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



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FORM 10-Q


(Mark One)

|  |                                                                                        
|- | ---------------------------------------------------------------------------------------
|þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
| 
|  | For the period ended: March 31, 2002                                                   

OR

|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 33-90532

SPATIALIZER AUDIO LABORATORIES, INC.

(Exact name of registrant as specified in its charter)


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

920 Hampshire Road, Suite A-34
Westlake Village, California 91361

(Address of principal executive offices)


900 Lafayette Street, Suite 710
Santa Clara, California 95050

(Address of principal corporate offices)


Telephone Number: (408) 296-0600

(Registrants telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

|        |  |       
|------- |  | ------
|Yes   þ |  | No   o

As of May 8, 2002, there were 47,406,939 shares of the Registrants Common
Stock outstanding.



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TABLE OF CONTENTS



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



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PART I. FINANCIAL INFORMATION




| |                             
| | ----------------------------
| | ITEM I. FINANCIAL STATEMENTS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

ASSETS

|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |             |  
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ----------- | ----------- | - | --------- | ----------- | -
|                                     |                                                                                                                                                                                   |   | March 31,   |             | December31,
|                                     |                                                                                                                                                                                   |   | 2002        |             | 2001       
|                                     |                                                                                                                                                                                   |   |             |             |            
|                                     |                                                                                                                                                                                   |   | (unaudited) |             |             |   |          
|Current Assets:                      |                                                                                                                                                                                   |   |             |             |             |   |           |            
|                                     | Cash and Cash Equivalents                                                                                                                                                         |   | $           | 877,752     |             |   | $         | 869,478     |  
|                                     | Accounts Receivable, net                                                                                                                                                          |   |             | 456,753     |             |   |           | 442,555     |  
|                                     | Prepaid Expenses and Deposits                                                                                                                                                     |   |             | 56,027      |             |   |           | 133,251     |  
|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |            
|Total Current Assets                 |                                                                                                                                                                                   |   | 1,390,532   |             |             |   | 1,445,284 |            
|Property and Equipment, net          |                                                                                                                                                                                   |   | 40,178      |             |             |   | 50,586    |            
|Intangible Assets, net               |                                                                                                                                                                                   |   | 309,215     |             |             |   | 255,726   |            
|Other Assets                         |                                                                                                                                                                                   |   |            |             |             |   | 1,510     |            
|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |            
|Total Assets                         |                                                                                                                                                                                   | $ | 1,739,925   |             |             | $ | 1,753,106 |            
|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |            
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current Liabilities:                 |                                                                                                                                                                                   |   |             |             |             |   |           |            
|                                     | Notes Payable to Related Parties                                                                                                                                                  |   |             | 112,500     |             |   |           | 112,500     |  
|                                     | Accounts Payable                                                                                                                                                                  |   |             | 12,855      |             |   |           | 14,872      |  
|                                     | Accrued Wages and Benefits                                                                                                                                                        |   |             | 74,911      |             |   |           | 72,969      |  
|                                     | Accrued Expenses                                                                                                                                                                  |   |             | 18,662      |             |   |           | 41,197      |  
|                                     | Net Liabilities of Discontinued Operation                                                                                                                                         |   |             | 88,150      |             |   |           | 100,000     |  
|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |            
|Total Current Liabilities            |                                                                                                                                                                                   |   | 307,078     |             |             |   | 341,538   |            
|Shareholders Equity:                |                                                                                                                                                                                   |   |             |             |             |   |           |            
|                                     | Series B, 10% Redeemable Convertible Preferred shares, $.01 par
value, 1,000,000 shares authorized, 87,967 shares issued and outstanding at March 31, 2002
and December 31, 2001. |   |             | 880         |             |   |           | 880         |  
|                                     | Common shares, $.01 par value, 65,000,000 shares
authorized, 47,406,939 shares
issued and outstanding at March 31, 2002 and
December 31, 2001.                                    |   |             | 474,070     |             |   |           | 474,070     |  
|                                     | Additional Paid-In Capital                                                                                                                                                        |   |             | 46,402,852  |             |   |           | 46,402,852  |  
|                                     | Accumulated Deficit                                                                                                                                                               |   |             | (45,444,955 | )           |   |           | (45,466,234 | )
|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |            
|Total Shareholders Equity           |                                                                                                                                                                                   |   | 1,432,847   |             |             |   | 1,411,568 |            
|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |            
|                                     |                                                                                                                                                                                   | $ | 1,739,925   |             |             | $ | 1,753,106 |            
|                                     |                                                                                                                                                                                   |   |             |             |             |   |           |            





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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                   |                            |             |         |                                  |            |           |         |         |            | 
|---------------------------------- | -------------------------- | ----------- | ------- | -------------------------------- | ---------- | --------- | ------- | ------- | ---------- | 
|                                   |                            |             |         | For the Three Month Period Ended
|                                   |                            |             |         |                                 
|                                   |                            |             |         | March 31,                        |            | March 31,
|                                   |                            |             |         | 2002                             |            | 2001     
|                                   |                            |             |         |                                  |            |          
|Revenues:                          |                            |             |         |                                  |            |           |         |        
|                                   | License Revenues           |             | $       |                                 |            |           | $       |        |           
|                                   | Royalty Revenues           |             |         | 440,481                          |            |           |         | 426,081 |           
|                                   | Product Revenues           |             |         |                                 |            |           |         |        |           
|                                   |                            |             |         |                                  |            |           |         |        
|                                   |                            |             | 440,481 |                                  |            |           | 426,081 |        
|Cost of Revenues                   |                            |             | 28,202  |                                  |            |           | 27,500  |        
|                                   |                            |             |         |                                  |            |           |         |        
|Gross Profit                       |                            |             | 412,279 |                                  |            |           | 398,581 |        
|Operating Expenses:                |                            |             |         |                                  |            |           |         |        
|                                   | General and Administrative |             |         | 135,335                          |            |           |         | 150,897 |           
|                                   | Research and Development   |             |         | 123,603                          |            |           |         | 137,322 |           
|                                   | Sales and Marketing        |             |         | 130,339                          |            |           |         | 113,703 |           
|                                   |                            |             |         |                                  |            |           |         |        
|                                   |                            |             | 389,276 |                                  |            |           | 401,922 |        
|                                   |                            |             |         |                                  |            |           |         |        
|Operating Profit (Loss)            |                            |             | 23,003  |                                  |            |           | (3,341  | )      
|Interest and Other Income          |                            |             | 3,489   |                                  |            |           | 17,857  |        
|Interest and Other Expense         |                            |             | (2,813  | )                                |            |           | (8,481  | )      
|                                   |                            |             |         |                                  |            |           |         |        
|                                   |                            |             | 677     |                                  |            |           | 9,376   |        
|                                   |                            |             |         |                                  |            |           |         |        
|Income Before Income Taxes         |                            |             | 23,680  |                                  |            |           | 6,035   |        
|Income Taxes                       |                            |             | (2,400  | )                                |            |           | (500    | )      
|                                   |                            |             |         |                                  |            |           |         |        
|Net Income                         |                            | $           | 21,280  |                                  |            | $         | 5,535   |        
|                                   |                            |             |         |                                  |            |           |         |        
|Basic and Diluted Income Per Share |                            | $           | 0.00    |                                  |            | $         | 0.00    |        
|                                   |                            |             |         |                                  |            |           |         |        
|Weighted Average Shares            |                            |             |         |                                  |            |           |         |        
|                                   |                            | Outstanding |         |                                  | 47,406,939 |           |         |         | 47,203,524 | 
|                                   |                            |             |         |                                  |            |           |         |        





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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

|                                                    |                                                                                             |   |                    |         |      |   |           |         |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------------- | - | ------------------ | ------- | ---- | - | --------- | ------- | -
|                                                    |                                                                                             |   | Three Months Ended
|                                                    |                                                                                             |   | March 31,         
|                                                    |                                                                                             |   |                   
|                                                    |                                                                                             |   | 2002               |         | 2001
|                                                    |                                                                                             |   |                    |         |     
|Cash Flows from Operating Activities:               |                                                                                             |   |                    |         |      |   |           |        
|                                                    | Net Income                                                                                  |   | $                  | 21,279  |      |   | $         | 5,535   |  
|                                                    | Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |   |                    |         |      |   |           |         |  
|                                                    | Depreciation and Amortization                                                               |   |                    | 29,480  |      |   |           | 21,870  |  
|Net Change in Assets and Liabilities:               |                                                                                             |   |                    |         |      |   |           |        
|                                                    | Accounts Receivable and Employee Advances                                                   |   |                    | (14,198 | )    |   |           | 57,441  |  
|                                                    | Prepaid Expenses and Deposits                                                               |   |                    | 78,734  |      |   |           | (1,796  | )
|                                                    | Accounts Payable                                                                            |   |                    | (2,017  | )    |   |           | (11,577 | )
|                                                    | Changes in Discontinued Operation                                                           |   |                    | (11,850 | )    |   |           | (65,856 | )
|                                                    | Accrued Liabilities                                                                         |   |                    | (20,593 | )    |   |           | (33,479 | )
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Net Cash Provided By (Used In) Operating Activities |                                                                                             |   | 80,835             |         |      |   | (27,862   | )      
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Cash Flows from Investing Activities:               |                                                                                             |   |                    |         |      |   |           |        
|                                                    | Purchase/Disp of Property and Equipment                                                     |   |                    |        |      |   |           |        |  
|                                                    | Increase in Capitalized Patent and Technology Costs                                         |   |                    | (72,561 | )    |   |           | (7,492  | )
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Net Cash Provided By (Used in) Investing Activities |                                                                                             |   | (72,561            | )       |      |   | (7,492    | )      
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Cash flows from Financing Activities:               |                                                                                             |   |                    |         |      |   |           |        
|                                                    | Issuance of Preferred Shares, Net                                                           |   |                    |        |      |   |           |        |  
|                                                    | Issuance of Common Shares, Net                                                              |   |                    |        |      |   |           |        |  
|                                                    | Exercise of Options                                                                         |   |                    |        |      |   |           |        |  
|                                                    | Exercise of Warrants                                                                        |   |                    |        |      |   |           |        |  
|                                                    | Issuance of Notes Payable                                                                   |   |                    |        |      |   |           |        |  
|                                                    | Issuance of Related Party Payable                                                           |   |                    |        |      |   |           |        |  
|                                                    | Repayment of Notes Payable                                                                  |   |                    |        |      |   |           |        |  
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Net Cash Provided by Financing Activities           |                                                                                             |   |                   |         |      |   |          |        
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Increase (Decrease) in Cash and Cash Equivalents    |                                                                                             |   | 8,274              |         |      |   | (35,354   | )      
|Cash and Cash Equivalents, Beginning of Period      |                                                                                             |   | 869,478            |         |      |   | 1,467,988 |        
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Cash and Cash Equivalents, End of Period            |                                                                                             | $ | 877,752            |         |      | $ | 1,432,634 |        
|                                                    |                                                                                             |   |                    |         |      |   |           |        
|Supplemental Disclosure of Cash Flow Information:   |                                                                                             |   |                    |         |      |   |           |        
|                                                    | Cash paid during the period for:                                                            |   |                    |         |      |   |           |         |  
|                                                    | Interest                                                                                    |   | $                  | 2,811   |      |   | $         | 2,811   |  
|                                                    | Income Taxes                                                                                |   |                    | 2,400   |      |   |           |        |  
|                                                    |                                                                                             |   |                    |         |      |   |           |        





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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(unaudited)

|                                    |  |                           |        |               |  |        |     |           |  |                 |            |         |  |            |         |             |  |               |            |  |  |   |             |   |  |   |           | 
|----------------------------------- |  | ------------------------- | ------ | ------------- |  | ------ | --- | --------- |  | --------------- | ---------- | ------- |  | ---------- | ------- | ----------- |  | ------------- | ---------- |  |  | - | ----------- | - |  | - | --------- | 
|                                    |  | Series B, 10% Convertible |        |               |  |        |     |           |  |                 |            |         |  |            |         |             |  |               |            |  |  |  
|                                    |  | Preferred Shares          |        | Common Shares |  |        |     |           |  |                 |            |         |  |            |         |            
|                                    |  |                           |        |               |  |        |     |           |  |                 |            |         |  | Total     
|                                    |  | Number of                 |        |               |  |        |     | Number of |  |                 |            |         |  | Additional |         | Accumulated |  | Shareholders'
|                                    |  | Shares                    |        | Par Value     |  | Shares |     | Par Value |  | Paid-in-capital |            | Deficit |  | Equity    
|                                    |  |                           |        |               |  |        |     |           |  |                 |            |         |  |           
|Balance, December 31, 2001          |  |                           | 87,967 |               |  | $      | 880 |           |  |                 | 47,406,969 |         |  | $          | 474,070 |             |  | $             | 46,402,852 |  |  | $ | (45,466,234 | ) |  | $ | 1,411,568 | 
|Issuance of Preferred Shares, Net   |  |                           |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |           |  |  |   |            |   |  |   |          | 
|Options Exercised                   |  |                           |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |           |  |  |   |            |   |  |   |          | 
|Warrants Exercised                  |  |                           |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |           |  |  |   |            |   |  |   |          | 
|Options Issued for Services         |  |                           |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |           |  |  |   |            |   |  |   |          | 
|Conversion of Preferred Shares, Net |  |                           |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |           |  |  |   |            |   |  |   |          | 
|Net Income                          |  |                           |       |               |  |        |    |           |  |                 |           |         |  |            |        |             |  |               |           |  |  |   | 21,279      |   |  |   | 21,279    | 
|                                    |  |                           |        |               |  |        |     |           |  |                 |            |         |  |            |         |             |  |               |            |  |  |   |             |   |  |   |           | 
|Balance, March 31, 2002             |  |                           | 87,967 |               |  | $      | 880 |           |  |                 | 47,406,969 |         |  | $          | 474,070 |             |  | $             | 46,402,852 |  |  | $ | (45,444,955 | ) |  | $ | 1,432,847 | 
|                                    |  |                           |        |               |  |        |     |           |  |                 |            |         |  |            |         |             |  |               |            |  |  |   |             |   |  |   |           | 



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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES




Notes to Consolidated Financial Statements

(1) Nature of Business

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

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

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

(2) Summary of Significant Accounting Policies

Basis of Presentation
The interim consolidated financial statements of the Company are condensed
and do not include some of the information necessary to obtain a complete
understanding of the financial data. Management believes that all
adjustments necessary for a fair presentation of results have been included
in the unaudited consolidated Financial Statements for the interim periods
presented. Operating results for the three-month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002. Accordingly, your attention is directed to
footnote disclosures found in the December 31, 2001 Annual Report and
particularly to Note 2 which includes a summary of significant accounting
policies.

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

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

Research and Development Expenditures
We expense research and development expenditures as incurred.

(3) Loss per Share

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





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per share is computed similarly to fully diluted earnings (loss) per share
pursuant to the Accounting Principles Board (APB) Opinion No. 15. The
following table presents contingently issuable shares, options and warrants to
purchase shares of common stock that were outstanding during the three month
periods ended March 31, 2002 and 2001 which were not included in the
computation of diluted loss per share because the impact would have been
antidilutive or insignificant:

|         |  |      |           |      |  |  |           | 
|-------- |  | ---- | --------- | ---- |  |  | --------- | 
|         |  | 2002 |           | 2001
|         |  |      |           |     
|Options  |  |      | 2,259,133 |      |  |  | 2,329,133 | 
|Warrants |  |      | 1,250,000 |      |  |  | 2,730,000 | 
|         |  |      |           |      |  |  |           | 
|         |  |      | 3,509,133 |      |  |  | 5,059,133 | 
|         |  |      |           |      |  |  |           | 

(4) Comprehensive Income

The Financial Accounting Standards Board issued Statement No. 130, Reporting
Comprehensive Income (SFAS 130), in June 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in financial statements. SFAS No. 130 was effective for fiscal
years beginning after December 15, 1997. We adopted SFAS No. 130 on January
1, 1998. Comprehensive income (loss) is the change in equity of a business
enterprise during a period from transactions and all other events and
circumstances from non-owner sources. Other comprehensive income (loss)
includes foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. We did not have components of other comprehensive income during
the three-month periods ended March 31, 2002 and 2001. As a result,
comprehensive income is the same as the net income for the three-month
periods ended March 31, 2002 and 2001.

(5) Segment Reporting

The Financial Accounting Standards Board issued Statement No. 131, Disclosures
about Segments of an Enterprise and Related Information(SFAS No. 131), in
June 1997. SFAS No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires enterprises to report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. It replaces the industry
segment concept of SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, with a management approach concept as to basis for identifying
reportable segments. SFAS 131 was effective for financial statements for fiscal
years beginning after December 15, 1997. We adopted SFAS 131 in December 1997.
At March 31, 2002, we have only one operating segment, DPI, the Companys
Audio Signal Processing business.

(6) Major Customers

A substantial portion of our licensing and royalty revenues are derived from
three major customers. The following customers comprised greater than 10% of
total revenues during the three months ended March 31, 2002 and 2001:

|           |  |      |    |      |  |  |    |  
|---------- |  | ---- | -- | ---- |  |  | -- | -
|           |  | 2002 |    | 2001
|           |  |      |    |     
|Customer A |  |      | 32 | %    |  |  | 36 | %
|Customer B |  |      | 31 | %    |  |  | 33 | %
|Customer C |  |      | 23 | %    |  |  | 17 | %





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(7) Contingencies

Legal

In connection with the downsizing of the Company in
1998, a number of employees were terminated and have filed, on
various dates, employment and compensation related claims with
California State labor authorities, all but two of which claims have
been settled. Two former officers and employees of MDT initiated
proceedings before the Labor Commissioner in 2000 seeking amounts
allegedly due under their employment agreements, which claims, if
resolved in favor of the claimants, could be material to the
financial statements of the Company. The Labor Commissioner has
postponed those proceedings. In that action, the claimants filed a
motion to strike the MDT complaint under the California
anti-Slapp legislation. The Court rejected that motion
and the litigation is in the discovery stages. Separately, MDT
initiated litigation in the Superior Court, Orange County seeking
declaratory relief to bar the labor claims, as well as return of
intellectual property and unspecified damages for breaches of the
former officers and employees employment agreements. These employees,
however, have filed for personal bankruptcy and as a result, the
claims became inactive. At December 2001, bankruptcy for one such
employee had been dismissed and that proceeding could be reactivated.

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

(8) Sale of Preferred Stock

In the December 1999, $895,000 in short term loan advances from officers,
directors and their affiliates and certain other securities holders, and
accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B preferred stock. The Series B preferred stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10 day average closing
bid price prior to the conversion, but subject to a minimum conversion of $.56 per share and a maximum of $1.12 per
share. We have a three year option to redeem any Series B preferred stock, not
sooner converted, in whole or in part, in cash.





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(9) Discontinued Operations

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





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

Results of Operations

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

Revenues

Revenues for the three months ended March 31, 2002 were $440,000, compared
to revenues of $426,000 in the comparable period last year, an increase of 3%.
The increase in revenues resulted primarily from royalties from new accounts
including SANYO and Sharp which were beginning to come on stream, partially
offset by the reduction in royalties from an account which suspended use of our
technology in mid-2001.

Gross Profit

Gross profit for the three months ended March 31, 2002 was $412,000 (94% of
revenue) compared to gross profit of $399,000 (94% of revenue) in the
comparable period last year, an increase of 3%. Gross profit increased due to
the increase in revenue.

Operating Expenses

Operating expenses in the three months ended March 31, 2002 were $389,000 (88%
of revenue) compared to operating expenses of $402,000 (94% of revenue) in the
comparable period last year, decrease of 3%. The decrease in operating expenses
for the three months ended March 31, 2002 resulted primarily from decreased use
of outside consultants.

General and Administrative

General and administrative expenses in the three months ended March 31, 2002
were $135,000 (31% of revenue) compared to general and administrative
expenses of $151,000 (35% of revenue) in the comparable period last year, a
decrease of 11%. The decrease in general and administrative expense resulted
from termination of the outside investor relations consultant, who provided
such services in the comparable period last year.

Research and Development

Research and development expenses in the three months ended March 31, 2002
were $124,000 (28% of revenue) compared to research and development expenses
of $137,000 (32% of revenue) in the comparable period last year, a decrease
of 9%. The decrease in such expenses resulted primarily from more
applications engineering performed in-house as compared with the prior
period.

Sales and Marketing

Sales and marketing expenses in the three months ended March 31, 2002 were
$130,000 (30% of revenue) compared to sales and marketing expenses of
$114,000 (27% of revenue) in the comparable period last year, an increase of
14%. The increase in sales and marketing expense resulted primarily from
greater international travel in the current period and marketing support
expense as compared with the comparable period last year.

Net Income

Net Income in the three months ended March 31, 2002 was $21,000, ($0.00)
basic and diluted per share, compared with net income of $6,000 ($0.00) basic
and fully diluted per share in the comparable period last year, an increase of
250%. The increase in net income resulted from increased revenues and a
decrease in operating expenses. This increase in net income was partially
offset by a reduction in interest income, resulting from declining interest
rates.





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Liquidity and Capital Resources

At March 31, 2002, we had $878,000 in cash and cash equivalents as
compared to $869,000 at December 31, 2001. The increase in cash and cash
equivalents is attributed to cash components of net income. We had working
capital of $1,084,000 at March 31, 2002 as compared with working capital of
$1,124,000 at December 31, 2001. 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 should generate additional cash
flow without imposing any substantial costs on the Company.

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

We have a related party obligation of $112,500, which is due upon demand.
We repaid related party obligations of $225,000 plus accrued interest of
approximately $30,000, which were convertible into Common Stock at our or the
Lenders option in June 2001. The Company owed a total of
$112,500 to related
parties on December 31, 2001.

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

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

In the December Transactions, $225,000 of secured debt, including accrued
interest, was converted into secured long term convertible debt. The long term
debt is held by existing institutional investors and is secured by essentially
all of our assets. The debt, and accrued interest, is convertible at our or the
holders options into registered Common Stock at a conversion price equal to
the





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average 10 day closing bid price prior to conversion but subject to the
same minimum and maximum conversion prices set for the Series B Preferred
Stock.

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





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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

In connection with the downsizing of the Company in
1998, a number of employees were terminated and have filed, on
various dates, employment and compensation related claims with
California State labor authorities, all but two of which claims have
been settled. Two former officers and employees of MDT initiated
proceedings before the Labor Commissioner in 2000 seeking amounts
allegedly due under their employment agreements, which claims, if
resolved in favor of the claimants, could be material to the
financial statements of the Company. The Labor Commissioner has
postponed those proceedings. In that action, the claimants filed a
motion to strike the MDT complaint under the California
anti-Slapp legislation. The Court rejected that motion
and the litigation is in the discovery stages. Separately, MDT
initiated litigation in the Superior Court, Orange County seeking
declaratory relief to bar the labor claims, as well as return of
intellectual property and unspecified damages for breaches of the
former officers and employees employment agreements. These employees,
however, have filed for personal bankruptcy and as a result, the
claims became inactive. At December 2001, bankruptcy for one such
employee had been dismissed and that proceeding could be reactivated.

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




ITEM 2. CHANGES IN SECURITIES

None




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None




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

None





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ITEM 5. OTHER INFORMATION

None




ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

None





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SIGNATURES

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

|                    |                                                                                                                                                                                 
|------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dated:
May 11, 2002 | SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)
 
 
/s/ Henry R. Mandell
Henry R. Mandell
Chairman of the Board, Chief Executive Officer
Chief Financial Officer and Secretary