##### Table of Contents



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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: March 31, 2003                                                   

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 9, 2003, there were 47,406,939 shares of the Registrants Common
Stock outstanding.



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TABLE OF CONTENTS



|                           |                                                                                               |  |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                           | ITEM I. FINANCIAL STATEMENTS                                                                 
|                           | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART I.                   
|                           | ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                             
|                           | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION
|                           | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                           | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                           | 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                                                      
|CERTIFICATION             
|SIGNATURES                
|EXHIBIT 99.1              



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##### Table of Contents






ITEM I. FINANCIAL STATEMENTS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |             |   | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------- | ----------- | - | ------------ | --------- | ----------- | - | 
|                                     |                                                                                                                                                                                  |   |           | March 31,   |   | December 31,
|                                     |                                                                                                                                                                                  |   |           | 2003        |   | 2002        
|                                     |                                                                                                                                                                                  |   |           |             |   |             
|                                     |                                                                                                                                                                                  |   |           | (unaudited) |   |              |           |            
|Current Assets:                      |                                                                                                                                                                                  |   |           |             |   |              |           |            
|                                     | Cash and Cash Equivalents                                                                                                                                                        |   | $         | 893,577     |   |              | $         | 858,725     |  
|                                     | Accounts Receivable, net                                                                                                                                                         |   |           | 345,500     |   |              |           | 499,023     |  
|                                     | Prepaid Expenses and Deposits                                                                                                                                                    |   |           | 91,777      |   |              |           | 82,920      |  
|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |             |  
|Total Current Assets                 |                                                                                                                                                                                  |   | 1,330,854 |             |   |              | 1,440,668 |            
|Property and Equipment, net          |                                                                                                                                                                                  |   | 59,856    |             |   |              | 70,842    |            
|Intangible Assets, net               |                                                                                                                                                                                  |   | 212,809   |             |   |              | 225,859   |            
|Other Assets                         |                                                                                                                                                                                  |   | 6,853     |             |   |              | 8,471     |            
|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |             |  
|Total Assets                         |                                                                                                                                                                                  | $ | 1,610,372 |             |   | $            | 1,745,840 |            
|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current Liabilities:                 |                                                                                                                                                                                  |   |           |             |   |              |           |            
|                                     | Notes Payable to Related Parties                                                                                                                                                 |   |           | 112,500     |   |              |           | 112,500     |  
|                                     | Accounts Payable                                                                                                                                                                 |   |           | 31,993      |   |              |           | 39,027      |  
|                                     | Accrued Wages and Benefits                                                                                                                                                       |   |           | 76,703      |   |              |           | 108,771     |  
|                                     | Accrued Expenses                                                                                                                                                                 |   |           | 33,765      |   |              |           | 55,682      |  
|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |             |  
|Total Current Liabilities            |                                                                                                                                                                                  |   | 254,961   |             |   |              | 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 March 31, 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 March 31, 2003 and
December 31, 2002.                                   |   |           | 474,070     |   |              |           | 474,070     |  
|                                     | Additional Paid-In Capital                                                                                                                                                       |   |           | 46,402,704  |   |              |           | 46,402,704  |  
|                                     | Accumulated Deficit                                                                                                                                                              |   |           | (45,522,391 | ) |              |           | (45,447,942 | )
|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |             |  
|Total Shareholders Equity           |                                                                                                                                                                                  |   | 1,354,383 |             |   |              | 1,428,832 |            
|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |             |  
|                                     |                                                                                                                                                                                  | $ | 1,610,372 |             |   | $            | 1,745,840 |            
|                                     |                                                                                                                                                                                  |   |           |             |   |              |           |            

See accompanying notes to
consolidated financial statements.



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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,
|                                          |                            |   | 2003                             |         | 2002     
|                                          |                            |   |                                  |         |          
|Revenues:                                 |                            |   |                                  |         |           |   |            |        
|                                          | License Revenues           |   | $                                |        |           |   | $          |        | 
|                                          | Royalty Revenues           |   |                                  | 332,378 |           |   |            | 440,481 | 
|                                          | Product Revenues           |   |                                  |        |           |   |            |        | 
|                                          |                            |   |                                  |         |           |   |            |         | 
|                                          |                            |   | 332,378                          |         |           |   | 440,481    |        
|Cost of Revenues                          |                            |   | 35,942                           |         |           |   | 28,202     |        
|                                          |                            |   |                                  |         |           |   |            |         | 
|Gross Profit                              |                            |   | 296,436                          |         |           |   | 412,279    |        
|Operating Expenses:                       |                            |   |                                  |         |           |   |            |        
|                                          | General and Administrative |   |                                  | 156,402 |           |   |            | 135,335 | 
|                                          | Research and Development   |   |                                  | 109,003 |           |   |            | 123,603 | 
|                                          | Sales and Marketing        |   |                                  | 102,139 |           |   |            | 130,339 | 
|                                          |                            |   |                                  |         |           |   |            |         | 
|                                          |                            |   | 367,544                          |         |           |   | 389,276    |        
|                                          |                            |   |                                  |         |           |   |            |         | 
|Operating Profit (Loss)                   |                            |   | (71,108                          | )       |           |   | 23,003     |        
|Interest and Other Income                 |                            |   | 2,492                            |         |           |   | 3,489      |        
|Interest and Other Expense                |                            |   | (2,813                           | )       |           |   | (2,813     | )      
|                                          |                            |   |                                  |         |           |   |            |         | 
|                                          |                            |   | (321                             | )       |           |   | 677        |        
|                                          |                            |   |                                  |         |           |   |            |         | 
|Income (Loss) Before Income Taxes         |                            |   | (71,429                          | )       |           |   | 23,680     |        
|Income Taxes                              |                            |   | (3,020                           | )       |           |   | (2,400     | )      
|                                          |                            |   |                                  |         |           |   |            |         | 
|Net Income (Loss)                         |                            | $ | (74,449                          | )       |           | $ | 21,280     |        
|                                          |                            |   |                                  |         |           |   |            |         | 
|Basic and Diluted Income (Loss) Per Share |                            | $ | (0.00                            | )       |           | $ | 0.00       |        
|                                          |                            |   |                                  |         |           |   |            |         | 
|Weighted Average Shares
Outstanding       |                            |   | 47,406,939                       |         |           |   | 47,406,939 |        
|                                          |                            |   |                                  |         |           |   |            |         | 

See accompanying notes to
consolidated financial statements.



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

|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  
|--------------------------------------------------- | -------------------------------------------------------------------------------------------------- | - | ------------------ | ------- | ---- | - | ------- | ------- | -
|                                                    |                                                                                                    |   | Three Months Ended
|                                                    |                                                                                                    |   | March 31,         
|                                                    |                                                                                                    |   |                   
|                                                    |                                                                                                    |   | 2003               |         | 2002
|                                                    |                                                                                                    |   |                    |         |     
|Cash Flows from Operating Activities:               |                                                                                                    |   |                    |         |      |   |         |        
|                                                    | Net Income (Loss)                                                                                  |   | $                  | (74,449 | )    |   | $       | 21,279  |  
|                                                    | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |   |                    |         |      |   |         |         |  
|                                                    | Depreciation and Amortization                                                                      |   |                    | 25,806  |      |   |         | 29,480  |  
|Net Change in Assets and Liabilities:               |                                                                                                    |   |                    |         |      |   |         |        
|                                                    | Accounts Receivable and Employee Advances                                                          |   |                    | 153,523 |      |   |         | (14,198 | )
|                                                    | Prepaid Expenses and Deposits                                                                      |   |                    | (7,238  | )    |   |         | 78,734  |  
|                                                    | Accounts Payable                                                                                   |   |                    | (7,034  | )    |   |         | (2,017  | )
|                                                    | Changes in Discontinued Operation                                                                  |   |                    |        |      |   |         | (11,850 | )
|                                                    | Accrued Liabilities                                                                                |   |                    | (53,985 | )    |   |         | (20,593 | )
|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  
|Net Cash Provided By (Used In) Operating Activities |                                                                                                    |   | 36,623             |         |      |   | 80,835  |        
|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  
|Cash Flows from Investing Activities:               |                                                                                                    |   |                    |         |      |   |         |        
|                                                    | Purchase/Disp of Property and Equipment                                                            |   |                    | (1,770  | )    |   |         |        |  
|                                                    | Increase in Capitalized Patent and Technology Costs                                                |   |                    |        |      |   |         | (72,561 | )
|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  
|Net Cash Provided By (Used in) Investing Activities |                                                                                                    |   | (1,770             | )       |      |   | (72,561 | )      
|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  
|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    |                                                                                                    |   | 34,853             |         |      |   | 8,274   |        
|Cash and Cash Equivalents, Beginning of Period      |                                                                                                    |   | 858,724            |         |      |   | 869,478 |        
|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  
|Cash and Cash Equivalents, End of Period            |                                                                                                    | $ | 893,577            |         |      | $ | 877,752 |        
|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  
|Supplemental Disclosure of Cash Flow Information:   |                                                                                                    |   |                    |         |      |   |         |        
|                                                    | Cash paid during the period for:                                                                   |   |                    |         |      |   |         |         |  
|                                                    | Interest                                                                                           |   | $                  | 2,811   |      |   | $       | 2,811   |  
|                                                    | Income Taxes                                                                                       |   |                    | 3,020   |      |   |         | 2,400   |  
|                                                    |                                                                                                    |   |                    |         |      |   |         |         |  

See accompanying notes to
consolidated financial statements.



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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 |  
|Issuance of Preferred Shares, Net   |  |               |           |           |  |                 |        |            |  |             |           |               |  |   |            |   |  |   |          |  
|Options Exercised                   |  |               |           |           |  |                 |        |            |  |             |           |               |  |   |            |   |  |   |          |  
|Warrants Exercised                  |  |               |           |           |  |                 |        |            |  |             |           |               |  |   |            |   |  |   |          |  
|Options Issued for Services         |  |               |           |           |  |                 |        |            |  |             |           |               |  |   |            |   |  |   |          |  
|Conversion of Preferred Shares,
Net |  |               |           |           |  |                 |        |            |  |             |           |               |  |   |            |   |  |   |          |  
|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 |  
|                                    |  |               |            |           |  |                 |         |            |  |             |            |               |  |   |             |   |  |   |           |  

See accompanying notes to
consolidated financial statements.



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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 and
digital versatile disc (DVD) server technologies associated with a network
based compact disc/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 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, 2003 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2003. Accordingly, your
attention is directed to footnote disclosures found in the December
31, 2002 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 (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 March 31, 2003 substantially
all cash and cash equivalents were on deposit at two financial institutions.

At March 31, 2003, five major customers, not presented in order of
importance, each accounted for 10% or more of our total accounts receivable:
Apple Computer, Inc., JVC, Samsung, Sanyo and Orion Corporation, each of whom
accounted for greater than 10% of our total 2002 accounts receivable. One OEM
accounted for 28.0%, another accounted for 22%, another accounted for 14.0%,
another accounted for 13% and one accounted for 10% of our total accounts
receivable at March 31, 2003.





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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 77% and
66% of total sales in the year to date periods ended March 31, 2003 and 2002,
respectively.

Major Customers During the quarter ended March 31, 2003, five customers
accounted for 29%, 23%, 15%, 14% and 11%, 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.

Advertising
Expenses Advertising is expensed when incurred and
included in selling, general and administrative expenses.

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 common stock that then shared in
the earnings of the entity. The following table presents contingently issuable
shares, options and warrants to purchase shares of common stock that were
outstanding during the three month periods ended March 31, 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  |  |      | 2,571,500 |      |  |  | 2,259,133 | 
|Warrants |  |      | 0         |      |  |  | 1,250,000 | 
|         |  |      |           |      |  |  |           | 
|         |  |      | 2,571,500 |      |  |  | 3,509,133 | 
|         |  |      |           |      |  |  |           | 





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##### Table of Contents



During the three months ended March 31, 2003, no options were granted to
officers and board members 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 March 31, 2003, the Company has only one
operating segment, DPI, the Companys Audio Signal Processing business.

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.

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.





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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 March 31, 2003 approximated fair value
due to their short maturity or nature.

The fair values of notes payable to a related party at December 31, 2002
and March 31, 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).

(3) Property and Equipment

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

|                                                    |  |           |         |              |  |   |         | 
|--------------------------------------------------- |  | --------- | ------- | ------------ |  | - | ------- | 
|                                                    |  | March 31, |         | December 31,
|                                                    |  | 2003      |         | 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      |  |           | 547,028 |              |  |   | 534,271 | 
|                                                    |  |           |         |              |  |   |         | 
|Property and Equipment, Net                         |  | $         | 59,856  |              |  | $ | 70,842  | 
|                                                    |  |           |         |              |  |   |         | 

(4) Intangible Assets

Intangible assets, as of December 31, 2003 and March 31, 2003 consist of
the following:

|                                                    |  |           |         |              |  |   |         | 
|--------------------------------------------------- |  | --------- | ------- | ------------ |  | - | ------- | 
|                                                    |  | March 31, |         | December 31,
|                                                    |  | 2003      |         | 2002        
|                                                    |  |           |         |             
|Capitalized Patent, Trademarks and Technology Costs |  | $         | 486,549 |              |  | $ | 486,549 | 
|Less Accumulated Amortization                       |  |           | 273,740 |              |  |   | 260,690 | 
|                                                    |  |           |         |              |  |   |         | 
|Intangible Assets, Net                              |  | $         | 212,809 |              |  | $ | 225,859 | 
|                                                    |  |           |         |              |  |   |         | 





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##### Table of Contents



Estimated amortization is as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 50,765  | 
|2004       |  | $ | 43,794  | 
|2005       |  | $ | 25,733  | 
|2006       |  | $ | 16,702  | 
|2007       |  | $ | 16,702  | 
|Thereafter |  | $ | 72,163  | 
|           |  |   |         | 
|           |  |   | 225,859 | 

(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 March 31, 2003. This amount bears interest at a fixed
rate of 10% annually and is due on demand.

(6) Shareholders Equity

During the quarter ended March 31, 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.





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##### Table of Contents



(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.

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 March 31, 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 Plan which was approved by the stockholders
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 March 31, 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 grant.

At March 31, 2003, there were
2,169,194 additional shares available for grant under the Plan.

(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.





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##### Table of Contents



(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 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.

(12) Severe Acute Respiratory Syndrome (SARS)

In recent months, we have become aware
of the increasing threat of Severe Acute Respiratory Syndrome,
or SARS. SARS is a contagious disease, which has been responsible for
over 400 deaths worldwide, primarily in Asia. United States health
officials have issued warnings as to the possible consequences if the
outbreak is not contained. At this point, travel to Asia has been
greatly restricted and the threat of the disease continues to spread.

A few of
our DSP partners perform software development, including the
application of our algorithms into such software in Beijing and
Shenzhen, Peoples Republic of China. Illness or the threat of
illness to their employees at these facilities may disrupt work
schedules and delay completion of such projects. This could cause a
delay or cancellation of the inclusion of our algorithms in our
customers products. Any resulting delay in royalty streams or
cancellation of new design wins may adversely affect our future
operating results.

In
addition, while none of our employees have contracted the disease, we
have suspended employee travel to Mainland China, Hong Kong and
Taiwan as a precaution until the outbreak subsides. While these
markets are currently not substantial to our overall business, this
limits our ability to do business in these markets and to capitalize
on these markets potential at the current time.





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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

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

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

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

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

The fourth critical accounting policy
relates to the existence of the Audit Committee of our Board of
Directors. This committee is directed to review the scope, cost and
results of the independent audit of the Companys books and
records, the results of the annual audit with Management and the
internal auditors and the adequacy of the Companys accounting,
financial, and operating controls; to recommend annually to the Board
of Directors the selection of the independent auditors; to consider
proposals made by the Companys independent auditors for
consulting work; and to report to the Board of Directors, when so
requested, on any accounting of financial matters.

Revenues

Revenues for the three months ended March 31, 2003 were $332,000,
compared to revenues of $440,000 in the comparable period last year, a decrease
of 25%. The decrease in revenues resulted primarily from the wind down and
expiration of a license agreement with a major account and further reductions
from a second account which began outsourcing manufacturing to third parties.
These reductions were partially offset by increases in royalties from licensees
added over the past several months, including a third party manufacturer of an
existing customer. We expect royalty revenue to trend downward in the second
quarter, as





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##### Table of Contents



the full effect of these developments take hold. We expect that
product launches of new design wins and growth from existing accounts,
including third party manufacturers will greater offset these losses in the
second half of fiscal 2003.

Gross Profit

Gross profit for the three months ended March 31, 2003 was $296,000 (89% of
revenue) compared to gross profit of $412,000 (94% of revenue) in the
comparable period last year, a decrease of 28%. Gross profit decreased due to
the decrease in revenue, while gross margin declined due to a higher
proportion of commission bearing foreign revenue.

Operating Expenses

Operating expenses in the three months ended March 31, 2003 were $368,000 (111%
of revenue) compared to operating expenses of $389,000 (88% of revenue) in the
comparable period last year, a decrease of 5%. The decrease in operating expenses
for the three months ended March 31, 2003 resulted primarily from decreased use
of outside consultants, partially offset by higher legal and accounting fees.

General and Administrative

General and administrative expenses in the three months ended March 31, 2003
were $156,000 (47% of revenue) compared to general and administrative
expenses of $135,000 (31% of revenue) in the comparable period last year, an
increase of 16%. The increase in general and administrative expense resulted
primarily from higher legal and accounting expenses arising from the new
regulatory requirements on public companies as a result of new
legislation in 2002.

Research and Development

Research and development expenses in the three months ended March 31, 2003
were $109,000 (33% of revenue) compared to research and development expenses
of $124,000 (28% of revenue) in the comparable period last year, a decrease
of 12%. The decrease in such expenses resulted primarily from using
more in-house resources as opposed to using more costly outside
consultants for applications engineering than during the prior
period.

Sales and Marketing

Sales and marketing expenses in the three months ended March 31, 2003 were
$102,000 (31% of revenue) compared to sales and marketing expenses of
$130,000 (30% of revenue) in the comparable period last year, a decrease of
22%. The sales and marketing expense resulted primarily from
lower marketing support staff expense as compared with the comparable period
last year.

Net Income (Loss)

Net loss in the three months ended March 31, 2003 was $74,000, ($0.00)
basic per share, compared with net income of $21,000 ($0.00) basic and fully
diluted per share in the comparable period last year. The net loss resulted
from decreased revenues, partially offset by slightly lower operating expenses.





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Liquidity and Capital Resources

At March 31, 2003, we had $894,000 in cash and cash equivalents as
compared to $859,000 at December 31, 2002. The increase in cash and cash
equivalents is attributed to the decreases in accounts receivable. We had
working capital of $1,076,000 at March 31, 2003 as compared with working
capital of $1,125,000 at December 31, 2002. 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. We
anticipate that there will be a wind down of our licensing program in early
2003 with a large computer account as that entity completes its migration to
its latest operating system. We added or expanded our relationships with JVC,
Sanyo, Orion and Mediatech this past year. We believe that growth from these
and other licensing arrangements including some that are pending but not
announced or in negotiation, will substantially offset any revenue shortfalls
from the computer account by the third quarter of fiscal 2003. Mediatech, in
particular, has been successful in penetrating the DVD market and our
relationship with them positions us well as the
audio solutions provider of choice in these new accounts for 2003 and
2004. Further, by the second half of 2003, we expect to begin generating
revenues from the Companys new products that were introduced in 2002.

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.

To the extent the Company maintains or exceeds its projected revenues and
is not required to fund contingencies, it expects to continue to retain its
current cash reserves and therefore, maintain its liquidity position at a
consistent level both on a short-term and long-term basis.





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To the extent that
the Company does not achieve current operating levels or is required to fund
contingencies, it will be required to use some of its cash reserves and this
could impact its longer term liquidity. In addition, we wish to achieve
accelerated growth and to take advantage of the dynamic market forces in which
we operate, rather than to be affected by them. To address these objectives, we
retained Neveric Capital, a San Francisco based investment banking firm, to
identify and evaluate strategic opportunities and to explore alternatives to
enhance stockholder value and support the Companys growth and overall
strategy.

In December 1999, we completed a set of financial transactions (the 1999
Transactions) with certain existing holders of our equity and debt and with
new institutional investors. The 1999 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 an 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 1999 Transactions, $895,000 in short term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, were 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. The Company had an option to redeem
with cash any Series B Preferred Stock not converted before the end of 2002 and
to pay Series B Preferred Stock accrued and declared cumulative dividends of
10%. In November 2002, the Board of Directors and the holders of the Series B
Preferred Stock, agreed to exchange the Series B Preferred Stock for a new
Series B-1 Preferred Stock which had terms substantially the same as the Series
B Preferred Stock, except that the conversion date was deferred to December
2005, no future dividends will accrue and dividends for prior periods on the
Series B Preferred Stock were reset and recalculated to the LIBOR rate in
effect on the first business day of each of
2000, 2001 and 2002, respectively and were paid through the issuance of
the appropriate number of shares of Series B-1 Preferred Stock. The exchange
was completed in December 2002. The 500,000 warrants issued in the 1999
Transactions expired, without exercise in December 2002. In connection with the
exchange the Series B-1 Preferred Stock, we withdrew the Series A and Series B
Preferred Stock and, therefore, currently the Series B-1 Preferred Stock is our
only authorized or outstanding class of preferred stock.

As noted above, in the 1999 Transactions, $225,000 of secured debt,
including accrued interest, was converted into secured long term convertible
debt. The long term debt was repaid with interest in 2001. We currently have 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 eliminated Net Liabilities of Discontinued Operation since the statute
of limitations for claims has been exceeded. We continue to maintain an accrual
for unasserted claims or settlement costs related to the discontinuation of MDT
in 1999. We do not expect any final liability to be in excess of this balance.





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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. The Company will also
continue to consider and evaluate capital investment or business arrangements
with financial or strategic participants or investors as such opportunities
become available to the Company on terms that enhance shareholder value and
support the Companys business strategy.

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





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##### Table of Contents






PART I.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

We have not been exposed to material
future earnings or cash flow fluctuations from changes in interest
rates on our term investments at March 31, 2003. A hypothetical
decrease of 100 basis points in interest rate (ten percent of our
overall earnings rate) would not result in a material fluctuation in
future earnings or cash flow. We have not entered into any derivative
financial instruments to manage interest rate risk or for speculative
purposes and we are not currently evaluating the future use of such
financial instruments.



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ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior
to the filing of this report, the Company carried out an evaluation,
under the supervision and with the participation of the
Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer of the effectiveness of
the design and operation of the Companys disclosure controls
and procedures. Consistent with the Companys policies adopted
to accommodate a single person holding both designations, the
evaluation was undertaken in the consultation with the Companys
audit committee and accounting personnel. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms.

There were no
significant changes in the Companys internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of their evaluation.



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##### Table of Contents






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 filed labor and employment termination related claims
before the Labor Commissioner in 2000 seeking approximately $400,000
each which was allegedly due under each of 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 postponed those proceedings while
other litigations 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 claim was postponed and then dismissed primarily
because of the bankruptcies. The labor claims became inactive while bankruptcy for one such employee had
been dismissed and the state court 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.





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##### Table of Contents






ITEM 2.   
CHANGES IN SECURITIES AND USE OF PROCEEDS

None




ITEM 3.   
DEFAULTS UPON SENIOR SECURITIES

None




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

None




ITEM 5.    OTHER INFORMATION

None




ITEM 6.    EXHIBITS AND REPORTS ON FORM 8K

Report
on Form 8-K





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##### Table of Contents



Exhibits



|99.1 |  | Certification Of
Chief Executive Officer Pursuant To 18 U.S.C. § 1350, As
adopted Pursuant To § 906 Of The Sarbanes-Oxley Act Of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------
|



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CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Henry R. Mandell, the Chief Executive Officer and Chief Financial Officer of
Spatializer Audio Laboratories, Inc., certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Spatializer Audio
Laboratories, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                                                                                                                                                                                  





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6.     I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: May 9, 2003

/s/ Henry R. Mandell

Henry R. Mandell
Chief Executive Officer and Chief Financial Officer





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##### Table of Contents






SIGNATURES

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

Dated: May 13, 2003

| |  |                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------
| |  | SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)                                                   
| |  |                                                                                                     
| |  | /s/ Henry R. Mandell                                                                                
| |  |                                                                                                     
| |  | Henry R. MandellChairman of the Board, Chief Executive Officer
Chief Financial Officer and Secretary