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Adjustments to Second Quarter Accruals Due to Late Royalty Reporting And Change in Licensee Royalty Reporting Method Negatively Impacts Third Quarter Operating Results, Which Would Otherwise Have Reflected a Small Profit

Revenues for the third quarter of fiscal 2001 were $303,000, compared to revenues of $630,000 in the third quarter of fiscal 2000, a decrease of 52%. Revenues for the nine-months ended September 30, 2001 were $1,215,000 compared to revenues of $1,666,000 in the comparable nine-month period last year.

The company reported net loss for the quarter of $175,000, $0.00 basic and diluted per share, compared with net income of $104,000, $0.00 basic and diluted per share, in the comparable period last year. Net loss for the nine-months ended September 30, 2001 was $267,000, ($0.01) basic and diluted per share, compared to net income of $386,000, $0.01 basic and diluted per share, in the comparable nine-month period last year.

The decrease in the revenues reported in the third quarter resulted primarily from adjustments to revenues accrued in the prior quarter to reflect actual cash receipts for second quarter operations. The Company's long standing policy has been to accrue revenue based on estimates derived from historical and current information available when SEC reports are due. In the quarter ended June 30, 2001, reporting changes and delayed reporting impacted these estimates. Effective April 1, 2001, two manufacturers assumed royalty reporting and payment responsibilities previously held by a single DSP foundry. The change in reporting entities and the related change in payment from the previous policy of shipments by the DSP foundry to the manufacturers to the new policy of royalties based on the manufacturer's shipment of DVD players resulted in an over-accrual of estimated revenues in the second quarter. An adjustment of approximately $200,000 was made in the third quarter.

Revenues for the nine months ended September 30, 2001 were lower because of the aforementioned adjustment and a flat fee license royalty of 250K earned in the first half of 2000 for which there were no comparable royalties in the current year. In addition, royalties on analog integrated circuits have declined from a major account due to a continuing sales decline of audio related special purpose ICs.

The net loss for the three and nine month periods are primarily the result of the decrease in revenue and an increase in operating expenses, primarily for research and development. The Company previously reported in its second quarter that it had accelerated its hiring program to capitalize on a brief supply of engineering talent in the Silicon Valley as a result of industry layoffs. In addition, the Company stepped up its use of outside consultants to move several projects closer to completion. These initiatives were trimmed in the third quarter to more closely synch overhead with current operating levels.

``It's always disappointing to report a quarterly loss, but when a modest quarterly profit is turned into a loss due to untimely and inadequate information, its even more difficult,'' stated Henry R. Mandell, Chairman and CEO of Spatializer. ``Shareholders sometimes ask why we don't report earlier and now we unfortunately see why that can be problematic. We have communicated to our licensee the importance of timely information and the obvious ramifications from any delayed information.''

Mandell continued, ``Nevertheless, we are moving our business ahead in these uncertain times. We reduced our overhead by over 20% compared to the previous quarter. In the third quarter, we announced our first portable digital player deal with Sanyo. This reflects a re-established relationship with the Sanyo organization where there are significant opportunities. We added Sharp DVD and SONICblue to our licensee family. Zoran Corporation designated us as a preferred provider on their Vaddis® DSP line, including the new Vaddis V processor. We extended our relationship with Texas Instruments with new platform availability and are collaborating with them in a joint marketing effort. Lastly, we announced Spatializer PCE(TM) that represents the Company's next-generation audio enhancement technology that both polishes and expands the listener's audio experience. As a small company, we have accomplished much in the past quarter and I'm proud of our team. I expect a solid and profitable fourth quarter and look forward to success in this competitive environment.''

About Spatializer

Spatializer Audio Laboratories Inc. is a leading developer, licensor and marketer of next-generation technologies for the consumer electronics, computing and entertainment industries. The company's advanced audio technology is incorporated into consumer electronics audio, video and DVD products from global brand leaders including Toshiba, JVC, Panasonic, Hitachi, Samsung, Acer, Sharp, Sanyo, SONICblue, Zenith and Kenwood, in PC multimedia systems and peripherals from Apple and Labtec, in silicon from Matsushita, Texas Instruments, Cirrus Logic, New Japan Radio Corporation, Zoran, Motorola, LSI/C-Cube, Tvia, VM Labs, LinkUp and Acer Laboratories Inc, and in MP3 players such as Sanyo and embedded with RISC cores from MIPS Technologies. Spatializer stock is traded on the OTC Bulletin Board under the symbol: SPAZ. The company is headquartered in Santa Clara, CA, with marketing offices in Tokyo, Japan. Further information may be obtained from the company's web site, www.spatializer.com, Spatializer's SEC filings, and by contacting the company's Investor Relations Department at 408-296-0600 or by writing to investor@spatializer.com.

Safe Harbor Act Statement Under the Private Securities Litigation Reform Act of 1995: Certain information in this background news release, including the comments by Mr. Mandell in this press release are forward looking statements that are based on management's belief, as well as assumptions made by, and information currently available to management. While the company believes that its expectations are based upon reasonable assumptions, there can be no assurances that the company's financial goals will be realized. Numerous uncertainties and risk factors may affect the company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the company. These uncertainties and risk factors include, but are not limited to the continued need for additional capital, dependence on new technology and intellectual property, dependence on the PC and consumer electronics industries, dependence on product shipments of third-party licensees, competition and pricing pressures, and other risks detailed from time to time in the company's periodic reports filed with the Securities and Exchange Commission.

NOTE: Desper Products Inc. is a wholly owned subsidiary of Spatializer Audio Laboratories Inc. Spatializer® is a registered trademark and Spatializer PCE(TM) is a trademark of Desper Products Inc. All other trademarks are the property of their respective owners. Copyright (C) 2001 Spatializer Audio Laboratories, Inc.

                        PART I.  FINANCIAL INFORMATION

    ITEM I.  FINANCIAL STATEMENTS

                     SPATIALIZER AUDIO LABORATORIES, INC.
                               AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS

                                    ASSETS

                                              September 30,   December 31,
                                                  2001            2000
                                               (unaudited)

    Current Assets:
      Cash and Cash Equivalents                  $771,381      $1,467,988
      Accounts Receivable, net                    488,896         506,558
      Prepaid Expenses and Deposits                55,083          26,458
    Total Current Assets                        1,315,360       2,001,004

    Property and Equipment, net                    74,592         108,061
    Capitalized Patent and
     Technology Costs, net                        299,715         302,789
    Other Assets                                   52,762          45,170

    Total Assets                               $1,742,429      $2,457,024


                       LIABILITIES AND SHAREHOLDERS' EQUITY

    Current Liabilities:
      Notes Payable to Related Parties            112,500         337,742
      Accounts Payable                             17,845          51,782
      Accrued Wages and Benefits                   26,680          61,390
      Accrued Expenses and Taxes                   30,975          99,595
      Net Liabilities of Discontinued Operation   170,049         255,840
    Total Current Liabilities                     358,049         806,349

    Shareholders' Equity:
      Series B, 10% Redeemable Convertible
       Preferred shares, $.01 par value,
       1,000,000 shares authorized,
       87,967 and 102,967 shares issued
       and outstanding at September 30, 2001
       and December 31, 2000, respectively            880           1,030
      Common shares, $.01 par value,
       65,000,000 shares authorized,
       47,406,939 and 47,087,971 shares issued
       and outstanding at September 30, 2001
       and December 31, 2000, respectively        474,070         470,880
      Additional Paid-In Capital               46,402,852      46,404,892
      Accumulated Deficit                     (45,493,422)    (45,226,127)
    Total Shareholders' Equity                  1,384,380       1,650,675

    Total Liabilities and
     Shareholder's Equity                      $1,742,429      $2,457,024


                     SPATIALIZER AUDIO LABORATORIES, INC.
                               AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (unaudited)

                       For the Three Month          For the Nine Month
                          Period Ended                 Period Ended
                    September 30,  September 30, September 30, September 30,
                        2001           2000          2001           2000

    Revenues:
      License
       Revenues            $--            $--            $--            $--
      Royalty
       Revenues        302,665        630,129      1,214,639      1,665,829
      Product
       Development
       Revenues             --             --             --             --
      Product
       Revenues             --             --             --             --
                       302,665        630,129      1,214,639      1,665,829
    Cost of
     Revenues           12,500         70,022         81,090        168,088
    Gross Profit       290,165        560,107      1,133,549      1,497,741

    Operating
     Expenses:
      General and
       Administrative  194,770        181,669        553,022        426,458
      Research and
       Development     172,978        186,294        533,681        388,338
      Sales and
       Marketing       101,462         90,172        330,448        276,858
                       469,210        458,135      1,417,151      1,091,654

    Operating Profit
     (Loss)           (179,045)       101,972       (283,602)       406,087

    Interest Income      7,220         19,624         36,852         50,526
    Interest
     Expense            (2,813)        (8,782)       (19,363)       (25,953)
                         4,407         10,842         17,489         24,573

    Income (Loss)
     Before Income
     Taxes            (174,638)       112,814       (266,113)       430,660

    Income Taxes          (682)        (9,000)        (1,182)       (44,271)

    Net Income
     (Loss)          $(175,320)      $103,814      $(267,295)      $386,389

    Basic/Diluted
     Earnings
     (Loss) Per
     Share              $(0.00)         $0.00         $(0.01)         $0.01

    Weighted
     Average
     Shares
     Outstanding    47,406,939     46,706,986     47,387,561     46,622,002

SOURCE: Spatializer Audio Laboratories, Inc.