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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)                       
|                                  |  |                                                                                        
|þ                                 |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|                                  |  |                                                                                        
|                                  |  | For the period ended: June 30, 2003                                                    
|                                  |  |                                                                                        
|OR                               
|                                  |  |                                                                                        
|o                                 |  | Transition report pursuant to Section 13 or 15(d) of the Exchange Act of 1934          
|                                  |  |                                                                                        
|Commission File Number: 000-26460

SPATIALIZER AUDIO LABORATORIES, INC.

(Name of Registrant as Specified in its Charter)

|                                |  |                    
|------------------------------- |  | -------------------
|DELAWARE                        |  | 95-4484725         
|(State or Other Jurisdiction of |  | (IRS Employer      
|Incorporation or Organization)  |  | Identification No.)

920 HAMPSHIRE ROAD, SUITE A-34
WESTLAKE VILLAGE, CALIFORNIA 91361

(Address of Principal Executive Offices)

900 LAFAYETTE STREET, SUITE 710
SANTA CLARA, CALIFORNIA 95050

(Address of Principal Corporate Offices)

TELEPHONE NUMBER: (408) 296-0600

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:

YESþ          NOo

As of August 6, 2003 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
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|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 8-K                                                     
|SIGNATURES                   
|EX-31.1                      
|EX-32.1                      



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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 8-K                    |                                                |  |  | 
|SIGNATURES                    |                                                             |                                                |  | 
|EXHIBITS                      |                                                             |                                                |  | 





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PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |              |             |         |       | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ----------- | ----- | ------------ | ----------- | ------- | ----- | 
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             | June 30,    |       | December 31,
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             | 2003        |       | 2002        
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |             
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             | (unaudited) |       |              |             |        
|ASSETS                                                                                                                                      
|Current Assets:                                                                                                                              |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|                                                                                                                                             | Cash and Cash Equivalents                  |                               | $                                                                                                                                                                              | 788,012     |             |       | $            | 858,725     |        
|                                                                                                                                             | Accounts Receivable                        |                               |                                                                                                                                                                                | 246,248     |             |       |              | 499,023     |        
|                                                                                                                                             | Prepaid and Deposits                       |                               |                                                                                                                                                                                | 127,490     |             |       |              | 82,920      |        
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|Total Current Assets                                                                                                                         |                                            |                               | 1,161,750                                                                                                                                                                      |             |             |       | 1,440,668    |            
|                                                                                                                                             | Property and Equipment, net                |                               |                                                                                                                                                                                | 51,642      |             |       |              | 70,842      |        
|                                                                                                                                             |                                            | Intangible Assets, Net        |                                                                                                                                                                                |             | 200,790     |       |              |             | 225,859 |      
|Other Assets                                                                                                                                 |                                            |                               |                                                                                                                                                                               |             |             |       | 8,471        |            
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|Total Assets                                                                                                                                 |                                            | $                             | 1,414,182                                                                                                                                                                      |             |             | $     | 1,745,840    |            
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                        
|Current Liabilities:                                                                                                                         |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|                                                                                                                                             | Notes Payable to Related Parties           |                               |                                                                                                                                                                                | 112,500     |             |       |              | 112,500     |        
|                                                                                                                                             | Note Payable                               |                               |                                                                                                                                                                                | 54,992      |             |       |              |            |        
|                                                                                                                                             | Accrued Wages and Benefits                 |                               |                                                                                                                                                                                | 41,328      |             |       |              | 108,771     |        
|                                                                                                                                             | Accrued Expenses and Taxes                 |                               |                                                                                                                                                                                | 62,412      |             |       |              | 94,709      |        
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|                                                                                                                                             |                                            | Total Current Liabilities     |                                                                                                                                                                                |             | 271,232     |       |              |             | 315,980 |      
|                                                                                                                                             |                                            | Commitments and Contingencies |                                                                                                                                                                                |             |             |       |              |             |         |      
|                                                                                                                                             |                                            |                               | Series B-1, Redeemable Convertible Preferred shares, $.01 par
value, 1,000,000 shares authorized, 102,762
shares issued and outstanding at June 30, 2003
and December 31, 2002 |             |             | 1,028 |              |             |         | 1,028 | 
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|Shareholders Equity:                                                                                                                        |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|Common shares, $.01 par value, 65,000,000 shares authorized,
47,406,939 shares issued and outstanding at June 30,
2003 and December 31, 2002 |                                            |                               | 474,070                                                                                                                                                                        |             |             |       | 474,070      |            
|                                                                                                                                             | Additional Paid-In Capital                 |                               |                                                                                                                                                                                | 46,402,704  |             |       |              | 46,402,704  |        
|                                                                                                                                             | Accumulated Deficit                        |                               |                                                                                                                                                                                | (45,734,852 | )           |       |              | (45,447,942 | )      
|                                                                                                                                             | Total Shareholders Equity                 |                               |                                                                                                                                                                                | 1,141,922   |             |       |              | 1,428,832   |        
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |              |            
|                                                                                                                                             | Total Liabilities and Shareholders Equity |                               | $                                                                                                                                                                              | 1,414,182   |             |       | $            | 1,745,840   |        
|                                                                                                                                             |                                            |                               |                                                                                                                                                                                |             |             |       |              |            

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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,  
|                                        |                                   |                  |                              |          | 2003                             |         | 2002                           |       | 2003     |         | 2002      
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |           
|Revenues:                               |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |       
|                                        |                                   |                  | Royalty and Product
Revenues |          |                                  | 250,902 |                                |       |          | 470,631 |            |          |        | 583,280 |            |        |        | 911,112 | 
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|                                        |                                   |                  | 250,902                      |          |                                  |         | 470,631                        |       |          |         | 583,280    |          |        |         | 911,112    |       
|Cost of Revenues                        |                                   |                  | 22,497                       |          |                                  |         | 39,719                         |       |          |         | 58,439     |          |        |         | 67,921     |       
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|Gross Profit                            |                                   |                  | 228,405                      |          |                                  |         | 430,912                        |       |          |         | 524,841    |          |        |         | 843,191    |       
|Operating Expenses:                     |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |       
|                                        |                                   |                  | General and
Administrative   |          |                                  | 236,135 |                                |       |          | 182,710 |            |          |        | 392,537 |            |        |        | 318,044 | 
|                                        |                                   |                  | Research and
Development     |          |                                  | 102,141 |                                |       |          | 119,437 |            |          |        | 211,144 |            |        |        | 243,040 | 
|                                        |                                   |                  | Sales and Marketing          |          |                                  | 99,553  |                                |       |          | 125,986 |            |          |        | 201,692 |            |        |        | 256,325 | 
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|                                        |                                   |                  | 437,829                      |          |                                  |         | 428,133                        |       |          |         | 805,373    |          |        |         | 817,409    |       
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|                                        | Operating Profit (Loss)           |                  |                              | (209,424 | )                                |         |                                | 2,779 |          |         |            | (280,532 | )      |         |            | 25,782 |       
|                                        |                                   | Interest Income  |                              |          | 1,972                            |         |                                |       | 3,079    |         |            |          | 4,464  |         |            |        | 6,569  |        
|                                        |                                   | Interest Expense |                              |          | (5,009                           | )       |                                |       | (2,812   | )       |            |          | (7,822 | )       |            |        | (5,624 | )      
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|                                        |                                   |                  | (3,037                       | )        |                                  |         | 267                            |       |          |         | (3,358     | )        |        |         | 945        |       
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|                                        | Income (Loss) Before Income Taxes |                  |                              | (212,461 | )                                |         |                                | 3,046 |          |         |            | (283,890 | )      |         |            | 26,727 |       
|                                        | Income Taxes                      |                  |                              |         |                                  |         |                                |      |          |         |            | (3,020   | )      |         |            | (2,400 | )     
|                                        | Net Income (Loss)                 |                  | $                            | (212,461 | )                                |         | $                              | 3,046 |          |         | $          | (286,910 | )      |         | $          | 24,327 |       
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|Basic/Diluted Earnings (Loss) Per
Share |                                   | $                | (0.00                        | )        |                                  | $       | 0.00                           |       |          | $       | (0.01      | )        |        | $       | 0.00       |       
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 
|Weighted Average Shares Outstanding     |                                   |                  | 47,406,939                   |          |                                  |         | 47,406,939                     |       |          |         | 47,406,939 |          |        |         | 47,406,939 |       
|                                        |                                   |                  |                              |          |                                  |         |                                |       |          |         |            |          |        |         |            |        |        |         | 

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                    |                                                                                                    |   |                  |          |      |   |         |         |  
|--------------------------------------------------- | -------------------------------------------------------------------------------------------------- | - | ---------------- | -------- | ---- | - | ------- | ------- | -
|                                                    |                                                                                                    |   | Six Months Ended
|                                                    |                                                                                                    |   | June 30,        
|                                                    |                                                                                                    |   |                 
|                                                    |                                                                                                    |   | 2003             |          | 2002
|                                                    |                                                                                                    |   |                  |          |     
|Cash Flows from Operating Activities:               |                                                                                                    |   |                  |          |      |   |         |        
|                                                    | Net Income (Loss)                                                                                  |   | $                | (286,910 | )    |   | $       | 24,327  |  
|                                                    | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |   |                  |          |      |   |         |         |  
|                                                    | Depreciation and Amortization                                                                      |   |                  | 47,069   |      |   |         | 48,803  |  
|Net Change in Assets and Liabilities:               |                                                                                                    |   |                  |          |      |   |         |        
|                                                    | Accounts Receivable and Employee Advances                                                          |   |                  | 252,775  |      |   |         | (14,856 | )
|                                                    | Prepaid Expenses and Deposits                                                                      |   |                  | (36,099  | )    |   |         | 84,447  |  
|                                                    | Changes in Discontinued Operation                                                                  |   |                  |         |      |   |         | (25,155 | )
|                                                    | Accrued
Expenses                                                                                   |   |                  | (99,740  | )    |   |         | 52,678  |  
|                                                    |                                                                                                    |   |                  |          |      |   |         |        
|Net Cash Provided By (Used In) Operating Activities |                                                                                                    |   | (67,913          | )        |      |   | 170,244 |        
|                                                    |                                                                                                    |   |                  |          |      |   |         |        
|Cash Flows from Investing Activities:               |                                                                                                    |   |                  |          |      |   |         |        
|                                                    | Purchase/Disp of Property and Equipment                                                            |   |                  | (1,770   | )    |   |         | (72,602 | )
|                                                    | Increase in Capitalized Patent and Technology Costs                                                |   |                  | (1,030   | )    |   |         | (95     | )
|                                                    |                                                                                                    |   |                  |          |      |   |         |        
|Net Cash Provided By (Used in) Investing Activities |                                                                                                    |   | (2,800           | )        |      |   | (72,697 | )      
|                                                    |                                                                                                    |   |                  |          |      |   |         |        
|Cash flows from Financing Activities:               |                                                                                                    |   |                  |          |      |   |         |        
|Note
Payable                                        |                                                                                                    |   | 54,992           |          |      |   |         |        
|Net Cash Provided by Financing Activities           |                                                                                                    |   | 54,992           |          |      |   |        |        
|                                                    |                                                                                                    |   |                  |          |      |   |         |        
|Increase (Decrease) in Cash and Cash Equivalents    |                                                                                                    |   | (70,713          | )        |      |   | 97,547  |        
|Cash and Cash Equivalents, Beginning of Period      |                                                                                                    |   | 858,725          |          |      |   | 869,478 |        
|                                                    |                                                                                                    |   |                  |          |      |   |         |        
|Cash and Cash Equivalents, End of Period            |                                                                                                    | $ | 788,012          |          |      | $ | 967,025 |        
|                                                    |                                                                                                    |   |                  |          |      |   |         |        
|Supplemental Disclosure of Cash Flow Information:   |                                                                                                    |   |                  |          |      |   |         |        
|                                                    | Cash paid during the period for:                                                                   |   |                  |          |      |   |         |         |  
|                                                    | Interest                                                                                           |   | $                | 7,820    |      |   | $       | 5,625   |  
|                                                    | Income Taxes                                                                                       |   |                  | 3,020    |      |   |         | 2,400   |  
|                                                    |                                                                                                    |   |                  |          |      |   |         |        

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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(unaudited)

|                           |  |               |            |           |  |                 |         |            |  |             |            |               |  |   |             |   |  |   |           |  
|-------------------------- |  | ------------- | ---------- | --------- |  | --------------- | ------- | ---------- |  | ----------- | ---------- | ------------- |  | - | ----------- | - |  | - | --------- | -
|                           |  | Common Shares |            |           |  |                 |         |            |  |             |            |               |  |  
|                           |  |               |            |           |  |                 |         |            |  |             |            | Total        
|                           |  | Number of     |            |           |  |                 |         | Additional |  | Accumulated |            | Shareholders'
|                           |  | shares        |            | Par value |  | paid-in-capital |         | Deficit    |  | Equity     
|                           |  |               |            |           |  |                 |         |            |  |            
|Balance, December 31, 2002 |  |               | 47,406,939 |           |  | $               | 474,070 |            |  | $           | 46,402,704 |               |  | $ | (45,447,942 | ) |  | $ | 1,428,832 |  
|Net Income (Loss)          |  |               |           |           |  |                 |        |            |  |             |           |               |  |   | (74,449     | ) |  |   | (74,449   | )
|                           |  |               |            |           |  |                 |         |            |  |             |            |               |  |   |             |   |  |   |           |  
|Balance, March 31, 2003    |  |               | 47,406,939 |           |  | $               | 474,070 |            |  | $           | 46,402,704 |               |  | $ | (45,522,391 | ) |  | $ | 1,354,383 |  
|                           |  |               |            |           |  |                 |         |            |  |             |            |               |  |   |             |   |  |   |           |  
|Net Income (Loss)          |  |               |            |           |  |                 |         |            |  |             |            |               |  |   | (212,461    | ) |  |   | (212,461  | )
|                           |  |               |            |           |  |                 |         |            |  |             |            |               |  |   |             |   |  |   |           |  
|Balance, June 30, 2003     |  |               | 47,406,939 |           |  | $               | 474,070 |            |  | $           | 46,402,704 |               |  | $ | (45,734,852 | ) |  | $ | 1,141,922 |  
|                           |  |               |            |           |  |                 |         |            |  |             |            |               |  |   |             |   |  |   |           |  

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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) is
in the business of developing and licensing technology. The Company sales,
research and subsidiary administration are conducted out of facilities in Santa
Clara, California.

The Companys 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. All Company revenues are generated from this subsidiary.

The Companys wholly-owned subsidiary, MultiDisc Technologies, Inc.
(MDT), was in the business of developing scaleable, modular compact disc
(CD) and digital versatile disc (DVD) server technologies associated with a
network based CD/DVD server for internet and intranet applications. Operations
of MDT were discontinued in the fourth quarter of 1998 and the assets have been
marketed for sale (see Note 9).

(2) 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 (see Note 9). All significant
intercompany balances and transactions have been eliminated in consolidation.
Corporate administration is not allocated to subsidiaries.

Revenue Recognition The Company recognizes 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.

Concentration of Credit Risk Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash, cash equivalents and trade accounts receivable. The Company places its
temporary cash investments in certificates of deposit in excess of FDIC
insurance limits, principally at CitiBank FSB. At June 30, 2003 substantially
all cash and cash equivalents were on deposit at two financial institutions.

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At June 30, 2003, three major customers, not presented in order of
importance, each accounted for 10% or more of our total accounts receivable:
JVC, Samsung, and Orion Corporation, each of whom accounted for greater than
10% of our total 2002 accounts receivable. One OEM accounted for 36.0%, another
accounted for 34%, and another accounted for 20.0% at June 30, 2003.

The Company performs ongoing credit evaluations of its customers and
normally does not require collateral to support accounts receivable. Due to the
contractual nature of sales agreements and historical trends, no allowance for
doubtful accounts has been provided.

The Company does not apply interest charges to past due accounts
receivable.

Cash and Cash Equivalents Cash equivalents consist of highly liquid
investments with original maturities of three months or less.

Customers Outside of the U.S. Sales to foreign customers were 87% and
64% of total sales in the year to date periods ended June 30, 2003 and 2002,
respectively.

Major Customers During the quarter ended June 30, 2003, four customers
accounted for 25%, 23%, 23% and 13%, respectively, of the Companys net sales.

Research and Development Costs The Company expenses research and
development costs as incurred, which is presented as a separate line on the
statement of operations.

Property and Equipment Property and equipment are stated at cost. Major
renewals and improvements are charged to the asset accounts while replacements,
maintenance and repairs, which do not improve or extend the lives of the
respective assets, are expensed. At the time property and equipment are retired
or otherwise disposed of, the asset and related accumulated depreciation
accounts are relieved of the applicable amounts. Gains or losses from
retirements or sales are credited or charged to income. Property and equipment
are depreciated over the useful lives of the asset ranging from 3 years to 5
years under the straight line method.

Intangible Assets Intangible assets consist of patent costs and
trademarks which are amortized on a straight-line basis over the estimated
useful lives of the patents which range from five to twenty years. The weighted
average useful life of patents was approximately 12 years.

Earnings 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





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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 at June 30, 2003 and 2002 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:

|         |  |      |           |      |  |  |           | 
|-------- |  | ---- | --------- | ---- |  |  | --------- | 
|         |  | 2003 |           | 2002
|         |  |      |           |     
|Options  |  |      | 2,771,500 |      |  |  | 2,510,000 | 
|Warrants |  |      | 0         |      |  |  | 2,100,000 | 
|         |  |      |           |      |  |  |           | 
|         |  |      | 2,771,500 |      |  |  | 3,610,000 | 
|         |  |      |           |      |  |  |           | 

During the three months ended June 30, 2003, 200,000 options were granted to
officers and board members for annual board member compensation and 100,000
options had expired.

Impairment of Long-Lived Assets and Assets to be Disposed of- The Company
adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of,on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amounts of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

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. The
Company adopted SFAS 131 in December 1997. MDT is considered a discontinued
operation as of September 1998. As of June 30, 2003, the Company has only one
operating segment, DPI, the Companys Audio Signal Processing business.





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Income Taxes- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Recent Accounting Pronouncements- The FASB recently issued the following
statements: FASB 146  Accounting for Costs Associated with Exit or Disposal
Activities, FASB 147  Acquisitions of Certain Financial Institutions, FASB 148
- Accounting for Stock-Based Compensation. These FASB statements did not, or
are not expected to, have a material impact on the Companys financial position
and results of operations. FASB 149 Amendment on
Statement 133 on Derivative Instruments and FASB 150
Accounting for Certain Financial Instruments.

Use of Estimates- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

Fair Value of Financial Instruments- The fair and carrying values of cash
equivalents, accounts receivable, accounts payable, short-term debt to a
related party and accrued liabilities and those potentially subject to
valuation risk at December 31, 2002 and June 30, 2003 approximated fair value
due to their short maturity or nature.

The fair values of notes payable at December 31, 2002
and June 30, 2003 are materially consistent with the related carrying values
based on current rates offered to the Company for instruments with similar
maturities.

Discontinued Operation- In September 1998, the Board of Directors
approved a plan to refocus corporate activities on the Companys core audio
business, Desper Products, Inc. In conjunction to this strategic refocusing,
the Company permanently suspended operations of MDT and placed the business and
its related patent portfolio up for sale. The Company is accounting for the
on-going operating and termination expenses of MDT as a discontinued operation
(see Note 9).





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(3) Property and Equipment

Property and equipment, as of December 31, 2002 and June 30, 2003,
consists of the following, net of a reserve for impairment loss in 1998 in
accordance with application of SFAS 121:

|                                                    |  |               |         |                   |  |   |         | 
|--------------------------------------------------- |  | ------------- | ------- | ----------------- |  | - | ------- | 
|                                                    |  | June 30, 2003 |         | December 31, 2002
|                                                    |  |               |         |                  
|Office Computers, Software, Equipment and Furniture |  | $             | 309,744 |                   |  | $ | 307,973 | 
|Test Equipment                                      |  |               | 73,300  |                   |  |   | 73,300  | 
|Tooling Equipment                                   |  |               | 45,539  |                   |  |   | 45,539  | 
|Trade Show Booth and Demonstration Equipment        |  |               | 171,301 |                   |  |   | 171,301 | 
|Automobiles                                         |  |               | 7,000   |                   |  |   | 7,000   | 
|Leasehold Improvements                              |  |               | 0       |                   |  |   | 0       | 
|                                                    |  |               |         |                   |  |   |         | 
|Total Property and Equipment                        |  |               | 606,884 |                   |  |   | 605,113 | 
|Less Accumulated Depreciation and Amortization      |  |               | 555,242 |                   |  |   | 534,271 | 
|                                                    |  |               |         |                   |  |   |         | 
|Property and Equipment, Net                         |  | $             | 51,642  |                   |  | $ | 70,842  | 
|                                                    |  |               |         |                   |  |   |         | 

(4) Intangible Assets

Intangible
assets, as of December 31, 2002 and June 30, 2003 consist of
the following:

|                                                    |  |               |         |                   |  |   |         | 
|--------------------------------------------------- |  | ------------- | ------- | ----------------- |  | - | ------- | 
|                                                    |  | June 30, 2003 |         | December 31, 2002
|                                                    |  |               |         |                  
|Capitalized Patent, Trademarks and Technology Costs |  | $             | 487,579 |                   |  | $ | 486,549 | 
|Less Accumulated Amortization                       |  |               | 286,789 |                   |  |   | 260,690 | 
|                                                    |  |               |         |                   |  |   |         | 
|Intangible Assets, Net                              |  | $             | 200,790 |                   |  | $ | 225,859 | 
|                                                    |  |               |         |                   |  |   |         | 

Estimated amortization is as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 37,716  | 
|2004       |  | $ | 43,794  | 
|2005       |  | $ | 25,733  | 
|2006       |  | $ | 16,702  | 
|2007       |  | $ | 16,702  | 
|Thereafter |  | $ | 60,143  | 
|           |  |   |         | 
|           |  |   | 200,790 | 

(5) Notes Payable to Related Parties

The Company was indebted to the Desper Family Trust, a related party, in
the amount of $112,500 at June 30, 2003. This amount bears interest at a fixed
rate of 10% annually and is due on demand.





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(6) Shareholders Equity

During the quarter ended June 30, 2003, no shares were issued or
converted.

During the year ended December 31, 2002, shares were issued or converted
as follows:

Capitalization

Series A Preferred Stock:On December 26, 2002 the Company filed a Certificate
of Elimination with the Delaware Secretary of State stating that no shares of
the Corporations Series A Preferred Stock are outstanding and that no shares of
the Series A Preferred Stock will be issued.

Series B Preferred Stock:On December 26, 2002 the Company filed a Certificate
of Elimination with the Delaware Secretary of State stating that no shares of
the Corporations Series B Preferred Stock are outstanding and that no shares of
the Series B Preferred Stock will be issued.

Series B-1 Redeemable Convertible Preferred Stock:On November 6, 2002 the
Board of Directors Designated a Series B-1 Preferred Stock. The series has a
par value of $0.01 and a stated value of $10.00 per share US and is designated
as a liquidation preference. The stock will rank prior to the Companys common
stock. No dividends will be paid on the Series B-1 Preferred Stock. Conversion
rights exist on or after January 1, 2003 to convert the Series B-1 Preferred
Stock to common at a certain formula. At December 29, 2005 certain mandatory
conversion requirements exist subject to a certain formula. The Series B-1
Preferred Stock has no voting power. Certain restrictions on trading exist
based on date sensitive events. In December 2002, 87,967 shares of Series B-1
Preferred Stock were issued in exchange for the Series B Preferred Stock and
14,795 shares were issued in lieu of the adjusted accrued dividends on the
Series B Preferred Stock.

(7)  Escrowed Performance Shares

In December 1996, the Company accepted the terms outlined by the British
Columbia Securities Commissions (BCSC) for the release of the Companys
5,776,700 escrowed Performance Shares from Canadian Escrow into a new escrow
arrangement with the Company. The overall modification was approved by the
Companys shareholders in August 1996. Under the revised arrangement, the
performance shares were released automatically as follows: 20% on June 22,
2000; 30% on June 22, 2001; and 30% on June 22, 2002. Under the revised escrow
arrangement, the performance shares vested, provided the individual had not
voluntarily terminated his/her relationship with the Company prior to
applicable vesting dates.





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Based on the revised escrow arrangement, which primarily converted the
escrow shares release from performance criteria to a time-based criteria, the
Company recorded as compensation expense the excess of the fair market value of
the 5,776,700 performance shares on the date the Company accepted the terms of
the new escrow arrangement over the purchase price of such escrow shares.

All of the performance shares are included in the issued and outstanding
shares. As of June 30, 2003, all performance shares under the escrow
arrangement have been released.

(8) Stock Options

In 1995, the Company adopted a stock
option plan (the Plan) pursuant to which the Companys
Board of Directors may grant stock options to directors, officers and
employees. The stockholder approved Plan authorizes grants of options
to purchase authorized but unissued common stock up to 10% of total
common shares outstanding at each calendar quarter, 4,740,694 as of
June 30, 2003. Stock options are granted with an exercise price
equal to the stocks fair market value at the date of grant.
Stock options have five-year terms and vest and become fully
exercisable up to three years from the date of the grant.

At June 30, 2003, there were
2,069,194 additional shares available for grant under the Plan. The
per share weighted-average fair value of stock options granted during
the first 6 months of 2003 was $0.02 on the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield 0%, risk-free
interest rate of 1.5%, expected volatility of 30% and expected life
of 5 years.

The Company applies APB Opinion
No. 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for the fair value of its stock
options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the
Companys net income (loss) would have been increased to the pro
forma amounts indicated below:

|                         |  |      |          |      |  |   |         |   | 
|------------------------ |  | ---- | -------- | ---- |  | - | ------- | - | 
|Six
months ended June 30 |  | 2003 |          | 2002
|NET
INCOME (LOSS):       |  |      |          |      |  |   |         |  
|As
Reported              |  | $    | (286,910 | )    |  | $ | 24,327  |  
|Pro
Forma                |  | $    | (298,055 | )    |  | $ | (70,510 | )
|BASIC
AND DILUTED LOSS:  | 
|As
Reported              |  | $    | (0.01    | )    |  | $ | 0.00    |  
|Pro
Forma                |  | $    | (0.01    | )    |  | $ | (0.00   | )

Pro
forma net income (loss) reflects only options granted since
December 31, 1994. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the options vesting
period and compensation cost for options granted prior to
January 1, 1995 is not considered.

Stock option activity during the
periods indicated is as follows:

|                                         |  |        |           |                                 |  |   |       |  | 
|---------------------------------------- |  | ------ | --------- | ------------------------------- |  | - | ----- |  | 
|                                         |  | Number |           | Weighted-Average
Exercise Price
|Options
outstanding at December 31, 2002 |  |        | 2,671,500 |                                 |  | $ | 0.24  | 
|Options
granted                          |  |        | 200,000   |                                 |  | $ | 0.07  | 
|Options
Exercised                        |  |        |           |                                 |  |   |       | 
|Options
forfeited / expired              |  |        | (100,000  | )                               |  | $ | 0.125 | 
|Options
outstanding at June 30, 2003     |  |        | 2,771,500 |                                 |  | $ | 0.23  | 



At
June 30, 2003, the number of options exercisable was 2,668,332
and the weighted-average exercise price of those options was $0.24.

(9) Discontinued Operation

On September 25, 1998, the Board of Directors determined that it would be
unable to raise the necessary capital required to properly commercialize the
MDT technology. Therefore, the Company ceased funding the operations of MDT and
is actively seeking to sell the assets and technology. All employees of MDT
have been terminated and the Company has vacated the MDT facilities.

Based on this action, the Company is treating MDT as a discontinued
operation. Accordingly, the balance sheet and statement of operations of MDT
are not consolidated in the continuing operations of the Company, but rather
are disclosed as Net Liabilities of Discontinued Operation and Loss From
Discontinued Operation, respectively. At December 31, 2002, after four years of
inactivity and inability to sell the assets, the remaining balance of $71,045
was eliminated.

(10) Commitments and Contingencies

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 the California State labor authorities. All
but two of these claims have been settled. Two former officers and employees of
MDT filed labor and employment termination related claims before the Labor
Commissioner in 2000 seeking





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approximately $400,000 each which was allegedly due under each of their
respective employment agreements, which claims, if resolved in favor of the
claimants, could be material to the financial statements of the Company. The
Labor Commissioner postponed those proceedings while other litigation proceeded
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, filed for personal bankruptcy and as a
result, the state court proceeding was postponed and then dismissed primarily
because of the bankruptcies. The claims became inactive. While bankruptcy for
one employee has been dismissed the claims have not been reactivated. 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.

(11) Profit Sharing Plan

The Company has a 401(k) profit sharing plan covering substantially all
employees, subject to certain participation and vesting requirements. The
Company may elect to make discretionary contributions to the Plan, but has
never done so over the life of the Plan.





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##### Table of Contents






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

You should read the following discussion in conjunction with our unaudited
consolidated financial statements and notes included herein. The results
described below are not necessarily indicative of the results to be expected in
any future period. Certain statements in this discussion and analysis,
including statements regarding our strategy, financial performance and revenue
sources, are forward-looking statements based on current expectations and
entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in the forward-looking statements.
Readers are referred to the section entitled Certain Factors That May Affect
Future Results contained herein which identify important risk factors that
could cause actual results to differ from those contained in the forward
looking statements.

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 important in gaining 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

Revenues

Revenue decreased to $251,000 in the three months ended June 30, 2003 from
$471,000 in the comparable period last year, a decrease of 47%. Revenue in the
six-months ended June 30, 2003 decreased to $583,000 from $911,000 in the
comparable period last year. The decline in revenue resulted from the
expiration of a licensing agreement with a major computer account in January
2003 and the effects of outsourcing by our existing DVD player accounts to
manufacturers in China and other manufacturers who decline to pay for such
software or with whom we do not have licensing arrangements.





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##### Table of Contents



Gross Profit

Gross profit decreased to $228,000 (91% of revenue) in the three months
ended June 30, 2003 from $431,000 (92% of revenue) in the comparable period
last year, a decrease of 47%. Gross profit for the six-months ended June 30,
2003 declined to $525,000 (90% of revenue) compared to $843,000 (92% of
revenue) in the comparable period last year. The decline in gross profit
resulted from decreased revenue. The slight decline in gross margin reflects a
greater mix of commissionable foreign revenue due to the expiration of the
licensing agreement with a domestic computer account.

Operating Expenses

Operating expenses increased to $438,000 (175% of revenue) in the three
months ended June 30, 2002 from $428,000 (91% of revenue) in the comparable
period last year, an increase of 2%. Operating expenses in the six-months ended
June 30, 2003 decreased to $805,000 (87% of revenue) from $817,000 (89% of
revenue) in the comparable period last year, a decrease of 1%. The increase in
operating expenses for the three-months ended June 30, 2003 result primarily
from increased legal and accounting expenses arising from new stringent
requirements of the Sarbanes-Oxley Act, as well as higher insurance and public
company expenses. Current operating expense levels reflect a baseline for a
public company, regardless of fluctuations in revenue levels.

General and Administrative

General and administrative expenses increased to $236,000 (94% of revenue)
in the three months ended June 30, 2003 from $183,000 (39% of revenue) in the
comparable period last year, an increase of 27%. General and administrative
expenses decreased to $393,000 (67% of revenue) in the six-months ended June
30, 2003 from $318,000 (35% of revenue) in the comparable period last year, an
increase of 22%. The increase in general and administrative expense result
primarily from increase in public company expenses: legal, accounting, annual
meeting/proxy and insurance expenses.

Research and Development

Research and development expenses decreased to $102,000 (41% of revenue)
in the three months ended June 30, 2003 from $119,000 (46% of revenue) in the
comparable period last year, a decrease of 14%. Research and development
expenses decreased to $211,000 (36% of revenue) in the six-months ended June
30, 2003 from $243,000 (27% of revenue) in the comparable period last year, a
decrease of 13%. The decrease in research and development in the three and six
month periods result from decreased use of consultants and a greater
focus on in-house applications development.

Research and development activities comprised our 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 Audio Alchemy 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 our Internet
applications initiative and unannounced collaborations.

Sales and Marketing

Sales and marketing expenses decreased to $100,000 (40% of revenue) in the
three months ended June 30, 2002 from $126,000 (27% of revenue) in the
comparable period last year, a decrease of 21%. Sales and marketing expenses
increased to $202,000 (35% of revenue) in the six-months ended June 30, 2003
from $256,000 (28% of revenue) in the comparable period last year, a decrease
of 212%. The decrease is attributed to the conversion of a full-time support
position to part-time, at a lower pay rate.





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Other Income and Expense

Income and other expense consist primarily of interest earned on short-term
investments and interest paid on related party debt. Other iIncome and expense
decreased to ($3,037) from $267 in the prior year comparable period. Other
income and expense in the six months ended June 30, 2003 decreased to ($3,358)
from $944 in the comparable period last year. The decrease is due to somewhat
lower cash investments, lower interest rates and interest on a premium
financing of the directors and officers liability policy in 2003.

Net Income (Loss)

Net loss increased to ($212,000) (-84% of revenues), $0.00 per share, in
the three months ended June 30, 2003 from net income $3,000 (1% of revenues),
$0.00 per share in the comparable period last year. Net loss increased to
($287,000) (0% of revenue), ($0.01) per share, in the six-months ended June 30,
2003 from net income of $24,000 (3% of revenue), $0.00 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.

Liquidity and Capital Resources

At June 30, 2003, we had $788,000 in cash and cash equivalents as compared
to $859,000 at December 31, 2002. The decrease in cash and cash equivalents is
attributed to the net loss, partially offset by collections on accounts
receivable. We had working capital of $891,000 at June 30, 2003 as compared
with working capital of $1,125,000 at December 31, 2002.

At June 30, 2003, we had a related party obligation of $112,500 which
bears interest of 10% per annum, which we pay on a current basis. The debt is
due on demand.

We expect our future cash flow will come primarily from the audio signal
processing licensing, Original Equipment Manufacturers (OEM) royalties and
from possible common stock issuances including warrants and options. We are
actively engaged in negotiations for additional audio signal processing
licensing arrangements which we anticipate should generate additional cash flow
without imposing any substantial costs on our business.

We anticipated a wind down in early 2003 of our licensing program with a
large computer account as that customer completes its migration to its latest
operating system. This was partially offset by added or expanded relationships
with JVC and Orion and this year. Our liquidity was also negatively impacted by
the effects of outsourcing by one of our major DVD player accounts to
manufacturers in China and other manufacturers who decline to pay for such
software or with whom we do not have licensing arrangements. While we expect to
replace a portion of this business by entering into direct licensing agreements
with some third party manufacturers, and with other new business development
opportunities in the latter stages of negotiation, design cycle times can be
lengthy and subject to unforeseen delays. As such, although we currently expect
some of these new opportunities to begin generating new revenues in the fourth
quarter of 2003, our ability to generate additional short-term revenues, and
our visibility remains limited, due to the design cycle lead times and
unforeseen delays outlined above. If these conditions continue, this would
negatively impact our cash flow, which if constrained into 2004, will require
further reductions in overhead expense and impair our ability to most
effectively compete in the marketplace. We are currently exploring ways to
further reduce our cost structure while at the same time identifying revenue
generating opportunities that can be fast tracked to revenue generation.
Spatializer Audio Alchemy and Spatializer Interactive are two such initiatives
to generate short-term revenue.

The operations of our business, and those of our competitors, is also
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, we must





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develop and license our 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 viable margins or returns.

We have responded by offering additional products targeted to each
price/quality segment of the market and continue 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 us, and our rational commercial competitors, to enhance their
operating results.

To the extent we maintain or exceed our current projected revenues and
are not required to fund contingencies, we expect to continue to draw on our
current cash reserves, but adequately maintain our liquidity position at least
on a short term basis. To the extent that we do not achieve current and
projected operating levels or are required to fund contingencies, we will be
required to accelerate use of our cash reserves and this will impact our longer
term liquidity. As such, we believe our liquidity position may be subject to
fluctuation or additional stress, but manageable in the short-term.

If we are forced to accelerate use of our cash reserves above current or
projected levels due to delays in closing new licensing arrangements, launch of
new royalty bearing products by our customers, or to fund contingencies, we may
be required in the near term, to consider, if available, new sources of debt or
equity financing, which may have a dilutive effect on our existing
shareholders. Further, we cannot assure you that debt or equity financing will
be available as required. Even if financing were available, it may not be on
terms that are favorable to us or sufficient for our needs.

We wish to achieve accelerated growth, support our Audio Alchemy and
Spatializer Interactive initiatives and in general, take advantage of the
dynamic market forces in which we operate, rather than to be affected
by them. We will continue to seek, consider, and evaluate other capital or
business arrangements with financial and or strategic participants or investors
as such opportunities become available to us on terms that enhance shareholder
value and support our business strategy.

Certain Factors That May Affect Future Results

This report includes forward-looking statements made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995.
Except for historical matters, the matters discussed are forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, that reflect our current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from historical results or those anticipated. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of their dates. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The risk factors, discussed below, among other possible
factors, could cause actual results to differ materially from historical or
anticipated results. More information about potential factors that could affect
our business and financial results is included in our Annual Report on Form
10-K for the year ended December 31, 2002, and our other Securities and
Exchange Commission filings.





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Because The Market In Which We Operate Is Highly Competitive, We Face
Significant Pricing Pressure and Competition.

We are seeking commercial acceptance of our products in highly competitive
markets. 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. We have responded by offering additional products targeted to each
price and 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 us, and its rational commercial competitors, to enhance
their operating results. There is no assurance that our present or contemplated
future products will achieve or maintain sufficient commercial acceptance, or
if they do, that functionally equivalent products will not be developed by
current or future competitors who had access to significantly greater resources
or which are willing to give away their products.

If New Product Development Is Delayed, We Will Experience Delays In Revenues
And Competitive Products May Reach The Market Before Our Products.

Since our inception, we have experienced delays in bringing new products
to market and commercial application as a result of delays inherent in
technology development, financial resource limits and industry responses and
maturity. These delays have resulted in delays in the timing of revenues and
product introduction. In the future, delays in new product development or
technology introduction on behalf of us, our original equipment manufacturers
of consumer electronics and multimedia computer products (OEMs), integrated
circuit (IC) foundries or our software producers and marketers could result in
further delays in revenues and could allow competitors to reach the market with
products before us. In view of the emerging nature of the technology involved,
and the rapidly changing character of the entire media, internet and computer
markets, our expansion into other technology areas and the uncertainties
concerning the ability of our current products and new products to achieve
meaningful commercial acceptance, there can be no assurance of when or if we
will achieve or sustain profitability.

We expect that we will continue to be dependent upon a limited number of
OEMs for a significant portion of our net sales in future periods, although no
OEM is presently obligated either to purchase a specified amount of products or
to provide us with binding forecasts of product purchases for any period. Our
four largest customers as of June 30, 2003 accounted for 25%, 23%, 23% and 13%
of our net sales for six months ended June 30, 2003. The loss of any one of our
major customers or licensees would significantly reduce our revenues and harm
our ability to achieve or sustain acceptable levels of operating results. The
loss, or signing of a similarly sized account or accounts would have a material
short term impact on our operations and there is no assurance that we will not
lose all or some of the revenues from one or more of these accounts. While we
are working to broaden the sources of our royalty streams, there can be no
assurance that we will be successful in retaining or attracting such key
accounts and broadening such revenue stream sources.

Our products are typically one of many related products used by consumer
electronic users. Demand for our products is therefore subject to many risks
beyond our control, including, among others:

     competition faced by our OEM customers in their particular end markets;

     the technical, sales and marketing and management capabilities of our
OEM customers;

     the
pressure faced by our OEM customers to reduce cost;

There can be no assurance that we will not lose sales in the future as a
result of the pressure to reduce costs faced by our customers. The reduction of
orders from our significant OEM customers, or the discontinuance of our
products by our end users may subject us to potential adverse revenue
fluctuations.





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Because The Technology Environment In Which We Operate Is Rapidly Changing, We
May Not Be Successful In Establishing And Maintaining The Technological
Superiority Of Our Products Over Those Of Our Competitors.

We operate in a technology environment which is competitive and rapidly
changing. 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. Our
future success is dependent on establishing and maintaining the technological
superiority of our products over those of competitors, our ability to
successfully identify and bring other compatible technologies and products to
market and a recognition by the market of product value. We compete with a
number of entities that produce various stereo audio enhancement processes,
technologies and products in both traditional two-speaker environments such as
consumer electronics and multimedia computing, and in multi-channel,
multi-speaker applications such as Home Theater. In the field of 3-D or
virtual audio, our principal competitors are SRS Labs, Inc., QSound Labs,
Inc. and Dolby Laboratories or technologies and products developed by other
companies, including entities that have business relationships with us. There
can be no assurance that we will be able to favorably compete in this market in
the future.

Our Operating Results Fluctuate.

We experienced a loss from operations in 2001 but were profitable in 1999,
2000 and 2002. We experienced small losses in the last quarter of 2002, the
first quarter of 2003 and a larger loss in the second quarter of 2003. While
our objective and full effort is on managing a growing and profitable business,
due to the market conditions and risk factors outlined above and its impact on
fluctuations in operating expenses and revenues , we cannot provide assurance
that we will be able to generate a positive profit position in any given future
period.

If We Are Unable To Attract And Retain Our Key Personnel, We May Not Be Able To
Successfully Operate Our Business.

Our future success primarily depends on the abilities and efforts of a
small number of individuals, with particular management obligations and
technical expertise. Loss of the services of any of these persons could
adversely affect our business prospects. There is no assurance that we will be
able to retain this group or successfully recruit other personnel, as needed.
We compete with other enterprises with stronger financial resources and larger
staffs that may offer employment opportunities to our staff which are more
desirable than those which we are able to offer. Failure to maintain skilled
personnel with the software and engineering skills critical to our business
could have an adverse impact upon our business, the results of our operations
and our prospects. Currently, we have an employment agreement with Henry R.
Mandell with a term expiring in November 2004.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes during the six months ended June 30, 2003 to our
exposure to market risk for changes in interest rates.




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer has carried out
an evaluation of the effectiveness of our disclosure controls and procedures
as of June 30, 2003 (as defined in the Securities





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Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)). Based on that
evaluation, this officer has concluded that as of June 30, 2003, our disclosure
controls and procedures were adequate.

Internal Control Over Financial Reporting

During the period covered by this report, there have been no changes in our
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.





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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

We periodically are subject to legal proceedings from time to time in
the ordinary course of our business. Litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on our results of operations of the
period in which the ruling occurs. Our estimate of the potential impact on our
financial position or overall results of operations for such legal
proceedings could change in the future.




ITEM 2. CHANGES IN SECURITIES

None




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None




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

On June 16, 2003 we held our Annual Meeting of Shareholders. Proxies for the
Annual Meeting were solicited pursuant to Regulation 14A 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.

At the Annual Meeting, the following persons were elected by the vote indicated
as directors to serve until the Annual Meeting of Stockholders to be held in 2006:

|              |  |            |  |          
|------------- |  | ---------- |  | ---------
|Name          |  | Vote For   |  | Withheld 
|Henry Mandell |  | 26,895,991 |  | 1,175,425

The two directors whose terms of office continued after the Annual Meeting were
James D. Pace and Gilbert N. Segel whose terms expire in 2004. Stephen W.
Desper, whose term of office expired at the Annual Meeting, declined nomination
for another term.





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ITEM 5. OTHER INFORMATION

None




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

|     |  |                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certificate of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
|32.1 |  | Certificate of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*



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|* |  | Certification will not be deemed filed for purposes of Section 18 of
the Securities Exchange Act of 1934.
|- |  | -----------------------------------------------------------------------------------------------------------

(b) Reports on Form 8-K:

On May 19, 2003, we filed a Current Report on Form 8-K regarding a press
release issued with earnings information for the quarter ended March 31, 2003.
The information furnished in the report shall not be deemed to be filed for
purposes of Section 18 of the Securities Exchange Act of 1934.





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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, 2003



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



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



| | HENRY R. MANDELLChief Executive Officer, Chief Financial Officer
| | ----------------------------------------------------------------