 (19% of revenue) in the comparable period last year,
an increase of 79%. The increase 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.

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, porting support of Spatializer N-2-2 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 collaborations.

Sales and Marketing

Sales and marketing expenses increased to $115,000 (24% of revenue) in
the three months ended June 30, 2001 from $87,000 (16% of revenue) in the
comparable period last year, an increase of 28%. Sales and marketing expenses
increased to $229,000 (25% of revenue) in the six-months ended June 30, 2001
from $187,000 (18% of revenue) in the comparable period last year, an
increase of 22%. The increase is attributed to expanded sales travel and
administrative staff.

Net Income (Loss)

Net loss increased to $98,000 (20% of revenues), $0.00 per share, in the
three months ended June 30, 2001 from net income of $112,000 (21% of
revenues), $0.00 per share in the comparable period last year. Net Loss
increased to $92,000 (1% of revenue), $0.00 per share, in the six-months
ended June 30, 2001 from net income of $283,000 (27% of revenue), $0.01 per
share in the comparable period last year. The increased net loss for the
three and six month periods are primarily the result of the decrease in
revenue and the increase in operating expenses.

Liquidity and Capital Resources

At June 30, 2001, the Company had $945,000 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 cash used to retire notes payable to related
parties, patent protection, legal fees in connection with MDT litigation and
for general operating activities. The Company had working capital of
$1,148,000 at June 30, 2001 as compared with a working capital of $1,195,000
at December 31, 2000. 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.

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 June 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.

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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.

12



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##### Table of Contents









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.

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

(a)  On May 25, 2001 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 | 
|                 |  |          |            |          | 
|James D. Pace    |  |          | 29,844,470 |          |  |  | 210,600 |  | 
|                
|                
|                
|                
|Gilbert N. Segel |  |          | 29,849,470 |          |  |  | 205,600 | 







ITEM 5.  OTHER INFORMATION

None







ITEM 6.  EXHIBITS AND REPORTS ON FORM 8K

None

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##### Table of Contents









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 13, 2001 |                                                                                     
|                       
|                        | SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)                                   
|                       
|                        | /s/  HENRY R. MANDELLHENRY R. MANDELLChief Executive Officer
Chief Financial Officer

15